New Payments Architecture infrastructure must drive innovation and reduce costs

Although the UK was a pioneer with the Faster Payments Scheme (FPS) in 2008, we cannot afford to be complacent in adopting real-time payments compared to other economies in the G7 and beyond. And with the UK’s New Payments Architecture (NPA) on its way, it will start impacting direct FPS participants in the next 12 months. Vendor selection and testing will be complete by the end of summer 2023, with full implementation predicted to be no later than June 2026, following an unexpected three-year delay.

The NPA aims to drive the adoption of the ISO 20022 financial messaging standard while delivering new payment products that operate in a real-time paradigm. Moving to ISO 20022 will allow richer data to accompany payments, thereby supporting faster allocation and reconciliation of incoming payments. The future expectation is that NPA should help support infrastructure which reduces cost to serve, reduces the fraud endemic, and lays out the framework for a replacement to the Faster Payments Scheme and what follows.

Understanding the transition from FPS to NPA

The need to transition to NPA was a result of three main challenges faced by FPS participants. The cost of redeveloping legacy core-banking in light of new payment changes such as ISO 20022 is significant, and something that banks would rather avoid, given that the cost of capital will go up further. The current approach to integrating critical payment infrastructure is disjointed – leading to high regression testing overheads and lack of interoperability capabilities. Finally, the current approach of building translation layers on top of legacy technology will be a sunk cost within the next 36 months. Against this backdrop the transition to NPA becomes clear.

Identifying the risks associated with NPA

In practice, not all banks have the IT capacity or capabilities to address the significant changes brought by NPA. Action will be needed to ensure that banks can process payments under both FPS and NPA – but for banks with legacy infrastructure, getting the necessary capabilities in place may not be straightforward. As such, upgrading their current system – or indeed moving to a new system – may be a considerable challenge in the time available.

A further concern is that the transition period from FPS to NPA will open up a significant fraud risk that banks will need to mitigate effectively. History has shown that transitioning to a new payment scheme tends to result in a surge in fraud. To tackle this, integrating third-party fraud detection apps will provide monitoring and activation in real time.

Assessing the current situation

The Payments Systems Regulator (PSR) is thinking hard about the next generation of payments infrastructure. It is now abundantly clear that there’s a need for better cooperation between payment systems to give users more choices. In the UK today, this has increased with a more rapid decline of cash.

Considering the broader ecosystem, we must understand how merchants and users are impacted. For example, a great use case for NPA is low risk payments that can help consumers manage their money, particularly for those who don’t have regular incomes. The PSR must facilitate a system that is cheaper, more competitive, drives innovation and gives users more choice.

The final question to be asked for the implementation of the NPA is whether merchants will pass on cost savings to customers. When it comes to digital payments today, merchants are not allowed to surcharge, but we are seeing them steer customers to a payment method that makes most sense to them. For example, in small market towns, many shops have window signs stating “please use cash, we can’t afford to take card” because they don’t believe in putting the prices of goods up to accommodate card payments. For the NPA to truly benefit everyone it needs to have a proper economic model and chargeback rules to benefit merchants. Equally, for banks to benefit, they must adjust their current business case to provide a more holistic view and offer the services their customers need.

Eagerly awaiting the delivery roadmap

Given the scale of this change, it is expected that all stakeholders funding the NPA will need to have an agile approach to delivery. The underlying technology for the future should support alternatives to cards. However, it is clear from the direct participants that for NPA to create business value, it needs to provide a capability where the infrastructure is cheap, so that the cost to serve declines and true economic benefits can be passed on to merchants and end customers. Thankfully, the NPA promises to provide more certainty, capacity and scale, but it needs to align Open Banking and instant payments. Ultimately, key industry players will closely monitor the NPA roadmap and eagerly anticipate its progress.