A DECADE OF FASTER PAYMENTS

The impact of real-time, and predictions for the future

About Faster Payments

Faster Payments is the only UK payment system available day and night, 365 days per year, supporting the demands of personal and business customers. In 2017, Faster Payments processed 1.65 billion payment transactions with a value of £1.396 billion.

About Hunch

Hunch is a strategic innovation practice working with big businesses across the connected economy – and particularly in Financial Services, Home Services, Utilities and Mobility. Hunch advise on market evolution, growth strategy and next-generation propositions, launching new businesses for blue-chip clients around the world.

About NPSO

The New Payment System Operator (NPSO) is the leading authority for payments, working in the public interest to ensure the UK’s payment systems are safe, open, innovative and resilient.

We move more than £6.3 trillion every year, through Bacs Direct Credit, Direct Debit, Faster Payments, and Paym. The Cheque & Credit Clearing Company and UK Payments Administration will also join the NPSO in 2018.

Disclaimer: This document has been prepared for Faster Payments Scheme Ltd and NPSO Limited by Brilliant Hunch Ltd. This document is only for information purposes and the users of this document shall use or refer to this document entirely attheir own risk, with no recourse to Brilliant Hunch Ltd, Faster Payments Scheme Ltd or NPSO Limited in any manner whatsoever. Brilliant Hunch Ltd, Faster Payments Scheme Ltd and NPSO Limited further make no representation or warranty as to the completeness or accuracy of the information contained in this document. Brilliant Hunch Ltd, Faster Payments Scheme Ltd and NPSO Limited disclaim any and all liability for any or all claims or losses whatsoever or howsoever caused, to any third party arising from reliance in any way on any part of this document or by anyone who may be informed of any of its contents. Each recipient or user is entirely responsible for the consequences of its use, including any actions taken or not taken by the users/recipient based on this document. Assumptions, opinions and estimates expressed herein are subject to change without notice.

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TEN YEARS OF FASTER PAYMENTSForeword by John Jefferson, General Manager of Faster Payments

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THE FASTER PAYMENTS VIEW OF THE EVOLVING PAYMENTS LANDSCAPE

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THE FUTURE PAYMENTS LANDSCAPE Strategic consultancy Hunch sets out four key trends that could shape payments

• The Economy of Things

• The subscription economy

• Business-to-business supply chains

• Smart local grids

Contents

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Now Faster Payments is ten years old and the UK payments industry is about to enter a new era of innovative, consumer-led convenience and control. Driven by the most significant technological and regulatory changes since Faster Payments introduced real-time in 2008, this will cement the UK’s status as a leader in the field of payments.

In this white paper Faster Payments, now part of the New Payment System Operator (NPSO), and Hunch, the strategic consultancy, examine how technology and regulatory changes are set to shape the payments market, unleashing the potential of new consumer-driven economic models to revolutionise the way we pay for services.

The last ten years have seen enormous changes in technology and the way we pay for things. The pace of change looks set to accelerate in the next decade, thanks to faster, more ubiquitous connectivity. The Internet of Things, changes in the value and volume of payments and greater real-time access to services could all have a profound impact.

Thanks in part to the work of Faster Payments, the UK’s payments system is already one of the world’s most advanced. The creation of the NPSO and the upcoming New Payments Architecture (NPA) will deliver even greater levels of access, and the opportunity to create innovative new services.

The combined result may not just be a new payments landscape, but an Economy of Things.

by John Jefferson, General Manager Faster Payments

There have been many highlights since the first Faster Payment was sent on Tuesday 27 May 2008. Our scheme transaction limit has increased from an initial £10,000 to £250,000 today; the Paym service launched in 2014 to make it possible to pay someone using just their mobile number and we have widened participation in our service to non-banks, helping drive competition in the market.

ForewordTEN YEARS OF FASTER PAYMENTSLooking forward and back

03 A DECADE OF FASTER PAYMENTS The impact of real-time, and predictions for the future

The last ten years have seen enormous changes in technology and the way we pay for things. The pace of change looks set to accelerate in the next decade, thanks to faster, more ubiquitous connectivity.

1998 2008 2018 2028

Typical internet in the UK is dial-up, with a speed of 56kbps.

A few banks have launched internet banking but, for most people, banking is done in branches and on the phone. Payments take three days.

Google has just been founded. Windows 98 is launched.

Typical internet speed in the UK is 3.6Mbps.

Around 33% of UK consumers have used internet banking. Faster Payments is launched in May. Nine banks and one building society sign up representing roughly 95 per cent of customers.

The first iPhone has been available for a few months.

Facebook has 100m users.

Typical UK internet speed is 46.2Mbps.

About two thirds of UK consumers now bank online.

Faster Payments has become the norm for online and telephone payments – more than 2 billion are expected to be sent.

11 billion devices are now connected to the Internet of Things.

UK internet speed is likely to be measured in Gigabits per second. HD films download in around 30 seconds.

Driverless cars are commonplace. Smartphones can diagnose many illnesses.

Real-time payments are now the means by which devices in the Internet of Things automatically pay each other.

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The UK was one of the first countries to introduce a real-time payments service – and has always been a strong innovator when it comes to banking. Over the past 10 years, a further 29 countries ranging from the USA to Australia – have started the journey towards a real-time payments system. Many have now launched comparable services.

Now the world of payments is about to undergo another seismic shift here in the UK. There are two principal drivers.

The first is the evolving payments industry. Faster Payments have become much more widely available thanks to technological advances and regulatory changes – the number of directly connected participants has grown from seven banks in 2008 to more than 20 today, including, for the first time, non-banks such as TransferWise. Thanks in part to Faster Payments’ successful access programme there is nothing to stop this change spreading further.

The second major driver – which strategic consultancy Hunch explore in detail below - is the ever increasing digitalisation and automation of the economy.

The New Payments Architecture

The Faster Payments access programme was in many ways just the first step. Since 1 May 2018, Faster Payments has been part of the New Payment System Operator (NPSO).

The NPSO is responsible for taking forward the blueprint for the New Payments Architecture (NPA) – a completely new conceptual model for retail payment delivery in the UK.

Faster Payments, Bacs and cheque payments have historically been processed using separate infrastructures – meaning there has been a mix of rules, standards and processes to follow. Bringing all of these payment schemes together in the NPSO has created an historic opportunity to rebuild the central infrastructure from the bottom up, simplifying requirements for Payment Service Providers (PSPs) across all of the payment systems and also creating space for new types of services.

2008 The first Faster Payment is sent on Tuesday 27 May

2009 £1 billion is processed in a single day on 2 March

2010 The scheme transaction limit is increased to £100,000

2011 The billionth Faster Payment is made, at 11am on 24 May

2012 811 million Faster Payments are made – up 50% year-on-year

2013 1 billion Faster Payments sent in the year

2014 Paym makes it possible to pay using a mobile number

2015 Scheme transaction limit increased to £250,000

2016 Faster Payments participation grows – two new banks join

2017 1 billion ‘single immediate’ payments processed in the year

2018 The first non-bank joins Faster Payments as a direct participant

Ten years ago the UK introduced Faster Payments. For most people this meant they had the convenience of not having to think three days ahead when banking. They could transfer money to friends, companies and so on and it would usually clear within a few seconds. Faster Payments has been a huge success and consumers and businesses have embraced it enthusiastically.

THE EVOLVING PAYMENTS LANDSCAPEby Faster Payments

05 A DECADE OF FASTER PAYMENTS The impact of real-time, and predictions for the future

The NPA – first conceived by the Payments Strategy Forum – will be the biggest change to the way payments are processed in the UK since the 1960s. It will build a new core clearing and settlement layer, administered by the NPSO, which will move money every time we pay a bill, pay back a friend, or a business pays their supplier – regardless of whether it’s an online banking payment, Direct Debit or a cheque. By focussing on this central task, the NPSO will clear the way for fintechs, banks and other providers to innovate and develop competitive ‘overlay services’ which can link directly and indirectly to the clearing and settlement infrastructure.

Overlay services will not necessarily be confined to a rigid, centrally-defined model and will therefore have space to develop organically. A roughly equivalent example would be the way that Google Maps allowed controlled access to its data through APIs, and in so doing created opportunities for everything from ride-hailing apps such as Uber to games like Pokemon GO.

So, the NPA could lead to new ways for customers to get more out of their banking and payment data, as well as, in all likelihood, things that haven’t even been thought of yet. Delivering it, including procuring the completely new clearing and settlement platform, is a long-term project. There will be continuity of service for users of Faster Payments throughout the process, with incremental improvements along the way such as Request to Pay (a new way to trigger a Faster Payment), and Confirmation of Payee – a way to check who you are paying before you confirm a payment.

Regulation and security

However payments are not just about technology – they are also about regulation. While the NPSO will procure and administer the clearing and settlement layer of the NPA, its responsibilities for other layers of the ecosystem will be focussed on standards, rules, governance and licensing access to the clearing and settlement platform.

This year will also see the implementation of Payment Services Directive 2 (PSD2). What this means is that access to payment infrastructure will become available to accredited third parties which will be able to initiate push-payment from customers’ accounts on their behalf.

In short, very soon, you could be using Facebook or Google or Tesco or Amazon to pay your bills. This could create a whole raft of new payment services and experiences – and all of them will be based around the same world-leading clearing and settlement functionality that underpins Faster Payments. Innovation and consumer choice will proliferate as new providers, ranging from fintechs to retailers, wrap their services around the core functionality provided by Faster Payments.

This opening up of payments access is likely to be a game-changer, akin perhaps to unbundling of BT’s local-loop in the 2000s. Unbundling allowed multiple telecoms operators to use the connections which ran from local telephone exchanges to customers’ houses and businesses. This increased competition, playing a key role in the development of the UK’s telecoms and internet service provider markets.

We will also see continued emphasis on security and probably multi-factor security that may combine, say, a passcode with retina scanning or finger vein recognition. As with so many new technologies, the big hurdle will be delivering convenience and driving adoption while prioritising security.

Looking to the future

Security technology is just one example of how everyday objects are increasingly being designed with embedded computing power and internet connectivity.

The ‘Internet of Things’ has the potential to help create an entirely new payments landscape, radically changing the way everyday goods and services are bought and sold.

The ‘Internet of Things’ has the potential to help create an entirely new payments landscape, radically changing the way everyday goods and services are bought and sold.

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To imagine what the world of payments will look like in ten years’ time, it’s useful to consider specific examples. From a consumer perspective, it might mean that your car pays all its own tolls on roads and bridges – or that, instead of owning a car, you subscribe to Ford or BMW. It could mean that your house is part of a local electricity grid and that you buy and sell electricity to your neighbours. For businesses it might involve being able to rent conference rooms as easily as you currently download music – and your own conference rooms may rent themselves out automatically.

THE FUTURE PAYMENTS LANDSCAPEby Hunch

07 A DECADE OF FASTER PAYMENTS The impact of real-time, and predictions for the future

Using insight-driven techniques and our specialist knowledge of the connected economy, we have identified four key trends which will drive the market evolution and next generation growth opportunities for payments.

The growth of the Economy of Things means payments are set to change as much in the next ten years as they have in the last 20.

Payments are set to rise in volume and shrink in average value as costs fall, with permission based machine-to- machine payments representing many daily transactions – particularly in B2B supply chains.

New economic models such as local electricity grids and subscription services for high-value products will become commonplace.

Real-time payments and advances in access and security across payment systems will be key factors in making these changes possible.

The Economy of Things

A key factor will be the development of the Economy of Things. This means that, increasingly, machine-to-machine payments will take place securely and with only minimal permissions-based human oversight. Combined with the falling price of payments and rising volumes enabled by access through the NPA this should enable whole new economic models to develop.

The Internet of Things (IoT) is made up of ‘smart’, or internet-connected devices such as cars, thermostats and medical implants. The number of these is growing exponentially. According to Gartner, in 2016, there were 6.4 billion. Now, there are 11.2 billion. By 2020, there will be over 20 billion. Around 12 million ‘things’ are now being connected to the internet every day.

The Economy of Things (EoT) is a concept that explains the consequences of these devices becoming able to make payments to each other (and other entities) on a large scale. As a recent IBM report states, if ‘digitising the physical world’ gives us the Internet of Things, the Economy of Things represents the ‘liquification of the physical world’.

What do we mean by this in practice? Connected physical assets (whether it is a TV or a factory machine that makes tractor parts) will become participants in real-time global markets. As mentioned earlier, a simple example of EoT in action might be a smart car paying tolls. But a more complex example is a ‘smart office’ making property more financially efficient by automatically renting out unused space.

This is where the idea of liquification comes in – the EoT will create efficient, liquid markets where none existed before. The effect of this will be similar to the effect of Airbnb on the short-term rental business.

Physical assets will be able to rent themselves. The EoT will allow an empty conference room or an unused haulage lorry to be visible and for hire. What is more, the hiring entity may not be a human. In the case of the haulage lorry, it might be a system or algorithm that looks after a port facility. The port facility system will choose, book and pay for the lorry. Real-time payments will facilitate it. Nobody need be involved unless the system flags up the transaction for human approval.

For consumers and businesses alike this world will mean a huge step up in convenience. It will be a similar kind of change to that which companies like Amazon, Uber, Deliveroo and Spotify have already brought to our lives.

The payments landscape will never be the same.

A key factor will be the development of the Economy of Things. This means that, increasingly, machine-to-machine payments will take place securely and with only minimal permissions- based human oversight.

10 YEARS

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£JAN

The Future Payments Landscape Continued

The subscription economy

The move towards a ‘subscription economy’ has been an important recent trend in consumer behaviour. Obvious examples are Netflix and Spotify – where once you bought the film or music, now you pay a monthly subscription – but there are many other areas, including in business, where moving away from buying goods and services as a one-off purchase is a growing trend. A notable example is software as a service. Where once companies bought software packages, now they pay for a subscription which includes support and updates.

We are likely to see much more of this behaviour for both low and high value transactions. With the former, we may see the growth of ‘microsubscriptions’ where, for example, consumers buy access to one artist’s back catalogue. With the latter, we are now seeing the appearance of quasi-subscription models for tractors which cost over $100,000. Recently there has also been a mini boom in what are effectively car subscriptions with firms such as Zipcar. Consumers might pay a monthly subscription to a company like BMW and then make use of the vehicles they need, which could include bikes.

09 A DECADE OF FASTER PAYMENTS The impact of real-time, and predictions for the future

Business-to-business supply chains

Enormous sums are currently locked up in business-to- business (B2B) supply chains – and this disproportionately affects small and medium sized businesses (SMEs). Smarter cash management platforms will help to unlock this money.

These will use a variety of technologies. Remote sensing and tracking (probably with embedded IoT/ EoT sensors) will mean that organisations’ systems will know exactly when orders arrive. The use of blockchain for contracts will add to security and traceability because smart contracts automatically execute when certain conditions are met.

Funds will be released in real-time, via Faster Payments, as goods arrive – and, as a result, businesses will have less money tied up and run more efficiently. The effect is likely to be similar to ‘Just-in-Time’ which revolutionised manufacturing in the 70s and 80s. This did so because companies no longer needed to keep large inventories on hand. Rather components arrived shortly before they were required – or ‘Just-in-Time’. This freed up cash and resulted in savings in areas such as storage and waste.

Smart local grids and distributed power generation

In countries like Germany, selling the power that your home generates back to the grid is already commonplace. And, in New York, a small system called Brooklyn Microgrid recently went one step further with a local peer-to-peer power grid that allows a group of around 50 neighbours to sell mostly solar-generated electricity to each other.

Now, imagine this everywhere. Perhaps you’re on holiday and the weather is very hot at home. The smart management system for the solar panels on your roof recognises these circumstances and sells the excess electricity to your next door neighbour who needs it for air-conditioning. It stays within your local grid which is a sort of rules-based membership club based on smart EoT devices. You see virtually none of this – the transactions are effectively your smart home selling to your neighbour’s smart home. At a given point in the cycle (although it could be done every day or even every hour) the home which has used more electricity makes a balancing payment to the other home. Sometimes you might go for days or even a week without actually buying power from the national electricity grid. This technology even allows you to use parked electric vehicles as a kind of giant dynamic smart battery.

Recently there has also been a mini boom in car subscriptions with firms such as Zipcar. Consumers might pay a monthly subscription to a company like BMW and then make use of the vehicles they need, which could include bikes.

Perhaps you’re on holiday and the weather is very hot at home. The smart management system for the solar panels on your roof recognises these circumstances and sells the excess electricity to your next door neighbour who needs it for air-conditioning.

Enormous sums are currently locked up in business-to-business (B2B) supply chains – and this disproportionately affects small and medium sized businesses (SMEs). Smarter cash management platforms will help to unlock this money.

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Faster Payments Scheme Limited 2 Thomas More Square, London E1W 1YN

020 3217 8200www.fasterpayments.org.uk MAY 2018