By Michael Mueller, CEO, Form3

The payments landscape has undergone some significant changes in the last few years. For a start, we’re seeing fewer cash payments being made. As well as this, the sheer amount of payments that are being made is growing — and growing fast. All of this adds up to a big headache for banks, who are increasingly finding that their own systems and processes are not fit for purpose.

There’s a lot more going on behind the scenes in the payments ecosystem than the ordinary person on the street may realise. Many banks utilise legacy IT systems for payment processing while different standards and rules add to the complexity. Given how fast the payments landscape is shifting, driven by consumer expectations and many other factors, the need to upgrade this infrastructure has never been more apparent. Enter the New Payments Architecture, or NPA. The ultimate aim of this programme is to modernise and future-proof the UK’s retail payments infrastructure, bringing it firmly into the 21st Century. And as payments evolve, so must the banks.

The competition is heating up

The NPA promises to create a more robust, resilient, scalable and secure payments ecosystem for the UK. It will also simplify access to payments infrastructure, with lower barriers to entry to encourage wider participation that will in turn foster innovation and increase competition. This should already be setting alarm bells ringing for the bigger banks. While the NPA is a collaborative effort overseen by Pay.UK— with many financial institutions contributing to the consultation and planning of the programme — it is also going to be a great leveller. 

This is why it is essential for banks to be planning carefully for the new world order. Technical innovations such as ISO 20022, the new messaging standard for payments, will provide the foundation for the creation of consumer-friendly features and products that could give some players a competitive edge. Those institutions that fail to recognise the opportunities on offer — or that are hampered by a lack of appropriate resources — could find themselves falling behind very quickly. 

Getting ready for the NPA

From a participant’s point of view, virtually every process in the payment flow is going to change in some way. Some of the changes will be more subtle; others much more obvious. And when you consider the volume of payments involved — billions every year — the size of the challenge becomes clear. Participating banks are faced with the question of how they are supposed to take their existing payment flows and run them through the new architecture without making life completely impossible for themselves.

The need to modernise

One of the issues that the NPA has brought into sharp focus for a lot of participants is the outdated nature of their existing infrastructure. Some banks are still using systems built in the 20th Century, and upgrading complex and inflexible processing platforms with dedicated payments engines to the requirements of the NPA is a challenge. 

Those banks that still use legacy systems should take the NPA as a sign. If the payments infrastructure is being modernised and future-proofed, then banks should be doing the same thing with their own infrastructure. There are a number of innovations that the NPA will bring — including richer data sets and end-to-end operability — that will enable banks to develop services that really enhance the customer experience. However, if they are still using legacy systems then their ability to do so will be compromised. 

But while participants should be taking the NPA as a sign to get their own house in order, they shouldn’t fall into the trap of focusing too hard on the NPA itself. Instead, they should adopt a longer-term approach. As mentioned above, the payments landscape moves quickly and very few of us would be able to accurately predict what it will look like in 10 years’ time. Banks already have the bonnet open, and will be assessing what they need to do to adopt the NPA — the very least they should be doing is asking themselves how they will approach future challenges too. 

Transitioning to the NPA could be a challenge for participant banks, but with the right approach there are also several opportunities here. While it is a costly and complex undertaking, the banks that best adapt to the NPA can also put themselves in a position to deal with any future challenges that happen in the payments ecosystem. The key is to take a flexible, API-based approach that enables them to react to changes and develop new, customer-focused solutions as and when required. For many, there is a certain amount of pain that will have to be suffered to get to this point. But if they aren’t prepared to bite the bullet and overhaul their legacy infrastructure now, then they will find themselves with the same problems time and time again.