What effect will the New Payments Architecture (NPA) have on the payments industry?

Background

On 29 July 2021, the Payment Systems Regulator (PSR) announced its decision to phase the development of the UK’s New Payments Architecture (NPA) by narrowing the scope of the NPA central infrastructure services (CIS) contract.

In its Annual Plan and Budget 2020/2021, the PSR recognised that the implementation of the NPA in the UK was a priority. Following this, the PSR also raised a few concerns in its July Consultation Paper, suggesting that the NPA programme operated by Pay.UK is hosting unacceptably high risks. This included the risk of the new interbank system not providing cost-efficient solutions and delaying or preventing the delivery of benefits from implementing the NPA.

The PSR reviewed the responses from the industry to its consultation in February 2021 and concluded that Pay.UK is required to narrow the scope of the CIS contract. This meant that Pay.UK, must buy services to support single push-payments to allow most Faster Payment transactions to migrate to the NPA and that they may buy additional services and system functionality, subject to the PSR’s view.

The purpose of the NPA

The NPA aims to organise the clearing and settlement of payments between banks (‘interbank payments’). This means that payment from one Payment Service Provider (PSP) to another will be cleared and settled using a more centralised and simplified approach. This would work by bringing all of the payment schemes (such as Faster Payments (FPS) and BACS) together into one central infrastructure with the aim of one set of rules, standards, and processes.

The interbank system is used in the payment of bills, direct debits, and sending money to friends through the internet or mobile banking via payment schemes like FPS. In an ever-increasing digital world, there has been a greater demand to upgrade the efficiency and resilience of payments for both businesses and consumers, in particular for technology-driven challenger banks, fintechs and their users.

Pay.UK, the UK’s leading retail payments authority in payment infrastructure and standards for businesses and consumers, is appointed to deliver the NPA to the UK payments industry and is currently monitored by the PSR. Pay.UK has been tasked by the PSR to secure the CIS contract for NPA implementation by procuring through a competitive tender. The CIS provider will be responsible for the design and build of the NPA system which includes a structure of hardware, software and accompanying security standards and operational functions.

The evolution of the NPA has originated from the Payments Strategy Forum, which was established by the PSR to deliver collaborative initiatives for interbank payments such as BACS, Cheque & Credit (C&C), and FPS, to meet service user needs.

The impact of the NPA on the payments industry

From a practical perspective, the NPA will allow payment service providers (PSPs) to be able to develop additional services (‘overlay services’) that can be affixed to the single payment infrastructure, at either end of the payments flow. Some examples of services include:

• The Confirmation of Payee (account name checking service)
• Enhanced Data (capability to add more information within payment messages increasing data capacity and transmission)
• Request to Pay (enables better control on receivables e.g. bill paying)

These overlay services will not only enrich the end-user experience for consumers, but also provide value for money in their usage of the payment product. An altogether win-win for all contributors in the payments industry.

Migrating to one interbank payment system will mean significant changes for PSPs including better payment tracking and the ability to send more information with payments.

With any major change in the payments strategy comes potential disruption to the current payments landscape. There has been concerns amongst PSPs with dedicating a large amount of time, money, and effort to ensure the NPA integrates successfully. This could entail the application of new compliance obligations around the payments migration process, such as extra responsibilities on the PSP’s use of data, data sharing, and consent. Something worth considering ahead of time.

What's next?

The PSR consultation on their proposed changes and the draft legal instruments they plan to give to implement their decisions ended on 10 September 2021. By the end of the year, the PSR intends to publish a policy statement on the regulatory framework for the NPA. Firms offering payment services and solutions are encouraged to review this document when it is made available to get an informed view on mitigating risks to competition and innovation relating to the NPA’s operation.

At this stage, although a lot of the proposed architecture is still conceptual, it should inspire businesses to start having those in-house discussions about known and possible operational and technological challenges of NPA migration versus cost-benefit analysis for them and their customers.

Read more in Part 2...