The U.K. payments industry is entering an all-important demand creation phase, as it prepares to launch the country’s New Payments Architecture (NPA). I spoke with Andy Morris, strategic solution consulting director at ACI Worldwide, to learn more about the opportunities on the horizon for the U.K.’s financial institutions, particularly around contextual and embedded payments.
Borja Lopez: What topics are top of mind for payment leaders here in the U.K., based on your recent conversations?
Andy Morris: Perhaps it was because we were all back in the room together for the first time in more than two years, but attending and reflecting upon recent in-person conferences like Pay360 and the MoneyLIVE summit, there certainly seems to be more — and louder — voices behind accelerating open banking adoption in the U.K., as well as the opportunities that the NPA initiative will help enable.
With the ISO 8583 messaging standard set to make way for the data-rich ISO 20022 format, the industry is getting more serious about exploring the benefits that can be unlocked by the new richer payload. In particular, contextual payment services, which simplify back-office processing and services to better reflect customers’ objectives rather than banks’ routing procedures, are high on the agenda.
Embedded payments (sometimes referred to as “Uberization” of payments) are also the focus of a great deal of energy and innovation, as is the closely related idea of embedded finance — as evidenced by the emergence and adoption of BNPL (buy now pay later) alternatives.
BL: What’s behind this increased interest?
AM: The U.K.’s Payment System Regulator (PSR) made clear in their strategy a desire to introduce more choice in payments by reducing the dominance of cards and leveling the playing field for new account-to-account payment methods.
In parallel, digital transformation continues to accelerate. It’s now clear that this step change in the way payments are made will have consequences far beyond more efficient transfer of funds. At the visionary end of the possibilities, there’s Web 3.0 and its blockchain-based economics. In these use cases, real-time account-to-account payments are vital enablers of the instant gratification underpinning both the user experiences and the business case.
Naturally, gaming and digital content companies are among the earliest movers in these virtual worlds, but major financial institutions are also already making moves to establish their brands in the metaverse.
BL: What are the wider implications of this step change in payments for financial institutions?
AM: It will take more than just renovation of existing payment infrastructures for a step change in payments choice to occur. The way customers, users and merchants interface with and collect payments has to change too. In the physical world, that means having some way of making a payment other than through a POS device, which will involve collaboration between acquirers and the merchant community. That might mean mobile-initiated barcodes and QR code transactions, as seen in other parts of the world, or smart-store setups where consumers don’t need to engage with a checkout at all.
Online and in the digital space, seamless payment experiences need to be enabled without opening the door to fraudsters. Establishing trust and confidence in the choice of payment is also going to be an important factor. I think most accept that there is clear room for improvement on today’s approach to strong customer authentication (SCA), for example, while poor internet and mobile telephone coverage present challenges for customers in rural areas who need to authenticate transactions.
But, whatever the sector, and whether you’re on the high street or in the metaverse, the guiding lights for understanding how to respond to the opportunities of NPA — and exploitation of open banking innovation — are based on offering more choice, speed and convenience.
BL: What are the time horizons that financial institutions need to have in mind?
AM: The launch of NPA requires a period of testing and a certification process. Pay.UK’s ambition is for the new NPA scheme to become available from mid-2024. That said, delivery of ubiquitous, data -rich real-time payments and instant experiences requires patience and coordination — the industry already has a complex change pipeline to navigate and deliver upon.
That doesn’t mean there isn’t work to do now, or that it’s time to take it easy. There is a vital period of demand creation ahead for the industry if we are to fully grasp contextual and embedded payment opportunities.
The challenge is that the existing Faster Payments system is built on technology that was first launched in 2008. That gives rise to potential limitations in the existing efficiencies with an aging infrastructure when it comes to satisfying demand creation. The same is true when it comes to the ability to scale and meet future account-to-account payment volumes, if the PSR’s goals of choice, speed and convenience are to be realized.
This can probably best be illustrated through the 4.5m open banking-initiated transactions in March 2022, compared to 1.35m in March 2021. This is a great sign that adoption is picking up – but potentially concerning is that this is only a fraction of the 327 million transactions processed by Faster Payments in March 2022. Capacity planning with existing infrastructure is going to require some serious thinking before NPA is fully launched.
BL: How should financial institutions respond?
AM: NPA promises to enable access more seamlessly and quickly than Faster Payments, providing fintechs, challenger banks, foreign banks and corporates with direct access to the new scheme. This is partly fueled and influenced by the Bank of England’s new RTGS program, which extends access and reach into the central bank clearing and settlement system as a direct settling participant, rather than the traditional model and reliance on finding a sponsor bank.
The good news here, in theory at least, is that more participants will accelerate innovation and push service level expectations ever higher. This will drive increases in agility and the ability to innovate, potentially accelerating adoption of software-as-a-service solutions for undifferentiated aspects of payment processing.
PSD2 has arguably not gained the traction that many hoped, and consultations around PSD3 are now gathering momentum. If not already doing so, many industry and individual ecosystem players will soon be asking what else they can do to differentiate around any new directive, to extend their current competitive advantages. Variable real-time recurring payments is one such area, for example, that is underdeveloped under PSD2 today, but should be welcomed by consumers as an alternative to BACS, offering greater choice and control. Meanwhile, Request to Pay (R2P) is a well-publicized use case for which the benefits seem clear, and yet it is still lacking that decisive nudge into the mainstream that adoption by a single large corporate or utility company could provide.
Learn more about how NPA is set to transform the U.K.’s retail payments infrastructure in the Expert’s Guide to New Payments Architecture.
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