The UK’s New Payments Architecture (NPA) is on its way and will start impacting direct Faster Payment Scheme (FPS) participants in the next 12 months.
The NPA aims to maintain a robust and resilient payments platform that can cope with the rising volume of interbank payments in the UK. It 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.
Furthermore, it will lower barriers to entry and thereby facilitate wider access to NPA payment services. The medium and longer-term aims of the NPA include consolidating existing payment capabilities and delivering new payment products not currently available in the UK’s interbank payment space.
But, before banks see the true benefits of NPA and open payments, they must prepare for the transition accordingly.
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 opportunity 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. The initial focus will be delivering a core clearing and settlement platform, replacing FPS with a more modern and scalable alternative based on ISO 20022.
The time is now, but what risks can be expected?
Alongside the opportunities, NPA also comes with a number of risks that banks need to consider. 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. Likewise, it may be challenging for banks to educate employees about any new processes that may be needed.
On another note, many banks are losing IT talent to fintechs, making it harder for them to access the expertise they need to adapt to the upcoming changes.
Faster Payments is a critical service for the banks, but not a direct income source. NPA, in contrast, will provide more data that banks can then monetise with new use cases and products.
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.
On the flipside, however, the adoption of ISO 20022 and richer data may bring new opportunities to address fraud more effectively.
Finding the right partner
Banks and payment providers should first look at working with technology partners that offer cloud-based solutions, as this will result in a more efficient, seamless transition to meet the NPA deadlines. The smartest way to address the transition risk is to use a trusted provider’s gateway technology. Here, banks and financial institutions can continue to process FPS traffic on their existing legacy infrastructure.
Technology providers can process both FPS and NPA payments in a hub which leverages a bank’s existing gateway for FPS. This method removes friction and allows the continued flow of data throughout the payment process.
The right technology partner can also ease the transition to ISO 20022 – an essential part of what the NPA is setting out to achieve. Moving to ISO 20022 will allow richer data to accompany payments, thereby supporting faster allocation and reconciliation of incoming payments.
It also promotes standardisation of payment data across numerous payment schemes, including CHAPS, SEPA and SWIFT. This will minimise the need to support legacy standards, while reducing the effort and potential for error associated with mapping payment data between different formats.
The future is open payments
Open payments is a natural progression of Open Banking and crucial to enable Open Finance. Finastra’s recent State of the Nation research, published in December 2022, shows that Open Banking is now universally and unequivocally regarded as a key part of a bank’s landscape, with 99% of respondents considering it either a ‘must have’ or ‘important’.
At the same time, Open Finance has moved from an emerging idea to a clear priority for institutions across the world, enabling business model shifts such as embedded banking and payments. The NPA presents the opportunity to modernise the payments stack as the industry gears up for digital wallets, AI, analytics and CBDCs.
The transition from FPS to NPA will impact the payments industry over the next 10 to 15 years and the leaders will become apparent in the next five years.
With immediate payments growing at +10%, and the swimming lanes between banks and non-banks competing for retail customer wallet vanishing, the UK will clearly have winners and laggards in this space.
2023 will be a year of positive change and transformation as banks leverage technology providers’ expertise and experience in real-time payments to support in the transition to NPA.
The future of payments is ‘open to collaborate’. Those who don’t adapt will fall behind.
Paul Thomalla is head of industry and regulatory affairs at Finastra
Read Finastra’s whitepaper on how banks can prepare for the NPA here.