February 2007

Albany Opinion

Faster Payments Save Money

While the banking industry may plan to focus primarily on the consumer with its new Faster Payments initiative, switched on UK businesses will be able to use the new service to improve cash flow, improve competitiveness and drive down expensive payment costs, explains Adrian Stafford-Jones, Managing Director, Albany Software.

One Day Model

Excellent financial management is the key to successful business, especially for smaller organisations. But, for many, it is far from simple. Managing cash flow whilst awaiting customer payments, ensuring temporary or new staff get paid on time, maximising cash management or making early payment to attain a discount are key objectives. But when reliant on the three day Bacs payment process just how easy is it to achieve highly effective financial management?

For those that miss the Bacs deadline, the alternatives are either to use a cheque - with its attendant delays - or opt for the expensive next day CHAPS payment, which can cost up to £30 per transaction. For organisations that often have to use the very latest information to make payments, such as payroll bureaux and local authorities, these traditional options are far from ideal.

There is a clear demand for a lower cost, faster payments process. Indeed, current European Union targets will push payments generally towards a two day rather than three day process over the next couple of years. Furthermore, in November 2007, the UK Banking industry will be introducing a Faster Payments Service to allow consumers and businesses to make same day sterling payments.

This new initiative will facilitate almost real time payments via internet bank accounts and telephone banking services, offering immediate appeal to consumers, and providing banks with a further lure to entice the consumer online.

However, while banks are focusing heavily on the consumer marketplace for this service and paying less attention to the pent up corporate demand during 2008, Faster Payments will also be available via a service similar to BacsTEL-IP for Bacs Direct Credit submitters. This is a major step forward for UK business and one that most companies would do well to adopt.

Financial Reward

In part, the lack of corporate focus on Faster Payments can be attributed to the £10,000 limit placed on each transaction. But a belief that business transactions are primarily greater than £10,000 is misplaced. According to the Bank of England Financial Stability Review, published in December 2005, of the 32 million payments made via CHAPS annually, half are actually under £10,000 - demonstrating a very real market for Faster Payments across UK business.

As yet the transaction cost associated with the Faster Payments process has not been confirmed, but it is expected to be around £1. At that price, replacing up to 16 million CHAPS payments with a Faster Payment transaction represents a significant saving to organisations across the UK.

Furthermore, the option of a low cost, one day payment process offers organisations far more flexibility in running day to day operations, from improving cash control onwards. Payroll bureaus will be able to pay wages and salaries using the latest timesheets for weekly pay, overtime or expenses; Corporate Treasurers will make last minute business to business payments against known available funds to improve cash management; Finance Managers can maximise early or prompt payments to attain discounts; and local authorities will be able to make urgent benefits payments without incurring untenable costs.

Making it Work

The good news is that any organisation already using BacsTEL-IP to make Bacs Direct Credit payments is well placed to adopt Faster Payments. The faster payments initiative came from a joint project between the Office of Fair Trading Payments System Task Force and APACS. They then appointed VOCA, the organisation processing all Bacs payments and LINK, the ATM network organisation to form a joint venture company, Immediate Payments, to provide the IT infrastructure for the new service. The Bacs Direct Credit service is likely to be called Secure IP.

Critically, the file format for payment submissions will continue to be in the present APACS Standard 18 which means for organisations currently using the BacsTEL-IP delivery channel, the Secure IP channel will provide an even faster way of making payments. The BacsTEL-IP three-day processing service will continue to be provided for several years to come and will continue to be used to process Direct Debits, as Secure IP will not provide this functionality.

The service will allow payments to be received by beneficiaries within two hours of being sent to Voca. It is likely to operate during the usual five-day bank business week, with payments being submitted by the senders to Voca between 06.00 and 14.00, to allow for the two hours required to reach beneficiaries' accounts.

Leveraging the existing BacsTEL-IP infrastructure enables organisations to create a highly flexible payment system. For example, some products already include a timing function, raising an alarm should a company attempt to make a payment that cannot be achieved within the three day Bacs window. In the future, when this situation arises, a combined system could offer a Faster Payments alternative - a far quicker, easier option than today's expensive, manual CHAPS payment process.

Getting Ready

While upgrading existing BacsTEL-IP software solutions to support Faster Payments should be a quick and straightforward process, it is likely that organisations will have to go through the typical, drawn out application procedures with each bank to attain Faster Payments authorisation. Therefore, while the opportunity to leverage this new service will not come into force until the end of 2007 and during 2008, it is worth preparing a business case sooner rather than later.

Any organisation enduring the expense of regular CHAPS payments, struggling to ensure payroll information is collated in time for the three day Bacs process or looking to maximise cash reserves, has clear opportunities to improve financial management using Faster Payments.

So while the banks may think Faster Payments is primarily about the consumer, there are very real opportunities for UK businesses to leverage their investment in BacsTEL-IP to use Secure IP to achieve quantifiable improvements in financial management.

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