Banks are re-using technology to help them take advantage of a joint Office of Fair Trading (OFT) and banking industry initiative to reduce payment processing times to one day.
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The introduction of the Faster Payments System (FPS), which goes live today, is the latest IT challenge facing banks.
FPS offers people the ability to make internet banking and telephone transfers between banks in near real-time. Standing orders can be processed on the same day, rather than the usual three days.
FPS was the result of an agreement in December 2005 between the Office of Fair Trading and 13 UK banks. Payment infrastructure provider VocaLink is providing the network infrastructure to allow faster payments.
Before the introduction of FPS, banks could only make payments through Bacs, which takes three days, or through the same-day Chaps system, which is used for high-value payments. FPS offers same day payments for lower-value transactions.
Banks rely heavily on data that sits on thousands of legacy systems that are as much as 40 years old. Ripping and replacing these systems would be expensive and time consuming. Instead, banks are introducing service orientated architecture to harness their legacy systems for faster payments.
Banks offer FPS to customers as a service. To do this, they must link existing payment and database systems to Vocalink's faster payment network.
HSBC is among the banks planning to offering FPS from 27 May.
"It is a very significant technology challenge that has to balance the need for speed of the service and the need to ensure continuity of service and customer security," said an HSBC spokesman.
HSBC has harnessed its existing payments infrastructure but has enhanced it with new software. It has built an application to send and receive messages between its Faster Payments service and its central infrastructure, which is made up largely of legacy systems.
The bank has also changed the interfaces that customers use to connect to the bank to ensure that they can use Faster Payments without having to make any significant changes themselves. Payments made using FPS are non-revocable, so bank systems must get it right and help prevent customers getting it wrong.
"Apart from the gateway, all our development has been a refresh of existing technology," HSBC said.
Banks expect more attempted fraud following the introduction of FPS, but Barclays has also made changes to its security system to prevent fraud.
The Royal Bank of Scotland (RBS) last month announced that it would strengthen security in readiness for FPS. It is using technology from Experian Payments to check payees and recipients and to check that payments follow typical patterns for the business customer.
Jane Barber, head of product development banking relationship services at RBS, said that because transaction speeds are going to increase, the bank had to upgrade its systems to reduce errors and the costs associated with them.
Barclays has added two applications to its existing Global Payments Infrastructure. It has developed an application that communicates with VocaLink's FPS infrastructure. It has also created Faster Payments Service Hub to communicate with all legacy back-office and middleware systems. The middleware manages the routing of outbound payments and checks and responds to inbound payments.
"Other than the development and implementation of a new FPS Hub and Gateway there are no other new components added to the Barclays Global Payments Infrastructure," said Barclays. "That said there has been numerous legacy system configuration and interface changes made."
Faster payments was orginally scheduled for early 2008. The fact that is overdue by six months which is a reflection of the challenge in upgrading technology, said Chris Skinner, chief executive at financial services think-tank Balatro.
"It is primarily a technology challenge, in which UK banks have invested about £300m," he said.