Settling the access issue
Access to instant payment infrastructures for non-bank payment service providers (PSPs) in this era of public policy that is focused on encouraging more open, competitive banking is a key public policy issue, says John Jefferson, General Manager of UK Faster Payments at the New Payment System Operator (NPSO). The trend was recently demonstrated when the Bank of England allowed TransferWise to access its real-time gross settlement (RTGS), with ipagoo following suit, thereby enabling these newcomers to access the UK Faster Payments Service (FPS) and compete directly with large incumbent banks on payments provision.
That’s settled then: the provision of non-bank RTGS accounts is possible and has lit the fuse on a new era of open access in payments.
Until just a few months ago, any company wishing to offer truly bespoke real-time payment services faced an insurmountable regulatory hurdle. Without access to an RTGS account at the Bank of England (BoE) it was impossible to secure a direct connection to Faster Payments.
Identified as one of the key detriments to payment systems access by the UK Payments Strategy Forum, this restriction meant that non-bank entrants to the payment market could never compete on a level playing field with high street banks and building societies. This is why changes were made by the BoE last year to open up RTGS settlement accounts to non-bank PSPs. Due to this, a whole new generation of innovative PSPs are now preparing to offer payment services on an even footing with the biggest names in UK banking.
Leading the way is TransferWise, an international money transfer company, which just last month became the first non-bank to directly connect to UK FPS. As a non-bank, it would previously have had to rely on a commercial bank that holds a settlement account at the BoE to effect settlement on its behalf and connect to the Faster Payments infrastructure in this manner. However, with their own new direct connection, TransferWise can now offer a truly bespoke real-time payment proposition to its customers, bringing more competition to market.
In many ways this milestone represents the culmination of the Faster Payments Access Programme, which set out in 2014 with a mission to level the playing field for every firm that wanted to offer real-time payments to their customers. The programme has only been possible thanks to extensive collaboration between Faster Payments, the BoE, the government in the form of HM Treasury and the regulator, the Financial Conduct Authority (FCA). They all combined to deliver a host of technical, policy and statutory changes to open-up real-time 24/7 access to new players and markets.
The resultant UK New Access Model redefined the standards and processes for PSPs, catalysing a market among technology vendors, and leading to an increase in direct participation to Faster Payments over the past four years from 10 institutions to 23, with more still in the pipeline. And now that new PSPs are seeing the benefit, the pace of uptake is expected to increase. In early May 2018, ipagoo became the second directly connected non-bank in as many months, proving the policy is working and newcomers are coming to market.
Stability, innovation & competition
The attraction of UK FPS participation to new PSPs in a digital world, where real-time is increasingly the expected standard, is an obvious one in terms of speed and constant availability. However, the benefits extend far further. As previously indirect participants establish their own direct connections to payments systems it will begin to sever the link in financial exposure between new PSPs and commercial banks. This serves to share the risk along with the benefits, substantially increasing the stability of the UK financial system.
The ultimate beneficiaries of this are the end users of payment systems – the customers, businesses and organisations that are the beating heart of our economy and society. Ideally, they will never notice this change, in a crisis situation it could provide a vital backstop.
Where users are more likely to notice the benefits of an open access model are in new, innovative, real-time services that are set to offer consumers and corporates greater choice and flexibility in how they manage their money. We can already see the potential of this in overlay services like the mobile UK Paym service. This now handles over 20,000 payments every day, to a value of more than £167 million in the second half of 2017 alone – and all that is required is a mobile phone number and a bank account to send and receive payments.
An accessibility boom
On 1 May 2018, UK Faster Payments joined the New Payment Systems Operator (NPSO), officially becoming part of an organisation that has a vision, as the leading payments authority in the UK, to enable a vibrant domestic economy, driving value for people and businesses. This body consolidates Bacs, FPS and the UK Cheque and Credit Clearing Company, responsible for the UK’s new Image Clearing System (ICS), into one retail payment body. The organisation is responsible for delivering the UK’s New Payments Architecture (NPA).
Key to the NPSO’s vision is the NPA, which is a completely new conceptual model for UK retail payments. It will not only ensure payments are safe but also encourage competitive innovation and unlock new business opportunities in everything from smarter uses of banking and payment data, through to new transactional services.
The implications for PSP access and overlay services are significant. Direct access will mean access to an interoperable shared infrastructure with unified standards, which is fit for the future and incorporates regulatory and market changes precipitated by regulations like the EU’s second Payment Services Directive (PSD2). Direct access to instant payment infrastructures will encourage more participation and the advent of overlay services across the full payments spectrum.
If the work of the UK Payments Strategy Forum, the Faster Payments Access Programme and the open availability of RTGS accounts has served to light the fuse on a new era of payments services, then the New Payments Architecture is set to provide the framework for this accessibility boom.