The UK FinTech report, commissioned by HM Treasury and published last month, confirmed something we’re pretty much all agreed upon: “The UK is a global capital for FinTech”. Within FinTech, the payments space in particular has been boosted by new entrants, with an average of £20 billion in annual revenue now generated across payments software, data and analytics platforms.
The report cites London’s strength as the global financial capital as a key driver behind this. Yet, although our
FinTech booming – payments infrastructure compliance remains in the dark ages
sophisticated history might be our biggest asset, it is often our biggest barrier to further progress, writes Rich Wagner, CEO and founder Advanced Payment Solutions (APS).
We are lucky to have the support of such a progressive regulatory landscape in the UK and the FCA has worked hard to level the playing field for traditional banks and FinTech players. However there are still a number of inefficiencies thanks to legacy regulation, systems and compliance matters that have for too long been accepted as simply ‘the way things are done’.
Non-bank FinTech providers, including payment service providers (PSPs) and electronic money issuers (EMIs) are restricted from directly accessing core payments infrastructure, such as Faster Payments. As such they are forced to run on the rails of traditional high street bank payments technology.
How does being shackled to traditional banks impact FinTech players?
Legacy Problems
All the while FinTech companies are forced to process and settle all their payments through traditional banks, they are forced to suffer all the inconveniences that come with legacy technology. We’ve seen a number of banking outages and customers locked out of payment transactions, thanks to banks’ creaking IT architecture buckling under the weight of modern banking demands. It’s a no brainer that FinTech payments would be more efficient if directly managed and settled through their own streamlined technology solutions.
My technology. My rules.
Running through the banks means PSPs can only offer services to those approved by the banks. As payments makes up just a fraction of the wider compliance concerns banks have to overcome, they are not known for taking a tailored approach to assessing credibility. Their broad brush approach to compliance means PSPs that operate through them are ruled out from servicing whole market segments, such as Money Services Businesses (MSBs).
The Cost Factor
As the number of clearing banks offering access to payments services is limited, alternative payments providers are forced to pay a mark-up price to operate through a high street bank – which is in many cases up to 600%.
Why is access denied?
Above all, the biggest barrier to FinTech players, when it comes to gaining direct access to core payments infrastructure, is that all non-banks are ruled out of gaining settlement accounts with the Bank of England (BoE). Faster Payments has recently ruled that non-banks can gain direct access to the system. However, all the while we are blocked from BoE accounts, which is a core requirement of operating directly with payments infrastructure, this gesture has little value.
It is expected that the nation’s public bank needs to take a firm risk-based approach to granting access to settlement accounts. However, the reality is that unlike banks, FinTech firms are not leveraged. We are always 100% collateralised – for every £1 liability we have £1 of assets. If we could use the same strategy to operate directly through the BoE, the risk involved would no longer be a concern.
A solution for the short term
It will take some time for the BoE to completely change its access requirements – but momentum is at least in the right direction. The Payments Systems Regulator (PSR), launched last year has done a fantastic job in raising this issue and fighting for fair and equal access to payments infrastructure. This push has led to Faster Payments opening its doors and the BoE is reviewing its rules for access. However, we cannot sit back and consider this a job well done. In the meantime, we need a short term solution to prevent FinTech firms from losing out on valuable business and growth opportunities.
The Direct Agency model would provide a hybrid of the current system (Indirect Agency model), and the ‘Holy Grail’ – Direct Access. The system would involve FinTech players working with a non-high street bank, which has fewer priorities beyond payments and a cleaner core IT infrastructure. Unlike the Indirect Agency model, this option would provide PSPs with Direct Access to the Faster Payments Central Infrastructure technology, but like the Indirect Agency Model, BoE settlement would be handled on the PSP’s behalf.
The reality is that banks don’t really want to have to be the channel for third parties to access payments infrastructure any more than we want to be chained to them. Payments is just a minute segment of the wider priorities of a high street bank. Pushing through this hybrid, short term solution would therefore be a huge boost, not only to FinTech companies, but to the wider financial ecosystem.
To view the payments infrastructure landscape, please visit.
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