Two countries inspire U.S. payments modernization
By Cary Whaley
Currently, the Federal Reserve continues to facilitate dialogue among payments stakeholders as to the feasibility of creating a near real-time payments mechanism and has examined several international examples. It’s safe to say that inspiration will be drawn from a country that plays cricket, is known for meat pies, and where residents drive on the left side of the road. What is unclear is whether that country will be the United Kingdom or Australia.
Both countries provide insights and inspiration for how near real-time payments system may develop in the United States. Both countries built new infrastructure. In the U.K., a new messaging platform was built to enhance existing settlement systems, while Australia is building an entirely new payments system.
U.K. faster payments. One of the first near real-time payments networks for non-card retail payments, the Faster Payments system in the U.K., launched in May 2008. Since then, it has processed more than 2.5 billion transactions. The system is operated by Vocalink, an EFT operator owned collectively by the British banks. Ten of the largest banks in the U.K. are members of Vocalink and are directly connected to the network. Nonmembers can be sponsored into the network by a member bank, and nonmember transactions are settled through member banks.
The Vocalink system was developed through industry collaboration under a joint government and industry body, The Payment Systems Task Force, chaired by the U.K.’s Office of Fair Trade, to address payments system improvements. This action was strongly encouraged by the British government “in advance of any legislation.”
British consumers can originate transactions through telephone, online or mobile payment origination tools owned by their bank. In 2009 a Direct Corporate Access Channel was added to allow corporate origination as well. Originator validation is done at the channel level, and single transactions are limited to 100,000 pounds.
Transactions are switched based on the bank account number and sort code (equivalent to a routing transit number in the United States), with receiving banks returning an acknowledgement immediately on the status of the transactions. Processing a single item in real time, and the acknowledgement, provides assurance that the transaction will post. Debits are not allowed on the Faster Payments system and are still processed through CHAPS, a U.K. equivalent to the ACH with a one-day cycle.
Processing is performed on a modified EFT switching environment in which the card data is replaced with the account number and sort code. Acknowledgements are returned with the same protocol in near real time.
When it launched in 2008, Faster Payments was the first near real-time national payments system with 24/7 availability.
Australia—from the ground up. Australia has been taking a building-block approach to modernizing its payments systems for several years, and the country’s approach has been studied by Federal Reserve officials interested in adapting the U.S. payments system for quicker electronic payments.
Australia started its modernization process when the Reserve Bank of Australia published a roadmap to modernization in 2008. The roadmap focused on encouraging quicker, reliable low-value payments. The roadmap identified three broad areas of focus: network connectivity, settlement arrangements and messaging standards. It also laid out objectives for the country to modernize its payments system in those three areas.
At the time of the roadmap’s publication, low-value payments were handled slowly by the country’s financial institutions and not in a uniform manner, mostly through bilateral arrangements between participants.
One result of the roadmap has been the establishment of a common payments infrastructure, called COIN, or Community of Interest Network, which established a segregated IP cloud infrastructure for payments processing. The infrastructure was opened in February 2012 and is operated by Telstra, Australia’s largest telecommunications network. Operations of ATM and EFT point-of-sale networks have now shifted to this infrastructure, as well as BPAY, the national bill payments system and the Reserve Bank’s Clearing Interconnector. The COIN replaced about 90 separate bilateral links in Australia.
The Reserve Bank of Australia’s roadmap was updated in 2011 to reflect progress and refine direction. It now points to the establishment of COIN and discussion of a low-value settlement system with standardized clearing based on the ISO 20022 standard, which is also used by the European SEPA program and other payments systems.
Following the update, the Reserve Bank of Australia issued a request for public consultation in June 2011 and received 35 responses, with a summarization published in early 2012 and a set of final conclusions published in mid-2012. The leading issue in the summary was governance and its impact on payments improvements, citing no consensus on the topic.
The final conclusions identified a need for real-time consumer payments and concurrent needs to address timely and efficient clearing and settlement. This led to the formation of two groups: the Real Time Payments Committee and the Australian Payments Council. The Real Time Payments Committee developed a comprehensive proposal for all aspects of the payments system including the architecture and construction of a clearing and switch network, a settlement hub, a governance framework, addressing and convenience processing. The Australian Payments Council, a payments industry coordination body made up of diverse elements of the payments system, will engage directly with the Payment Systems Board of the Reserve Bank of Australia to collaborate in ongoing improvements in the country’s payments system.
Both countries’ approaches to promoting faster payments have advantages and disadvantages. While the U.K. model allows for a faster implementation and leverages existing payments infrastructure, the Australian model is more comprehensive, leverages international standards and may be better positioned for the future.
In both countries, the banking industry has realized that there is value is an open, near real-time payments environment, but there is also significant expense in developing the infrastructure to support it. In the U.K. especially, faster payments resulted in a more rapid decline of paper check usage, but at the moment both processing environments must be supported. It is also possible that the U.K.’s approach could be used as a first step to an overall payments system rebuild.
The United States has the most vibrant and complex community of financial institutions of any country in the world, so we will need to draw from the experiences of the U.K., Australia and other countries to ensure success as the process moves forward.
Cary Whaley (email@example.com) is ICBA’s vice president, payments and technology policy.