Supporting the successful renewal of the UK’s interbank payment systems

The New Payments Architecture (NPA) is one of the most significant changes to the UK’s interbank payments landscape in a generation. That’s why we’re consulting on ways to make sure risks to the delivery of the NPA are reduced while its benefits are maximised.

Let’s pretend that I owe you some money. Maybe we went to the cinema or had a meal together; you paid and now I need to settle up.

(And yes, I know that right now the chances of this scenario actually happening are pretty remote. But let’s just pretend – for one blissful moment - that the pandemic never happened and we can still do these things.)

Unless I give you cash, I'm probably going to send money from my bank to yours through online banking, or via a banking app on my smartphone. And millions of others are doing the same; last year, billions of payments were made in this way.

Interbank payments, those that flow from one bank account to another, are the lifeblood of many people’s finances.

So, whether I'm receiving my wages or paying bills (via Bacs/Direct Debit), or transferring money to a friend using internet banking (via Faster Payments), interbank payment systems are as important to the smooth running of my everyday life as they are to the functioning of the UK’s economy as a whole. 

The NPA is the payment industry’s proposed way of organising the clearing and settlement of most interbank payments in the future, including those that currently use Bacs and Faster Payments. 

That’s why getting it right is hugely important. This is a once in a generation change to the fabric of our payment systems.

It’s a significant opportunity to make payments and payment systems more resilient, meet growing demand for digital payments, support increased competition and, ultimately – why it all really matters - benefit people and businesses across the UK.

But the work is at a critical stage and to help support the successful delivery of these improvements, we’re consulting on options for reducing risks in two main areas:

• the procurement of the NPA’s central infrastructure services (CIS)
• the promotion of competition and innovation in the NPA

The procurement of central infrastructure services

In late 2016, the creation of the NPA was proposed by the Payments Strategy Forum – an industry group we set up to develop a payments strategy for the 21st century.

The Forum envisaged the NPA would consist of a ‘thin’ core layer of centrally-procured CIS to handle clearing and settlement. Market players new and old would then compete to offer innovative services and products to participants, businesses and consumers.

Four years on and Pay.UK is responsible for delivering the Forum’s vision and is procuring a provider of CIS for the NPA. Its intention has been for the same contract to include services to enable the migration of Faster Payments and Bacs transactions (including Direct Debits) to the NPA.

The current programme and intended contract scope are carrying significant risk, including that the CIS procurement will not deliver value for money. They could also stifle competition and innovation by procuring centrally some services that could potentially be provided competitively as overlay services. 

So, what’s our preferred approach?

We’re consulting on limiting the scope of an initial procurement to a ‘thin’ core that will provide an enhanced immediate payments service and enable Faster Payments transactions to move to the NPA. Pay.UK would then carry out further work to assess what additional centrally-procured common services (if any) are required to support the migration of Bacs transactions to the NPA. We are also seeking views on the appropriate way to secure this contract.

Simply put, we think a phased approach, where Pay.UK only buys the services needed to migrate Faster Payments for now and tackles the more complex issues around Bacs separately, will significantly de-risk the delivery of the NPA.

We think this will also reduce complexity, making the procurement quicker, easier and more efficient. This could accelerate the migration of Faster Payments transactions and allow us all to begin enjoying innovative new services and products sooner.

It could also promote competition by giving third parties an opportunity to provide services that support the migration of Bacs transactions (rather than procuring these services from a single provider now), which could in turn help reduce transition risk.

We also want to consider whether taking a different approach to the procurement of the NPA CIS would help lower risks.

We think there are three options for Pay.UK for the procurement of the NPA CIS:  

• continue with the current tender
• start a new tender
• directly negotiate with the incumbent provider of Faster Payments and Bacs without a competition  

Each option poses different challenges that must be carefully considered in relation to the other areas raised in our consultation.

Promoting competition and innovation

By promoting effective competition and innovation, we aim to ensure everyone has a good choice of affordable, safe and reliable ways to pay. The NPA is no different.

Building on the feedback we received following our call for input in January 2020, we’ve assessed the potential risks to competition and innovation in the NPA. We think that a ‘thin’ CIS design and effective procurement can reduce these risks.

In addition, we need adequate safeguards against any CIS provider’s potentially dominant position within the NPA ecosystem.

With this in mind, we’re proposing measures that require Pay.UK to, for example, ensure that user prices are set using proportionate, objective and non-discriminatory criteria, and that the contract with a CIS provider includes incentives to promote innovation and prevents it using commercially sensitive information for its own benefit in another market.

We’re also proposing three governance principles for the NPA ecosystem. The first principle will establish that Pay.UK rather than the CIS provider should be the primary decision-maker for all matters relating to NPA CIS provision. A second principle will ensure that rules promote competition and proportionate, objective and non-discriminatory access for the CIS. And our final proposed principle is that the CIS provider is operationally separate from parts of any wider business which could benefit from unfair competitive advantage in payment markets.

Next steps

Taking the right decisions now will put us in the best position to help make sure the NPA delivers good outcomes for everyone who uses it.

In whatever form the procurement proceeds, we want the benefits of the NPA to be felt as soon as possible. That’s why we want your feedback on our proposed options for reducing risks relating to the scope of, and approach to, the initial procurement by 19 March 2021.

This feedback will help inform a follow-up paper we plan to publish in 2021. If we’re considering requiring Pay.UK to make changes to the scope or approach for the initial procurement, we will set out and consult on our proposals in that document.

We're seeking views on our proposals on competition and pricing until 5 May 2021 with a view to publishing a policy statement on the issues, with next steps, later in the year.

You can send your comments to PSRNPA@psr.org.uk.

Final thoughts

We’re committed to making sure the NPA is fit to serve the diverse needs of the millions of us who collectively make and receive billions of interbank payments, worth trillions of pounds, every year.

It needs to be efficient, resilient and secure, while promoting competition and innovation.

In our consultation, we’ve laid out how we think this can be achieved.

We look forward to hearing your thoughts.