How do Bank Payments work?

How Bank payments work?

We all know that a bank without payments wouldn’t be much of a bank at all, we also know that there are many types of payments out there such as SWIFT, CHAPS and BACs to name a few but something that we in the UK may be taken for granted or even forgotten is the ability to make a payment nearly instantly which is pretty unique in the world. This service is known as the Faster Payments Service (FPS)


What is Faster Payments? 

As mentioned, there are many types of bank payments, but what I’m focusing on is something known as the Faster Payment Services or FPS for short. Launching in 2008, it allows instant settlement – 24 hours a day, 7 days a week (minus scheduled maintenance) – within the UK for any supported UK bank, which there are currently 10 members who process over 1.2 millions transactions per month.

In order for the FPS to work, both banks (sender and receiver) need to be part of the FPS Scheme, those few banks or building societies that do not support FPS are known as Agency Banks and essentially need to partner with one of the supported banks who receive the funds on their behalf and pass it along usually by the next day. This is typically known via the sort-code, that helps to route the payments to the right bank or building society.

The FPS service was built and is maintained by an organisation named Vocalink who also provide other industry-wide services such as Account Switching, Paym and soon to be Zapp, which we will write about in a future article(s) but for now it is important to know that FPS is pretty much their flagship product, and some of their other services rely on leveraging FPS (in particular Paym and Zapp).


Time to pay

So what happens when you click or press that pay button, once you complete the basics such as the recipients account number, sort-code, payment amount and reference, typically the account details will be checked to see if it the account and sort-code are a valid combination and whether the sort-code can be routed via FPS, as well as basic validation such as you have the funds in your account or you have entered a number for the amount or you reference doesn’t have any funky characters, etc… Once that has all passed the bank reserves the funds on your account, so that you cannot spend it again, and submits a request to FPS who then confirm that they have got the message, in which then they will communicate to the receiving bank that some funds are owed. The other bank credits (adds) the funds to recipient’s account to acknowledge that the payment has been made, this may take a few seconds or hours depending on the bank and its IT systems. At this point in time, no actually money has passed from one bank to the other, only messages have been shared informing them of the funds passing across.

A high level flow of a FPS payment
A high level flow of a FPS payment
  1. Customer initiates a payment via any supported channel (e.g. telephony, Internet Banking, Mobile, etc…).
  2. Bank A acknowledges the requests, gathers the necessary details required, validates the request and finally submits it to FPS.
  3. FPS determines which bank or building society needs to receive the funds, in this case Bank B.
  4. Bank B confirms the incoming funds back to FPS
  5. FPS confirms back to Bank A that the funds were received by the receiver, at the same time FPS will accumulate the total amounts that Bank A and Bank B have processed and will remind them later of the differences that each owe each other and determine how much each party owes for the service provided.
  6. The happy customer sees their funds in their account.


Who pays who?

So essentially what happens is that several times a day Vocalink will inform all its participants of their current net positions and only the differences will be paid, this is known as “deferred settlement”. So if we take a simplistic example between 2 banks where Bank A had received a total of 80 transactions totalling £200 while Bank B had a total of 50 transactions of £120. Bank B will pay Bank A the difference in funds which will be £80 (£200 – £120). This of course is a bit more complex as there are many member banks but the summary is that only money owed to each other is sent across as opposed to each transactions. The system works as all the members are ‘good for it’. Vocalink earns about 1 pence per transaction which it uses to invest in the maintenance of the service and develop future services. This fee is incurred by the FPS members, who fortunately for customers do not currently charge their customers for this service.


What happens next?

So sounds all good, no? – Well, despite the service helping millions of transactions to occur and picking up in popularity over the years, having grown between 10%-15% per year, there has been criticism that it favours the large established institutions, who can afford to connect to the FPS network which is an expensive and complex undertaking, making it harder for smaller and newer entrants to complete.

Faster Payments   Volume and Value of FPS (2008 to 2014). Source: UK Payments Council
Faster Payments Volume and Value of FPS (2008 to 2014). Source: UK Payments Council

A key fact is that no new members have joined the FPS since its conception, however with the introduction of the newly set up Payment Systems Regulator (PSR) this may start to change, but as was only started on 1st April 2015, it may take a while before any big results are seen. Over the coming years it may see some radical changes, especially with the addition with the divestment of RBS’s Williams and Glyn who are looking to join the FPS membership too. However, the FPS network looking to expand to allow other payment mechanisms (Keep an eye out for our other articles where we will dive into Vocalink’s other services: Paym and Zapp) that will allow the service to be more accessible to customers and FPS members.

Well only time will tell. In the meantime we will keep paying each other with with FPS.




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