It’s time for payments infrastructures to change
There’s no doubt about it, fintech is a force to be reckoned with, and the UK has positioned itself convincingly as the global capital. Speaking at an event only last month, Economic Secretary, Harriett Baldwin, commented on how fintech is “helping normal people in their daily lives” by giving them extra choices when it comes to finance. The payments space has seen a particular boost, with an average of £20 billion in annual revenue now generated across payments software, data and analytics platforms.
We have the support of a progressive regulatory landscape, and the FCA has strived to level the playing field for traditional financial institutions and fintechs. However, as the fintech space flourishes and evolves, some of the inefficiencies of London’s financial history and legacy are starting to be exposed.
The problem lies with access to core payment infrastructure. Currently, non-bank fintech providers, including payments service providers (PSPs) and electronic money issuers (EMIs) are denied direct access to core payments infrastructure, such as Faster Payments. As such, they are forced to run on the rails of high street banks payment technology.
So what does this mean?
Perhaps one major blocker with this set-up is that, because the number of clearing banks that offer access to payments services is limited, alternative payments providers are forced to pay a mark-up price to operate through a high street bank. This can sometimes be up to 600%!
The legacy issue
In recent months, we’ve seen a number of banking outages resulting in customers being locked out of payments transactions, all down to outdated IT architecture not being able to withstand modern day banking demands. As long as fintech companies are made to process and settle their payments via traditional banks, they are inevitably open to suffering too when these situations occur. If fintech payments could be directly managed and settled through their own streamlined technology solutions, clearly this would be more efficient.
Chained to rules
Additionally, because fintechs are forced to rely on the banks, PSPs can only offer services to those approved by the bank. Payments make up only a small percentage of other compliance considerations that banks need to think about, so it’s no surprise that they aren’t renowned for being particularly open-minded and forward-thinking in their approach to assessing credibility. Due to this mindset, PSPs that operate through them are ruled out from servicing whole market segments, such as money services businesses (MSBs).
Why is access denied?
The key reason that FinTechs are denied direct access is due to the fact that all non-banks are ruled out of gaining settlement accounts with the Bank of England (BoE). Whilst Faster Payments recently ruled that non-banks can gain direct access to the system, this is in effect pointless when fintechs are still blocked from BoE accounts – a core requirement of operating directly with payments infrastructure.
Of course, it is understandable for the BoE to take a firm approach to risk, particularly when it comes to settlement accounts. The Bank has the nation’s financial health to consider. But unlike banks, alternative finance providers are not leveraged. We are 100% collateralised and for every £1 of liability, we have £1 of assets. Although unlikely, if our customers requested to withdraw every penny they hold with us, we could satisfy that. A 2008-style “run on the banks” would not in fact impact us in the way it does banks, who tie client money up elsewhere. If we could simply work with the BoE to pre-fund our settlement account, to prove we hold in capital the equal value of our outward payments at any one time, any risk would be eliminated.
Solving the problem in the short term
Quite clearly, it will take time for the BoE to change its access requirements, but I’m pleased that the ecosystem is moving in the right direction and the BoE has at least confirmed a review of the current system. The Payments Systems Regulator (PSR), which was launched to fight for equal access for fintech players, has done a stellar job in highlighting this issue.
But, whilst this is a great step forward, it could be a number of years before we are able to secure direct access. In the meantime, a short-term solution is required so that fintech firms don’t lose out on business and growth opportunities. The Direct Agency model would provide a mixture of the current system (Indirect Agency model), and the ultimate goal – Direct Access, whereby fintechs would work with non-high street banks, who have better IT infrastructures, and fewer legacy issues. This would then provide PSPs with Direct Access to the Faster Payments Central Infrastructure technology, whilst the BoE settlement would be handled on the PSP’s behalf.
It’s no surprise that banks wouldn’t choose to be the channel for third-party access to payments infrastructure, just like fintechs don’t want to be chained to them. However, if we can push through this hybrid model for the short term, we would see a huge boost to the whole financial ecosystem. When fintech can offer so many opportunities when it comes to finance, it’s important that these blossoming businesses aren’t held back by outdated processes.
By Rich Wagner, CEO and founder of Advanced Payment Solutions (APS)