Interbank payments in the UK, such as Bacs and the Faster Payments Service (FPS), used to pay wages, pay bills or transfer money to a friend, accounted for nearly £7 trillion in 2020. The UK is now planning to replace the underlying infrastructure for the New Payments Architecture (NPA), which may be in place by 2024.
The UK began its open banking revolution in 2017 with the adoption of antitrust remedies against the nine largest banks, compelling them to provide access to account holders’ data to third parties. The UK also created a new regulator, the Payment Systems Regulator (PSR), and a new operator, Pay.UK, tasked with the promotion of competition and innovation in the payment sector.
Also in 2017, the UK announced the creation of the NPA, aimed to modernize the UK’s retail payment infrastructure. The NPA “is the payment industry’s proposed way of organizing the clearing and settlement of most interbank payments in the future, including those that currently use Bacs and Faster Payments,” according to the PSR.
One of the main features of the NPA is that the core infrastructure to provide real-time payments or account-to-account payments (clearing and settlement services) will be provided by a single supplier (a layered architecture with open APIs). Then, payment service providers (PSPs) and other third parties will have access to this infrastructure to provide their services to end users. The operator in charge of designing the NPA and selecting the central infrastructure service (CIS) provider is Pay.UK.
Pay.UK, supervised by the PSR, is a strong advocate for open banking. It previously claimed that “open banking payments [will] be a viable alternative to card payments for purchase [in] both online and in face-to-face retail environments.”
While this NPA proposal was welcomed by most parts of the industry, according to the responses received by the regulator in 2021 during the open consultation, many players highlighted the potential competitive risks of having only one CIS provider that may have interest in other payment systems or in the overlay services.
To this end, the PSR published on December 6 the regulatory framework for the NPA, establishing the requirements that Pay.UK and the CIS provider will have to follow to minimize risks to competition and innovation in the NPA ecosystem.
The first set of concerns refers to monopoly risks. A CIS provider might not have strong incentives to control costs or improve services. The second concern is that the CIS (or an affiliate) could have a significant interest in another payment system, and it could give an unfair advantage to that system. The last concern is that the CIS could have a significant interest in overlay services, which could give it an unfair advantage over other providers of similar services.
To address these concerns, the PSR proposes a set of requirements that are likely to mitigate these risks. For instance, Pay.UK, and not the CIS provider, will be the primary interface with CIS users. Pay.UK will also be the primary decision-maker about the provision of CIS to a CIS user, and it will have the authority to set prices and standards to promote competition.
Additionally, if the CIS provider is also present in other payment systems or is itself a PISP, it will need to observe a strict separation of both businesses, and it will be prevented from disclosing information to the public about the provision of CIS.
Despite possible competition concerns, this is a step toward open banking 3.0, where instead of compelling financial institutions to share data with others, it will provide a new infrastructure with open standards that will likely deliver a more open ecosystem and encourage PISPs and third parties to join and innovate.
It is too early to say whether this system will become dominant and replace other payment systems created by financial institutions, as it is expected to cohabitate with them. Yet, it has all the elements to succeed. First, the NPA will replace the core infrastructure that most legacy banks and financial institutions use to make payments. Second, it will use open APIs and international standards, which will facilitate harmonization with over 70 countries. Finally, third parties will likely have easier access to data, fostering innovation.
However, the NPA is still in its early stages — it will take a few years to be completed, and it won’t be an easy task. According to the Bank of England, this system may be operational in 2024. But for the moment, PSR is seeking comments on the suggested requirements for Pay.UK and the CIS provider.