Written evidence from VocaLink (TDE 42)
1.1 The UK’s payments infrastructure, one of the very few real-time 24x7 payments systems in the world, is widely regarded as world class. VocaLink currently operates significant elements of this payments infrastructure, processing around 10 billion transactions each year, with a combined value of about £6 trillion – or 3.7 times the UK’s GDP. VocaLink provides the central infrastructure for Bacs Direct Debit and Credit payments (facilitating 95% of the UK’s salaries and virtually all state benefits) and the Faster Payments Service (online and mobile payments), as well as managing the world’s busiest ATM network (LINK), which connects over 70,000 ATMs. The average UK citizen interacts with the services that VocaLink runs 196 times per year – or at least once every other day.
1.2 VocaLink also operates the banking industry’s 7-day Current Account Switching Service and the Cash ISA Transfer Service, as well as being a key platform for the banking industry’s mobile consumer payments service, Paym. The future launch of Zapp will allow consumers and businesses to make real-time payments to retailers or other businesses when shopping online or in-store via a smart phone app.
1.3 VocaLink welcomes the opportunity to respond to this important inquiry by the Business, Innovation & Skills Select Committee from the perspective of the provider of significant elements of the payments infrastructure that the UK’s current and future digital economy will be built upon.
2.1 Payments System: An efficient and resilient payments system is critical to the functioning of our economy. The payments infrastructure is the mechanism that facilitates daily transactions whereby money is transferred from one account to another, and is essentially the ‘bit in the middle’ that connects the banks, building societies and other organisations with whom you have an account and from which these payments are made. The Payment Systems Regulator (PSR) which launched in April 2015 intends to open up access to payments systems and also drive greater innovation to benefit consumers, businesses and other users. VocaLink would like HM Government to retain oversight of the activities of the PSR, and regularly evaluate how its programme of work will impact upon the digital economy, including unintended consequences.
2.2 Immediate Payments: A culture of 24/7 communication, brought about through improved mobile and computing technology, has fundamentally changed customers’ expectations of service providers and is creating demand for immediacy of service and payment. As our economy becomes more digital and by that very nature, more immediate, there is a stronger case for the fully functioning immediate payment system that we already have in place to be more widely utilised. There are benefits for large businesses in utilising immediate payments as they will be able to make supplier payments, especially as the value limit rises from £100,000 to £250,000 as we expect it to later this year. There are also benefits for micro- and small businesses who can receive payments far quicker than through card payments, cheques, or Direct Debits. VocaLink believes that HM Government has a role to play in encouraging expedited takeup of the immediate payments system, which would also help to achieve their policy of tackling late payments to SMEs. We would encourage HM Government to sponsor the amendment of the Prompt Payment Code to encourage the greater use of Faster Payments.
2.3 Flexible payments: It is expected that the numbers of people who are self-employed or work flexibly will continue to increase, and consequently there will be an ever growing population who do not have a single job with a monthly salary, but rely on irregular and unpredictable work as their main source of income. There is a strong case for flexible Direct Debits, where the individual could decide when this would be paid and in what proportion. Push payments will also play an important role. VocaLink would like to see HM Government evaluating how it can show leadership or support efforts by industry to introduce more flexible forms of payments.
2.4 FinTech and the digital economy: FinTech is a growing movement that has the potential to deliver greater value and choice to consumers, especially as technology firms compete with established banks to provide ‘banking’ service directly to consumers. VocaLink would encourage HM Government to recognise and nurture the FinTech industry to deliver its ambitions to make London the global FinTech centre.
2.5 Open data/APIs/PSD2: The requirements set out by these policy initiatives will improve the customer experience through opening the door for third parties to sit between the bank and the customer making a payment. This will likely lead to technological innovations to support consumers with their payments. How HM Government implements PSD2 and takes forward open data and API initiatives will define the level of opportunity for the UK’s digital economy.
2.6 Digital currencies and the blockchain: VocaLink believes there may be some merits to digitising part of Sterling in the future, as is currently being investigated by the Bank of England, and in the shorter term, the technology underpinning many digital currencies – distributed ledger and blockchain – has many potential applications. However, VocaLink would strongly urge HM Government to undertake a detailed assessment of the risks and benefits of distributed ledger and blockchain technology; and its specific application, before incorporating it into existing or future policy.
Ben Wilson |
4.1 An efficient and resilient payments system is critical to the functioning of our economy. Everyone expects to be paid on time, all the time. Without the means to make and receive payments, business cannot function, consumers are unable to purchase the goods and services they need, and those reliant upon state funding are deprived of a lifeline.
4.2 There is much more to payments than the bank card you carry or the mobile app on your smartphone. These are just the tip of the iceberg. The rest of it, below the waterline, is the mechanism that facilitates daily transactions whereby money is transferred from one account to another. It provides the network of connections through which transfers are made from payers to payees across the UK economy. It is essentially the ‘bit in the middle’ that connects the banks, building societies and other organisations with whom you have an account and from which these payments are made. Similarly, it is this infrastructure that thousands of corporate organisations connect to directly so they can conduct their daily business. Whilst remaining largely unseen, it is this invisible 24x7x365 infrastructure that is critical to the functioning of the UK’s economy and society and to our modern day-to-day lives, from receiving our salary payments, to paying our gas bill on time and shopping online.
4.3 In order to understand how the digital payments system increasingly underpins our economy – and how it will play an ever more critical role as the foundation for the UK’s digital economy – it is necessary to set out some of the key facets of how the UK makes and receives payments.
4.4 While cash use in the UK remains high, with over 18 billion payments made last year, it has declined in recent years. In 2014, for the first time ever, cash represented just under half of all payments made in the UK. In fact, the UK is one of the highest non-cash users in the EU. In terms of non-cash transactions on a per capita basis, the UK is above both France and Germany and has more than double the number of transactions of Spain and more than four times that of Italy. It is no coincidence that the UK is at the very top of various e-commerce league tables with more sales and more spent online than any other developed country.
4.5 In the UK, individuals and businesses are comfortable with handling and using multiple methods for making payments. This ranges from paying with a contactless card for a journey to work, buying a coffee with cash, buying your weekly grocery shop with a credit card and paying your utility bill by Direct Debit. Increasingly the UK is becoming a nation that pays digitally for its goods and services.
4.6 Two of the critically important payments systems for the UK’s digital economy are Bacs and Faster Payments.
4.7 Bacs: Run by VocaLink on behalf of the Bacs Scheme Limited, it is a simple and cost-effective way to take recurring (and one-off) payments where same-day payment is not required – i.e. where scheduled payments will suffice. One important use for Bacs is to enable Direct Debits, such as those to your electricity, gas or mobile phone supplier. Through the Bacs system, it is possible for you to put in place a system that automatically credits your utility company’s account when you are billed for their services.
4.8 The Bacs system also processes Direct Credits, which includes 95% of all UK salary payments, and virtually all state benefits. The payment effectively takes three days to reach you after being initiated, but can be scheduled in advance so that you can receive or send the same payment with certainty of the timing – ‘set and forget’.
4.9 Faster Payments
4.10 Faster Payments, operated by VocaLink for the Faster Payments Scheme (FPS), is the UK’s immediate payment system that enables individuals, businesses and government to make payments up to the value of £100,000 with the certainty that it will reach its destination in near real-time. Virtually all internet and telephone banking payments in the UK are now processed via this system. It allows individuals to transfer money to friends and family via their account details, and can be used for making immediate or one-off payments, as well as arranging forward-dated payments. Critically, it can also be used by businesses for lower value payments such as bill payments or flexible salaries. This is explored later in this submission.
4.11 These are just two of the numerous payments systems used in the UK; and which the UK’s digital economy relies upon today. How they develop will have a fundamental impact on how the UK’s digital economy also evolves.
4.12 The Payment Systems Regulator (PSR) which launched in April 2015 intends to open up access to payments systems and also drive greater innovation to benefit consumers, businesses and other users. This directly impacts on the development of the UK’s digital economy, and VocaLink would like HM Government to retain oversight of the activities of the PSR, and regularly evaluate how its programme of work will impact upon the digital economy, including unintended consequences.
5.1 The payments system forms the beating heart of the UK’s economy, facilitating funds transfers from one account to another. But the real-time infrastructure that powers the payments system is also a platform for innovation and an engine of economic growth. It is the platform that the UK’s digital economy will increasingly rely upon.
5.2 In practical terms, a real-time payments system is the bridge between the digital economy and the real economy. With the growth of mobile, people expect to be able to make payments whilst they are on the go. This is reflected in the exponential growth of new payment services and mobile phone apps that promise to make payments easier than ever.
5.3 The proliferation of smartphones has created a society that is locked into the internet whenever and wherever, with constant and immediate access to a huge array of services and 24/7 communication. It is not about the phone itself, as much as the immediacy of interaction it facilitates. Instant interaction on social media, up to the minute bank balances via online banking and the ability to buy with one click on Amazon wherever and whenever are increasingly the norm for consumers. The subsequent demand for immediacy and convenience has fundamentally changed the expectations that customers have of service providers.
5.4 At the retail point of sale, shopping online, paying bills online or sending money to a family member, we expect payment to happen immediately. Debit cards are perceived as immediate payment despite the reality for the merchant that they receive the money some considerable time after the event. The customer does not care this is the case as what will determine their choice of payment method will be driven by immediacy and convenience. The growth of online commerce and in particular the exponential increase in demand for immediate online digital content has also had an impact on demand for immediate payments. Generation Y customers, growing up with unlimited access to the Internet and the ‘one-click’ purchases of online content, goods and services, expect immediate payment power. There is little point in choosing a film to download onto a tablet or smartphone if you then have to send a cheque in the post before you can download it.
5.5 As our economy becomes more digital and by that very nature, more immediate, there is a stronger case for the fully functioning immediate payment system that we have in place to be more widely utilised. Two notable beneficiaries of this would be SMEs and employees.
5.6 However it is not to say that every payment needs to happen immediately. The Bacs processing cycle takes three days for Direct Debit collection, but these are regular collections and there is no float (debits and corresponding credits happen together on the third day). Whilst such a system may not be built this way today from scratch, it works well for many uses across our economy and society where payments can be planned in advance and delivered where and when they are expected. Much of the flexibility that the payments system can offer to consumers and businesses alike will stem from the adaption of established but reliable forms of payments such as Direct Debits that most UK consumers and businesses will use.
5.7 Fundamentally, if the UK’s future digital economy will be based upon the exchange of currency (of some kind) for goods and services, the platforms that these transactions take place on will play a fundamental role in shaping the evolution of our digital economy. This submission gives an overview of some of the issues that the Business, Innovation and Skills Select Committee may therefore want to take into consideration.
6.1 Over the next ten years we will likely see an increase in the use of Faster Payments and an increase in innovations which build on this existing system. These new services will accelerate the move away from cash and cheques and start to challenge the dominance of debit cards when we pay online, on our mobiles and in store.
6.2 In the longer term it is likely that more and more people and organisations will take advantage of the fact that an immediate payment system is readily available. Larger businesses will be able to make supplier payments, particularly as the value limit on transactions rises past the current level of £100,000 to £250,000 (this is expected to happen later this year). This has obvious benefits for micro and small businesses especially as payments can be received far quicker than they would be through card payments (seemingly immediate for the payer but not for the payee); cheques or Direct Credit payments. The financial crisis taught us that ‘cash is king’ and the difference between the survival and failure of a small business can be its liquidity over a matter of days. Greater certainty of cash flow can also have a positive effect on the ability of small businesses to grow.
6.3 Over the longer term the majority of businesses will move towards Faster Payments as a default means to make supplier payments (scheduled and one-off) up to a certain value. However this will take a considerable time and in the meantime the benefits to SMEs – and the broader UK economy - are being lost.
6.4 Therefore HM Government has a role to play in encouraging expedited uptake of this already functioning system, as part of their policy on reducing late payments to SMEs. There is merit in considering how the Prompt Payment Code could incorporate Faster Payments into its terms for signatories, especially as it relates to payments to SMEs. Similarly, HM Government could lead by example, by encouraging the public sector as a whole – from central departments to local government and agencies – to adopt Faster Payments as their default payment method to SMEs.
6.5 Employees and employers can also benefit significantly from businesses’ greater usage of Faster Payments. Staff salaries will be increasingly easy to pay, as a payment can be made at the end of a week to reflect the exact hours worked, with the employee receiving their salary immediately rather than having to wait until the following week to receive it. For the millions of employees across the UK (again, who are also consumers with expectations of immediacy gained from other aspects of their lives) who get paid on a contract or hourly basis, this will allow them greater flexibility in the way they manage their finances. For the employers this will, again, contribute to greater certainty of cashflow. So there is also an opportunity for HM Government to identify what role it can play alongside employers’ representatives and organisations such as the Federation of Small Businesses, to promote the expedited usage of Faster Payments.
7.1 Regardless of speed of payment it is this sort of ‘flexibility’ that a digital payments system such as that which underpins the UK economy has the potential to deliver. In return there are considerable benefits that can be returned to different corners of this economy and society.
7.2 Already around 1 in 40 people in employment have a zero hours contract as their main job and this figure is likely to rise. There are around 4.5 million people registered as self-employed, higher than at any point over the past 40 years. And although the rise in total employment since 2008 has been predominantly among the self-employed, the average income from self-employment has fallen by 22% over the same period.
7.3 The data also shows that self-employment is likely to be both an alternative to long-term unemployment amongst all income ranges and a top-up option for those past the formal retirement age. Similarly self-employment is also the situation that many individuals starting their own businesses will find themselves in. Consequently there will be an ever growing population who do not have a single job with a monthly salary, and who increasingly rely on irregular and unpredictable work as their main source of income.
7.4 If we are to provide the optimum conditions for the UK’s digital economy, an obvious facet would be for HM Government to provide the best possible platform for entrepreneurs to succeed. For many, making the move from paid employment with a regular income to self-employment where income is more irregular is a major risk, especially as their outgoings will remain attached to rigid dates (e.g. a monthly electricity bill), and with penalties for missing these payments.
7.5 So if the UK as an economy is to encourage people to become more financially independent, to encourage entrepreneurism, productivity and further provide a platform for economic growth, there needs to be greater flexibility in the way people pay their bills and their outgoings that match the increasing incidence of irregular incomes. In essence, there is a very strong case for innovation such as flexible Direct Debits, where the individual could decide when this would be paid and in what proportion – perhaps via their mobile – to suit their own economic situation. Push payments will certainly play an important role here, empowering consumers to initiate the payment, at a time that suits them, rather than the payee initiating it on their terms.
7.6 The payments system is capable of delivering this innovation, but what is lacking is the consensus across the economy – necessary as it will require the buy in of consumers and businesses, payers and payees, to effect. Organisations such as Toynbee Hall have been recommending such initiatives to counter financial exclusion for some time; and as such leadership from HM Government on this issue may help to expedite the process of achieving consensus across all parties on this issue.
8.1 Faster Payments is essentially the foundation that much of the future innovation in the payments system will be built upon. As immediate payments are increasingly expected by all individuals and organisations, this will help to shape the future direction of innovation. One such industry where this plays a key role is financial technology or ‘FinTech’.
8.2 The concept of technology underpinning the financial services industry is not new. However, the concept of technology firms competing with established banks to provide specific ‘banking’ services directly to consumers, at lower cost and in more innovative ways than many banks are able to is a more recent market dynamic. It is a growing ‘movement’ that has the potential to deliver greater value and choice to consumers, increasing the options for individuals and businesses to pick and choose the services that they want, which at present they may receive from a single bank.
8.3 The UK’s FinTech industry was worth £20bn in 2014 across payments, software, data analytics and platforms; and employing 135,000 people according to a recent report by Innovate Finance. This contribution to the UK’s economy will certainly increase over the coming months and years. HM Government has backed this sector to be a leading export for the UK economy in the coming years, and is promoting London as the global FinTech centre.
8.4 A significant proportion of this innovation will be in payments and as such will be built and rely upon the existing immediate payments infrastructure. The UK is a world leader and the some of the systems operated by VocaLink have subsequently been introduced in Sweden and Singapore and VocaLink has recently signed a Letter of Intent with The Clearing House in the United States. As such, the UK is in an enviable position of already having this infrastructure in place and we are in a better position than most to maximise the benefit that FinTech deliver. However if HM Government’s ambitions for this important and burgeoning sector of the UK’s digital economy are to be realised, this infrastructure should be recognised and nurtured as such.
9.1 The second Payments Services Directive (PSD2) will provide a platform for e-commerce to thrive through allowing third party providers to initiate payments from consumers’ accounts. In parallel, HM Treasury’s Open Data and API initiative will require UK banks to provide account information through an Application Programming Interface (API) to account aggregators and similar service providers. This offers huge potential for the development of services that are driven by the data held by banks about their customers, or that can improve the payments experience for end-users. Banks, FinTech providers and established e-commerce companies are already evaluating the services they can offer on the back of PSD2.
9.2 Essentially the requirements set out by these policy initiatives will improve the customer experience through opening the door for third parties to sit in between the bank and the customer making a payment. Given the proliferation of smart phones and other portable consumer tech, we are likely to see ever-more advanced and user-friendly apps, that could fulfil a number of functions ranging from reducing the ‘faff’ of making a payment either in store or online, to helping people manage their expenditure or improve their saving habits. These third parties could also act as a data aggregation service, ‘interpreting’ the data held about you by your bank, and automatically recommending the best financial services and products (such as loans or current accounts) based on your own personal spending and saving habits.
9.3 There are obvious implications here for maintaining customer trust, and this is something that the banking and payments industry must get right if they are to be successful, and beneficial to consumers.
9.4 With our research showing that 83% of consumers in the UK check their balance before making a significant purchase, and over half interested in an app that would allow them to quickly check their balance and help them budget more easily, there is a market eager for innovation. It is likely that in ten years’ time, making informed decisions on expenditure will become even easier as portable communication devices (from smartphones, to watches, glasses, etc.) help us budget more effectively, giving us more options for ring-fencing funds within our bank accounts in seconds and even automatically helping us seek out better ‘deals’ from retailers.
9.5 How HM Government implements PSD2 over the next 2 years, which has a narrower scope to the Open Data & API initiative, and indeed how this initiative is implemented will define the level of opportunity this exciting area poses for the UK’s digital economy.
10.1 Arguably digital currencies – and bitcoin in particular – as a means to pay for goods and services are regarded by many as a passing fad and unlikely to become a mainstream form of payment because of their volatility, their lack of oversight and their complexity.
10.2 The most significant from the perspective of an individual or a business is the sheer lack of oversight and therefore means of redress. The distributed ledger technology that underpins most digital currencies means that it is virtually impossible for a regulator to provide some sort of protection for those that use a digital currency. Transactions are essentially unmonitored which is of course good for criminal activity, but not so good if you are the victim of it. Digital currencies’ role in the UK’s future economy should therefore not be presumed as an eventual ‘given’ and as such should not be treated as a fundamental plank of HM Government’s digital economies policy.
10.3 The Bank of England is examining the possibility of ‘digitising’ part of Sterling in the future, in order to reduce some of the limitations of a national currency, and there may be some merit to this. For instance, without having to make substantial changes to the existing real time central infrastructures (such as Faster Payments and CHAPS), a digital currency could be programmed to fulfil a set of transactions in sequence, such as the purchase of a property involving a chain of transactions e.g. payment from the purchaser to a solicitor (where it is held in escrow until relevant documentation is signed) and then onto the vendor. Additionally a digital currency would deliver greater user control over a payment if, as bitcoin is, it is based on a ‘push payment’ model and as such would not involve giving customers’ data to businesses, reducing the likelihood of fraud. Due to the international nature of most (but not all) digital currencies, there would be no exchange costs which may be appealing to individuals and businesses that undertake significant cross-border activity.
10.4 So, in the shorter term, the technology underpinning many digital currencies – distributed ledger and blockchain – has many potential applications. However VocaLink would strongly urge HM Government to undertake a detailed assessment of the risks and benefits of blockchain technology and its specific application, before incorporating it into existing or future policy and in particular as a facet of its digital economy policies.
10.5 One specific issue to address would be how distributed ledger technology could be adapted to complement the existing payments – and so deliver wider benefits to end users – rather than seeking to replace it. This technology, and the thinking around it, is in its infancy and as such HM Government must be careful not to ‘back the wrong horse’ in any efforts to harness disruptive technologies. For the sake of today’s digital economy, there are unrealised potential benefits in the established and world-leading Faster Payments service, and as such HM Government would be advised not to neglect this in establishing its policies for the UK’s digital economy.
11.1 Our economy is becoming ever more digital at the same time as our payments system becomes ever more digital. However these respective evolutions are not necessarily as complementary and co-ordinated as they could be. There is no doubt that over time that all businesses will take advantage of the digital payment systems that are already in place and delivering benefits to corners of the UK’s economy and society. The steady decline in the use of cash tells us that more and more consumers, businesses, charities and others are all increasingly turning to the many digital payment options that are available to them. However more businesses, more individuals – as both employees and consumers – and even the State and the citizens it serves, can be better served by what is already available, sooner, if HM Government is able to develop a greater understanding of how the UK’s world leading payments system can support policies to support our world leading digital economy ambitions.
11.2 If the UK’s payments system are to provide the foundation for the growth of the UK’s digital economy and by doing so meaningfully contribute to economic growth, policy makers attempting to create the optimum conditions for this industry to grow need to have a greater understanding of the how the payments system works and what it can and cannot do for the UK.
11.3 VocaLink’s key recommendations for HM Government are as follows:
29 October 2015