Speed and convenience are driving innovations in payments. Nowhere can that be seen more clearly than the United Kingdom, where Faster Payments Service (FPS) is described as "ACH on steroids." FPS is a payments innovation that provides near real-time delivery and 24/7 accessibility for consumers. It enables customers to make electronic payments, typically via the phone and Internet, in a matter of hours rather than days.
The need for financial institutions to better compete with other same-day clearing changes (i.e., image exchange) coupled with consumer demand for immediacy and convenience in payments has spurred efforts to introduce expedited payments services like FPS both abroad and in the United States.
How does it work?
Launched on May 27, 2008, FPS was the culmination of a three-year initiative to reduce clearing times on phone, Internet, and standing order payments in the United Kingdom that previously took three days to process. The design and implementation of this new payments infrastructure involved several partners, including the U.K.'s Office of Fair Trading, the Payments System Task Force, the former APACS (Association for Payment Clearing Services), U.K. Payments, VocaLink, and 13 founding member banks.
The new service runs alongside existing payments channels in the United Kingdom such as BACS and CHAPS. The daily operations of FPS are managed by CHAPS, which is also responsible for the U.K.'s real-time, gross settlement payment system (CHAPS Sterling). CHAPS would be the equivalent to Fedwire and CHIPS in the United States. However, VocaLink provides the central infrastructure for FPS through its ATM/Debit network.
FPS only supports credit payments and imposes a £100,000 maximum on standing orders (regular payments made on the same date to a specific beneficiary) and a £10,000 maximum on single immediate payments (SIP) or ad hoc transactions. Customers are able to initiate payments over the phone or online all day, every day.
In its first year, FPS processed 180 million transactions representing £70 billion. According to a recent PricewaterhouseCoopers and VocaLink report, FPS had processed 240 million transactions as of July 2009. Much of this volume is made up primarily of payments between personal account holders or from personal accounts to business accounts (i.e., bill payments).
FedACH to offer same-day service
There is particular interest in the U.K.'s experience with Faster Payments as similar efforts are under way to develop a same-day ACH service in the United States. In March 2009, the Federal Reserve announced plans to develop an intraday service for certain existing ACH debits. In particular, the new service would be limited to consumer checks converted to ACH (ARC, BOC, and POP) as well as consumer debits generated from Internet and telephone transactions (WEB and TEL).
There are at least two key differences in the United Kingdom and FedACH same-day services. Unlike the U.K.'s Faster Payments service, the FedACH settlement of same-day payments will not be real time. Settlement for ACH same-day will occur only once a day at 5 p.m. (see chart below). Also, consumer and corporate credits will not be included in the service.
However, similar to FPS, the FedACH same-day service is not mandatory. An opt-in participation agreement will be required from any financial institution engaging in the service. It is anticipated that the faster settlement will allow participating banks to gain earlier availability of funds as well as to identify return items and potentially fraudulent transactions earlier. Implementation of the service is scheduled for the second quarter of 2010.
| FedACH Same-Day | U.K. Faster Payments Service | |
| What types of payments are eligible? | Consumer checks converted to ACH and debits initiated over the telephone or Internet | Electronic payments made via the Internet, telephone and standing order payments |
| When will the service launch? | Second quarter 2010 | FPS was launched on May 27, 2008. |
| What type of settlement will it offer? | The same-day ACH service will be a batch-processed, gross settlement system. | FPS is a real time (no batches), net settlement system. |
| Is the service real time? | Entries will be deposited by 2 p.m., delivered by 4 p.m., and settled at 5 p.m. | FPS processes near real-time payments made via the phone or internet. P2P payments are processed 24/7/365, while standing orders are processed during banking hours. |
| What infrastructure does it use? | The FedACH network | VocaLink's existing ATM/Debit infrastructure |
| Source: Federal Reserve, CHAPS | ||
Global payments context is changing
The payments world is changing as emerging product innovations provide faster processing and delivery of payments. In general, faster payments reduce temporal risk to the parties to a transaction, which is the lag time between the deposit of an item into a clearing system and the delivery and settlement of that item. There are lessons to be learned with each development—whether in the United States or across the globe—that can help better inform the design and implementation of future payments services. Ultimately, all of the participants benefit by collaborating to ensure a more secure payments system.
By Jennifer Grier, senior payments risk analyst in the Retail Payments Risk Forum at the Atlanta Fed