NPA and ISO 20022 pave the future for modern banking in the UK 

The New Payments Architecture (NPA) and ISO 20022 stand a chance of revolutionizing the UK’s banking sector. If you add AI into the mix, the vision of “modern banking” goes way beyond what we might expect. But human expertise is still necessary to ensure 100% compliance. 

The UK has always been at the forefront of financial innovation. The Faster Payments Scheme (FPS), introduced in 2008, was a testament to this pioneering spirit. Now the New Payments Architecture (NPA) is on the horizon, and it is set to directly impact FPS participants within the next year. The project for a New Payments Architecture was hailed “one of the biggest changes happening in UK payments”, as it plans to reorganise how retail interbank and cross-border payments are cleared and settled. 

New Payments Architecture: why the transition? 

The idea behind NPA was to consolidate all current payment systems which process millions of payments every day: 

  • Automated Clearing Systems (BACS) used for receiving wages or benefits, 
  • Direct Debit used for paying bills, 
  • Faster Payments used for transferring money via online banking, 
  • the Clearing House Automated Payments System (CHAPS) used for clearing wholesale payments and 
  • Cheque and Credit Clearing (C&CCC) system. 

The new payment scheme, ready to operate in a real-time paradigm, will be a single, central, modern ISO 20022-compliant architecture. The transition to ISO 20022 will allow enhanced data to accompany payments, supporting faster allocation and reconciliation of incoming payments. The NPA is expected to reduce costs, prevent fraud, and lay the groundwork for a replacement to the FPS. 

The transition from FPS to NPA was necessitated by several challenges faced by FPS participants. The cost of redeveloping legacy core-banking systems in light of new payment changes, such as ISO 20022, is significant. The current approach to integrating critical payment infrastructure is disjointed, causing high regression testing overheads and a lack of interoperability capabilities. Moreover, building translation layers on top of legacy technology will be a sunk cost within the next three years. 

Transitioning from FPS to NPA: beware of the challenges 

The payment modernization agenda is not without risks. Not all financial institutions have the IT capacity or capabilities to address the significant changes brought about by NPA. Upgrading their current system or moving to a new one  may be a considerable challenge in the time available. Furthermore, the transition period from FPS to NPA will trigger a significant fraud risk that the banking industry will need to mitigate effectively. 

The Payments Systems Regulator (PSR) is thinking hard about the next generation of payment infrastructure. There’s a need for better cooperation between payment systems to give users more choices. Considering the broader ecosystem, we must understand how merchants and users are impacted. The PSR must facilitate a system that is cheaper, more competitive, and drives innovation. 

The economic model of NPA: balancing benefits for merchants and banks 

The implementation of the NPA also raises questions about whether merchants will pass on cost savings to customers or not. For the NPA to truly benefit everyone, it needs to have a proper economic model and chargeback rules to benefit merchants. Equally, for banks to benefit, they must adjust their current business case to provide a more holistic view and offer the services their customers need. 

Given the scale of this change, all stakeholders funding the NPA will need to have an agile approach to delivery. The underlying technology for the future should support alternatives to cards. The NPA promises to provide more certainty, capacity, and scale, but it needs to align Open Banking and instant payments. 

Delivering cost-effective outcomes with AI as copilot, not captain 

To deliver these outcomes cost-effectively, the banking sector is eyeing AI-like solutions. The duty of care, a key aspect of the new regulations, depends largely on customer understanding and provision of the information they need to make decisions. 

Banks and financial institutions will need to use AI to review customer circumstances, the changing environment, and available products to advise customers on the best products and to automatically move customers’ funds around. This makes AI-to-AI connections essential. 

However, while the consumer duty does not prevent firms from adopting business models with different pricing by groups, AI-derived price-discrimination strategies could breach the requirements if they result in poor outcomes for groups of retail customers. In short, AI is not a silver bullet for banks. It could operate well as copilot, but not as captain of banking operations. Human expertise will remain at a premium. 

Is your organization prepared for the future of banking? 

As we stand on the brink of this significant transition, it is crucial to remember that change, while challenging, often brings opportunities for all kinds of payment service providers. The NPA, along with ISO 20022 adoption offer an opportunity to streamline operations, improve efficiency, and ultimately, better serve customers. 

Are you ready to navigate the changes brought to financial market infrastructures by the New Payments Architecture and ISO 20022? If you need a time shield for ISO migration, we recommend using a flexible solution: an independent converter – for details see “NPA ISO 20022: the game is afoot!”, “Payres: deadline buffer for CHAPS ISO 20022 migration”, or delve right into our free e-book: “ISO 20022: a new standard in a complex environment”.  

Our team of experts is ready to guide you through this transition, ensuring your organization is prepared for the future of banking. Act now and start your journey with us.