Payment Infrastructure
A Call For Fair And Equal Access For FinTech
#FinTechAccess PAYMENT INFRASTRUCTURE: A CALL FOR FAIR AND EQUAL ACCESS FOR FINTECH Rich Wagner, CEO and founder Advanced Payment Solutions (APS) and Chairman of the Emerging Payments Association (EPA) In collaboration with
Introduction and message from Rich Wagner, CEO and founder APS and Chairman of the Emerging Payments Association (EPA With the ’s history of sohisticated financia serices, it is unsurrising that the nation is no€ eading the charge €ith FinTech innoation‚ Inestments in the sector hae gro€n at ƒ„… a year in the and Ire and since †‡‡ˆ, comared €ith †ƒ… g o‰a y and Š‹… in Si icon Œa ey‚ The ayments sace in articu ar has ‰een shaŽen ‰y ne€ entrants, €ith an aerage of £†‡ ‰i ion in annua reenue no€ generated across ayments soft€are, data and ana ytics atforms‚ The goernment is Žeen to maintain this momentum, and has announced a num‰er of schemes to ensure the remains at the forefront of g o‰a innoation in the financia serices sector – from aointing industry eteran Ei een “ur‰idge as the ’s FinTech enoy, to announcing a regu atory sand‰o” for financia serices innoators‚ •et, €hi e aearances may suggest that the industry and regu atory andscae is oening the doors to disrution, there is sti a Žey ‰arrier to innoation in the ayments sector‚ Access to ayment systems oerators, such as “ACS, Faster Payments and C–APS is resered on y for ‰anŽs‚ This means that the myriad of a ternatie ayment serice roiders (PSPs and e—money issuers (E˜Is are forced to run on the rai s of traditiona ‰anŽs, desite ‰eing heai y regu ated ‰y the FCA themse es‚ In a €or d €here thousands of ayments are rocessed through non—traditiona roiders eery day, this system no onger maŽes sense‚ In a €or d €here thousands of I hae ‰een in the ayments industry for oer ‹‡ years and hae a €ays fought to ee the aying fie d ‰et€een ‰anŽs and ayments are rocessed through a ternatie financia serices roiders‚ It has ‰een my ‰e ief that non—traditiona roiders eery day, if you ush hard enough, maŽe your oice heard and ‰e iee this system no onger maŽes sense‚ strong y enough in the a ue of your o€n serice, the traditiona infrastructures €i sit u and isten‚ At a time €hen on y traditiona ‰anŽs cou d artner €ith the ma™or card associations in †‡‡ƒ, APS ‰ecame the first non—‰anŽ issuer to gain ˜asterCard mem‰ershi‚ Simi ar y, €hi e it may hae taŽen seen years of ersistence, ast year €e ‰ecame the first eer non—‰anŽ to inŽ u €ith the Post Office – ena‰ ing us to roide rea —time face—to—face ‰anŽing serices ia its net€orŽ of ŠŠ,‡‡‡ ‰ranches‚ 2 | Payment infrastructure: a call for fair and equal access for FinTech
–o€eer, I hae rea ised that this ‘access cha enge’ is ‰eyond the reach of my oice a one‚ It is not ™ust a case of ra ying serices such as Faster Payments, ‰ut engaging in conersation €ith the Payment Systems Regu ator (PSR, core techno ogy roiders such as ŒocaœinŽ and u timate y the “anŽ of Eng and (“oE‚ This is not a ™o‰ for one man a one‚ For that reason, I hae ‰een an actie mem‰er of the Emerging Payments Association (EPA for the ast t€o years in order to harness the suort and ‰acŽing of ayments ‰usiness founders and industry e”erts €ho share my ie€ and €ant to drie for€ard fair and ežua access to ayments infrastructure for a ternatie ayments roiders‚ Ÿo€, as the Chairman of the EPA, I aim to harness the oices of oer ƒ¡ mem‰ers, €ho see that innoation in ayments režuires co a‰oration‚ As art of this mission, I hae deised the fo o€ing reort, €ith insights from the EPA’s mem‰ers, €hich out ines our conso idated ie€s on ho€ to ‰ui d a ayments system that €orŽs for the ‰anŽs – €ithout e”c uding the increasing y influentia a ternatie ayment roiders‚ Ÿ“‚ £irect Access as €e are defining in this €hite aer (and secifica y in the refers to gaining direct mem‰ershi to infrastructures such as “ACS and Faster Payments and most imortant y, direct sett ement accounts €ith the “oE‚ Payment infrastructure: a call for fair and equal access for FinTech | 3
Why do non-banks want direct access to payment infrastructure? There are four key restrictions associated with the current model that act as barriers to alternative payments providers. 1. Legacy Problems: having to disclose 600,000 missing payments in the Faster Payments system. When banks developed their core operating systems over two decades ago in a pre-Internet Forced to run on the rails of the banks, alternative era, they were not anticipating the technological providers suffer the consequences when traditional revolution that would develop in the years that banks’ systems fail. Given the opportunity to access followed. Fast growth for banks in the 80s and 90s infrastructure such as Faster Payments directly, saw many making quick fixes to keep up, rather alternative payment providers could rely on their than overhauling the whole system. What’s left is own, flexible modern IT architectures to manage a convoluted mess of system upgrades on top of the payment flow. antiquated architecture, which struggles to keep pace with today’s digital financial demands. 2. Hindering Innovation: As a result, those that now control this payment Alternative providers currently offer streamlined ecosystem – the high street clearing banks – don’t solutions through their innovative front-end have the robust operating technology to maintain technology. But all the while these alternative and develop the core payment infrastructure they providers are chained to the back-end system built, which now controls services such as BACS of the banks, they cannot truly adapt their core One incident last year resulted in a high street technology and evolve at the speed that they, and their customers, desire. bank having to disclose 600,000 missing payments in the Faster Payments system. 3. Lack of Control: and Faster Payments. Over the past few years we Having suffered a slew of regulatory fines for lax have witnessed a number of IT outages and errors anti-money laundering controls, high street clearing in processing payments at major high street banks. banks took extreme measures to better manage One incident last year resulted in a high street bank and govern compliance risks These controls can 4 | Payment infrastructure: a call for fair and equal access for FinTech
include a restriction on the size, number and type MSBs who had worked with banks for (e.g. international) of payments that can be offered decades received letters to notify them of the to end customers, whether these payments are executed by the bank itself, or on behalf of clients closure of their banking facilities. using the bank’s services. In addition, many banks chose to rule out the provision of financial services providers, who have the flexibility and means to to entire industries, rather than taking a prudent dedicate time to analysing specific industry risks, (yet admittedly laborious) risk-based approach, as require the control to be able to make these risk- advised by the regulators. based decisions for themselves. Money Service Businesses (MSBs) – non-bank 4. The Cost Issue: institutions that transmit or convert money – suffered in particular with this approach. In some As the number of clearing banks offering access to instances, MSBs who had worked with banks for payments services is limited, alternative payments decades received letters to notify them of the providers are forced to pay a mark-up price to closure of their banking facilities. This denied them operate through a high street bank – which is access not only to credit, but to basic services in many cases up to 600%. Direct access would such as bank accounts. This blanket decision to not necessarily solve this issue, as many FinTech eliminate certain industry sectors from participation players do not have the scale to support the fixed has also resulted in clearing banks preventing their cost that technology platforms require. But with a own partners from servicing those same industries, greater number of credible banks and hopefully even if the partner is regulated in its own right. some larger electronic money issuers (EMIs) accessing the scheme, a more competitive market With widespread business operations and therefore would drive down existing pricing, enabling those compliance considerations, it is understandable procuring these services to pass savings onto that high street banks want to avoid additional customers and continue their mission of creating a regulatory hurdles. This is why smaller, more tailored fairer financial landscape. Payment infrastructure: a call for fair and equal access for FinTech | 5
Why are non-banks denied access? There are four key restrictions associated with the current model that act as barriers to alternative payments providers. 1. Hesitance from this, whilst still updating the status quo to ensure that traditional banks new, regulated FinTech firms can be granted entry. Let’s be fair to banks, when the system was created Proposed solution: Banks need to understand in the 1960s there were no FinTech players. Likewise, that FinTech players are not out to gain a free ride on there were no thoughts that anyone besides banks the infrastructure that they spent billions of pounds would ever need access to payment systems. developing – FinTechs simply want a fair system that doesn’t block them out entirely, purely because they Banks built the system (the ‘rails’) that we all ‘ride on’ arrived later to the market. today. Billions have been spent over the past 50 years to create a fantastic payments environment It is fair and reasonable for the founding fathers of whereby today’s payments can be sent and received the core payments infrastructure to expect some in seconds – this entire capability was initially funded sort of ongoing compensation. So let’s give it to by the banks. them. FinTech companies, certainly in the short term, do not have the economies of scale that banks have. It is therefore understandable that banks are During this time it is right that smaller players should putting up resistance when it comes to opening pay a higher unit cost than those that process – in up the payments rails to alternative players. There some cases – tens of millions more transactions. is a fear and frustration amongst banks, that they FinTech providers that desire direct access to the would be expected to open up their systems for traditional payments infrastructure need to be free, to competitors who have not contributed to the realistic about what it is they are demanding and be development of the infrastructure. open to paying for this service. As the overall cost would still be less than the banks currently charge Banks hold a sacred responsibility to look after the for accessing the system indirectly, this approach system. With that in mind, they are right to fear that would likely be attractive to many FinTech providers. ‘FinTech cowboys’ could disrupt the whole system. Any move to open up the infrastructure must address If new entrants were allowed access, these 6 | Payment infrastructure: a call for fair and equal access for FinTech
incremental revenues would reduce the running process, and allowing a more uniform technology costs of the schemes, and therefore the overall costs gateway whereby a technology provider who sits for the small number of big banks who currently between the scheme and the member is certified, split the cost between themselves to support these would allow new entrants to access the system at a payment schemes. Regulators, banks and FinTech lower cost. It would also allow them to put the tools providers need to recognise that by expanding in place to link up to the system, without requiring an access to a wider group of PSP providers, all integration from scratch each time. participants benefit, including the founding members who set-up the original infrastructure. Faster Payments is leading the way to certify technology partners in line with this approach. 2. Cost of granting Although this will lower the price, the implementation direct access cost of circa £500,000 will likely only be viable for the larger, more financially capable PSPs. The move In the past, setting up access to infrastructure such is undoubtedly a step in the right direction, though as Faster Payments, cost millions of pounds. The more still needs to done to standardise this process reason the cost was so high? Every time a new in order to further reduce cost and give more FinTech bank sought to join Faster Payments, a bespoke businesses the opportunity to drive and control their integration project was required, including a robust own technology. testing and certification process to sync the bank up to the network. As these integrations were set Implementation cost of circa up to process what could be billions in transaction value, no one would dispute the effort and cost to ensure these were done at the highest quality level £500,000 possible. However, repeating this work each time was costly and inefficient. When APS joined MasterCard, it was a costly exercise (but well worth it). It then opened the doors Proposed solution: Standardising the set up for other PSPs to do the same and at a lower cost. Payment infrastructure: a call for fair and equal access for FinTech | 7
Likewise, all it takes is one PSP to successfully gain institutions have the capital liquidity to pay out, in direct access to the Faster Payments system and it order to maintain the financial stability of the nation. will be possible to define the standard for all others that follow. A number of larger players, including Proposed solution: With such responsibility, APS, would be willing to act as the ‘test bed’ for the it is therefore crucial that the BoE takes an equally future of the payments industry. rigorous approach to non-banks. However, as smaller payments players do not have the capital 3. Access to Bank of England (BoE) of the larger players, a different approach to protect settlement accounts ‘the system’ is required to avoid ruling them out altogether. Aside from the fears of traditional banks, the main hurdle to gaining direct access for alternative Rather than demanding “banking” status or even players is that access to Faster Payments requires a large amount of collateral/capital at all times, the a settlement account through the BoE – a service BoE could impose a condition, whereby non-banks which is denied to non-banks. With responsibility are required to pre-fund their settlement account for the nation’s economic health in its hands, it is to an amount that supports a member’s outward understandable that the BoE exercises caution payments. In fact, Faster Payments already supports when granting access to settlement accounts. As this type of model and it would greatly benefit the such, any solution needs to mitigate the risk from ecosystem if there was an opportunity to leverage non-banks, without simply ruling them out altogether. this similar process within the BoE. Ironically, the Regulators (primarily the PRA and the FCA) have 100% collateral EMIs are already required to hold on created significant capital requirements on banks in all customer funds, along with this potential prefund order to operate as a bank. The BoE leverages this model for settlement accounts at the BoE, would strong governance as the main criteria for granting result in PSPs having less systemic risk (at least a settlement account. This level of risk mitigation financial risk) than the current model that banks is a justified requirement. In the event of a ‘run on create for the BoE to oversee. the banks’, the BoE needs to ensure that these 8 | Payment infrastructure: a call for fair and equal access for FinTech
What has been achieved so far? Introduction of the Payment Systems Regulator Introduction of the Payment Systems a pricing model that recognises the work of the Regulator founding fathers of the infrastructure – the banks. Such a solution will take time to implement. We The Payment Systems Regulator (PSR), launched in need the backing of the PSR to continue pushing April 2015, is the biggest groundswell of thinking, for the long-term aim of gaining direct access, but a momentum, regulation and political pressure to short term compromise is required in the meantime, have been generated within the payments space to support FinTech players immediately. for generations. A core objective of the PSR is to work towards establishing access to traditional No one has taken on the PSR mandate better than infrastructure such as (but not limited to) BACS the Faster Payments service itself. This is thanks to and Faster Payments for non-banks. While this is the fact that the service is relatively new. Operating still a work in progress, the mere existence of the for just eight years, compared to BACS, which is body has created positive movement among the the grandfather of the payments industry, Faster payment schemes and technology providers that Payments is open to non-banks gaining better the PSR now regulates, to not just review, but to access to these schemes. act on initiatives that will drive viable updates to the access model. One concern is that, in its bid to drive much- The biggest groundswell of thinking, needed change, the PSR’s objective may in momentum, regulation and political pressure fact be too ambitious in its timeline. The PSR is demanding access to Faster Payments for non- to have been generated within the payments banks but without detailing how banks would be space for generations compensated. As explained earlier, if we are to reach a point where PSPs and other non-bank payment institutions have direct access to these systems, we will need to negotiate a solution and Payment infrastructure: a call for fair and equal access for FinTech | 9
What has Faster Payments achieved? Faster Payments has created three main models for access, summarised below: Indirect Agency: Direct Member: This is today how most non-banks and current This enables members to connect directly into FinTechs like APS access Faster Payments. This the Faster Payments Central Infrastructure to send option enables a PSP (the Indirect Agency) to and receive Faster Payments. Directly connected generate a Faster Payment request via its Direct members also perform their own settlement with Member Agency Sponsor (typically a high street the BoE. This is the ‘Holy Grail of Access’ for many bank). The Direct Member then applies the funds, non-banks, as it provides the greatest freedom for subject to its own rules for compliance. In this innovation and control of a member’s own destiny. instance the Indirect Agency is reliant on the Direct Faster Payments membership was modified Member for both access to the technology platform in the run up to the establishment of the PSR to and access to the BoE settlement platform. allow membership to non-banks for the first time. However, Direct Membership is subject to having a Drawbacks: It is the lack of control offered settlement account with the BoE and currently non- to Indirect Agencies, the poor number of banks banks are denied this. offering this service and subsequent inefficiencies – as outlined in detail earlier in the paper – that Drawbacks: The BoE has recognised that a has created the need for the PSR and its mission review into its own access model is required. However, as the BoE is only in the early stages It may be a number of years before any sort of of a review process for opening up access to settlement accounts to non-banks, it may be a action is implemented number of years again before any sort of action is implemented. to improve access for all payment providers. This would be a viable model in an open marketplace Moreover, while large established PSPs, including with no monopoly, though this is not currently the APS, have the transaction volume to justify the case with limited competition. cost of this model, the UK’s smallest and emerging 10 | Payment infrastructure: a call for fair and equal access for FinTech
PSPs require the option of a mid-way solution that BoE settlement is handled on the PSP’s behalf. works for them also. The technology gateways that connect a Direct Member to schemes such This solution offers PSPs much needed control as Faster Payments today costs £500,000 to build over how payments are initiated via the scheme and approximately £250,000 a year to support. – allowing innovation to flourish especially around Analysis completed by Faster Payments estimates device solutions (e.g. mobile) and the drive for that a PSP or any member of Faster Payments improved customer experience. As the PSP is would need to process over 1.2 million transitions a not reliant on the technology of the bank, it also year to make this model commercially viable. There needs to be a sense of realism and a APS will continue to lobby for direct access, but if commitment to a phased approach we want to collectively drive payment innovation sooner, for PSPs of all sizes, there needs to be a sense of realism and a commitment to a phased removes the risks associated with relying on legacy approach, so short term advancements towards infrastructure. wider access can be made. However, with the Direct Member managing the Direct Agency: BoE settlement, ultimately the PSP is still dictated by the compliance restrictions of a Direct Member. This model, as the name implies, is a hybrid of the The decision over who to service (such as MSBs), two models above, therefore potentially providing and what type of payments can be made would still a feasible short-term solution and a more cost- lie in the hands of the Direct Member. effective model for the smallest PSPs. Unlike the Indirect Agency model, this option provides a PSP Nonetheless, as this model can be implemented (in this case, the Direct Agency) with Direct Access in the short-term, without the need for immediate to the Faster Payments Central Infrastructure action from the BoE, it is important that we technology, but like the Indirect Agency Model, concentrate on driving this forward where possible. Payment infrastructure: a call for fair and equal access for FinTech | 11
Making the Direct Agency model With this model consequently looking set to work for the short term – a question become increasingly popular this year, regulators of liability (FCA and PRA) should look to address compliance responsibility within this model. As PSPs are The simplest way to move forward with this model, regulated entities themselves, with their own without falling foul of Direct Members’ restrictive requirements for AML and compliance, the compliance procedures, is to work with a non- liability for the payment should reside with the high street bank settlement partner. Unlike high PSP executing the payment, not the bank settling street banks, who reluctantly offer this service the transaction. This change to current regulation (the regulatory risk and fines can in no way be would go a long way to give FinTech players what compensated by the commercial models that are they really want – control – in a timeframe that currently in place), emerging challenger banks would not be protracted by any review by the BoE. and smaller private banks would benefit from the new business and opportunities of this model. Their risk-based approach to AML and compliance procedures would also provide PSPs with greater flexibility over who they serve. Independent UK bank Raphaels has recently confirmed its intention to become a Direct Member of Faster Payments and initiate this hybrid model, with a number of new financial services providers expected to follow suit this year. This change to current regulation would go a long way to give FinTech players what they really want – control 12 | Payment infrastructure: a call for fair and equal access for FinTech
Closing comments: Don’t let perfection be the enemy of progress I wholeheartedly support the BoE’s decision to review the current model, which denies non-banks from accessing settlement accounts, and thus infrastructure such as Faster Payments. We have been fighting for such a move for a long-time and the fact that the BoE is at last considering this issue, is a step in the right direction. Such a measure Rich Wagner, would not be possible without the support and rallying of the Payment Systems CEO and Regulator (PSR), which has created a real force for change over the past year. We hope Founder, APS to build a long-term solution that provides fair and equal access to non-banks, while and Chairman, paying due credit to banks, who were the founding fathers of these systems. However, Emerging we urge both regulators and infrastructures – in particular Faster Payments – not to Payments be stalled by the plans of the BoE. Actual change from the BoE will take significantly Association longer to implement. In the meantime, key non-bank payment providers will lose out (EPA) on valuable business and growth opportunities, all the while being chained to high street banks. A short-term hybrid solution would deliver the perfect test-bed for the BoE – providing proof that alternative payment providers can be trusted with access to these systems, while the BoE works on its long-term plan to grant truly direct access to non-banks. I have been championing change in the UK payments system for over a decade. The changes I have helped to enforce have opened up opportunities to a number of companies, resulting in not only more innovation, but also greater competition. The Emerging Payments Association represents more than 75 companies from across the payments ecosystem, and together we aim to advance innovation while driving the Tony Craddock UK forward as the global innovation hub for payments. The EPA accepts that change Director General, in payment systems does not happen overnight, and nor should it. But the EPA fully Emerging supports making changes to access to the payments system soon. Not only will the Payments EPA’s members and their customers benefit, this will also allow the UK to continue to Association demonstrate its global leadership as the most progressive and innovative country in the (EPA) world for payment systems. Payment infrastructure: a call for fair and equal access for FinTech | 13
About the Author: Rich Wagner, CEO and Founder, APS Rich has over 30 years’ experience in both the payments industry, having held leading roles across both Visa and Barclaycard, before forming his own FinTech payments enterprise APS in 2004. Today APS is one of the largest non-bank e-money issuers in the UK – providing digital current account and payment solutions to consumers, SMEs and the Public Sector. Rich has a long history of battling traditional barriers in the financial services space to make room for alternative players. Rich fought for APS to become the first non-bank issuer to gain MasterCard membership in 2007 and last year became the first non-bank to sync up with the Post Office to offer banking services. An advisory board member of the Emerging Payments Association since 2014, Rich now serves as the organisation’s chairman – active January 2016. As part of this role, Rich is passionate about fighting for non-banks to gain access to traditional payment infrastructure. 14 | Payment infrastructure: a call for fair and equal access for FinTech
About the Emerging Payments Association (EPA) The EPA is a trade body for the emerging payments industry built by experienced payment practitioners and a community for the UK’s most progressive payments companies, supported by our benefactor Visa Collab. The EPA helps its members to have influence over the payments landscape and get access to the people operating in it, whether they are buyers, sellers or partners. Based in the heart of London, the EPA houses the Catalyst – the world’s only incubator dedicated to early stage PayTech companies, sponsored by MasterCard and The Bancorp. The EPA works with its members – from global giants to niche start-ups – to shape the future of the payments industry landscape by raising the profile of the industry, helping members grow their business and addressing the barriers that stifle innovation. Payment infrastructure: a call for fair and equal access for FinTech | 15
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