Pay.UK and ISO 20022: One step closer to a new payments ecosystem?

United Kingdom

On 4 February this year Pay.UK, the leading retail payments authority, published a consultation paper setting out its proposals for the adoption of ISO 20022 and other key standards for the clearing and settlement capability to be enabled by the New Payments Architecture (NPA) infrastructure and inviting feedback on its proposed modernisation of the UK payments ecosystem.

The consultation paper focuses on three key areas:

  • The approach to implementing ISO 20022 to enable the core clearing and settlement capability of the NPA, describing the use case for ISO 20022 and identifying how data enhancements can drive innovation in payment services and deliver significant improvements to help overcome some of the challenges faced by the sector;
  • Foundational technical details for the ISO 20022 message standard including Pay.UK’s technical design and ISO 20022 readiness approach, including: (i) its proposed adoption of the business application header message as a wrapper (to be used in combination with any other ISO 20022 compliant message) to provide a consistent way for data about the ISO 20022 compliant message to be carried with it, and (ii)  six proposed message types that will represent the standard interface to the NPA Core. Pay.UK notes that it is particularly interested in feedback from developers in this regard; and
  • The future direction on concepts requiring a degree of standardisation across the payments ecosystem, such as the provision of a common liquidity interface for the real time gross settlement (RTGS) service operated by the Bank of England and the NPA, and the setting of payments metadata standards.

With the first phase of ISO 20022 expected to launch in the UK just two years from now, participants are encouraged to make the most of this opportunity to provide input on the critical structural designs of the UK retail payments landscape.

What are the NPA and ISO 20022?

The NPA is a new conceptual model for the future development of the UK’s shared retail payment infrastructure. It is set to replace Bacs and Faster Payments (i.e. payment schemes for which Pay.UK has operational responsibility) and implement ISO 20022 for clearing and settlement purposes. The Payments Strategy Forum issued its NPA blueprint – a detailed design and implementation approach for a new payment system for the UK - for consultation in July 2017.  It concluded its work and delivered its final blueprint in December 2017.  Since taking on the blueprint, Pay.UK has been testing the NPA conceptual architecture using typical customer payment journeys and forming the security and resilience model that will be vital in underpinning the NPA design. The programme will design the standards and business rules necessary for UK payments and provides a “once in a generation” opportunity to modernise data and service capabilities.

ISO 20022 (Universal financial industry message scheme) is an international standard developed by the International Organization for Standardization (ISO) to simplify global business communication, particularly in relation to the communication of financial information between people and systems. The standard describes the development methodology, registration process and organisation of the central repository that contains the ISO 20022 messages and their components. It does not describe the messages themselves, but rather serves as a “recipe” to develop message standards. In other words, ‘ISO 20022 compliant’ messages are defined using the ISO 20022 development methodology. 

The standard has emerged as the global standard designed to streamline communications for payments, securities, funds, foreign exchange trading and credit card sectors. Over 70 countries have already adopted ISO 20022 and, by 2023, it is expected to support 87 percent of the world’s financial transactions. A key benefit of using ISO 20022 in the payments space is that its messages allow a significant amount of data to travel with (or be allocated to) the payment. 

The migration to ISO 20022 for retail payments in the UK is intended to occur in parallel with the implementation of ISO 20022 for domestic high value and time critical payments (processed via the Clearing House Automated Payment System (CHAPS) and operated by the Bank of England)). Pay.UK is collaborating with the Bank of England to adopt the global messaging standard, to ensure their common objectives of supporting easier access to and wider interoperability between payment systems are achieved. It also anticipates a joint change process may be necessary going forwards.

The Consultation

Pay.UK anticipates that participants’ feedback on this latest consultation will help it design the standards used to exchange payments data and identify opportunities for further development. It invites end user representative bodies, financial institutions, businesses, solution providers and anyone with an interest in payments to respond to the consultation.

Pay.UK’s recommendations build upon its 2018 consultation, which was conducted in collaboration with the Bank of England and the Payment Systems Regulator and received generally strong support for its proposed introduction of ISO 20022. 

Data enhancement building blocks

In the consultation paper, Pay.UK proposes a range of data enhancements as building blocks to support future innovation.  Pay.UK anticipates the enhancements will:

  • help overcome challenges associated with fraud, efficiency, transparency and regulatory alignment;
  • be interoperable with the Bank of England’s operations, and harmonised with those of other payment system operators globally; and
  • benefit end users by providing more transparency about the payment, who is involved in it and its status.

The paper also discusses the potential use of legal entity identifiers, structured data, purpose codes, enhanced characters, enhanced remittance data and unique end-to-end transaction reference data blocks. For example:

  1. Structured data. Structured data is information that has been organised into meaningful data elements or codes, so that it can be made available for more efficient processing by a machine. For example, structured address fields can be used to automate delivery details when purchasing goods online. Pay.UK states that this could lead to changes to existing systems and procedures for NPA participants and end users who are adopting more structured data formats.Pay.UK does not intend to mandate the use of structured address data on day one. Rather, it intends to phase out unstructured addresses over the longer term.
  2. Enhanced Remittance Data. Enhanced remittance data is a capability that conveys more structured remittance information with a payment that is currently only afforded by unstructured fields of restricted length. Pay.UK believes that the ability to provide and exchange more structured remittance data will contribute to fraud prevention and enable improved processing and reconciliation. It states that the technical requirements to support structured and unstructured data will require development and testing by NPA participants. With this in mind, Pay.UK will initially support both structured and unstructured remittance data with the aim that unstructured data support will eventually be phased out.
  3. Unique End-to-End Transaction Reference (UETR). UETR is a 128-bit number used to provide an end-to-end reference for a payment transaction, mainly used in correspondence banking. A UETR can enable a service to provide exact status of payment information so participants and users can be confident about payment into and out of their accounts. Pay.UK states that this could lead to changes to existing systems and procedures, and thus there may not be a widespread adoption in the retail payments ecosystem. Nevertheless, Pay.UK concludes that it will mandate that the NPA standard supports the UETR.

In terms of standardisation, the paper discusses: the use of common standards as a basis for a harmonised liquidity interface; payment metadata standards and the exchange of additional information to improve payments efficiency; standards to enable market differentiation; a payment authorisation standard, to support payments that will require more than one authorising signatory at payment initiation; and standards to assist data exchange for the purposes of exceptions and investigations, to assist in the resolution of unintended outcomes. 

What next?

Pay.UK has set a deadline for feedback on the consultation of 31 March 2020 and plans to publish the findings of the consultation in the second quarter of 2020. Those invested in the payments space should keep abreast of future updates. With the Bank of England seeking to implement the first phase of ISO 20022 in 2022, our new payments ecosystem could soon be on the horizon.