Banks as Gatekeepers, how 2017 could see increased access for Payment Service Providers

As 2017 progresses, it is safe to say few could have predicted the geopolitical events that unfolded during 2016, and fewer still would want to predict what the consequences will be in the years ahead. It wouldn’t be an unfair assumption however to say the Brexit vote and Donald Trump’s election should lead to lighter regulation and greater emphasis on pro-market forces.

One area governments might well focus on is the role banks play in providing personal current accounts, where approximately 80% of retail bank accounts are held by four high street banks that earn over £8bn each year from their customers. The UK government’s Competition & Markets Authority has declared that the sector needs greater competition and could improve the levels of service it provides to its customers. At present, 48 institutions have settlement accounts in the Real Time Gross Settlement System (RTGS, the computer system that maintains accounts at the Bank of England). All other users of the systems settle across RTGS via one of four agent banks, however with retail banking being the exclusive club that it is, these banks’ incentives to reform and improve are limited.

The retail payments sector has long been ready for competition, with more and more people conducting business over their smartphones and seeking to make instantaneous financial payments and transfers, there has never been a customer base more amenable to the changes on offer. However, the payments industry, despite bearing many hallmarks of a rapidly-evolving technology business, is subject to much more stringent regulatory hurdles and is forced to use existing bank infrastructure.

This has a negative impact on consumers, and benefits incumbent banks. Payments platform ePayments Group (https://www.epayments.com/) sees enormous potential to reform current regulation and ensure alternative account holders to commercial banks are created, unleashing FinTech innovation in this area.  

Already the Bank of England (BoE) has suggested that a new access model is created allowing payment providers to hold accounts with it, thereby increasing competition. The government may also look to grant bank licenses to FinTech companies in the hope that it will increase competition. Regulation would be a concern, however compliance with Know Your Customer (KYC) and Anti-Money Laundering (AML) checks would go a long way to ensure retail customers were protected. The regulator could provide a framework for FinTech firms to comply with, and an agency – the FCA – could then evaluate the potential of the firm and decide if it was ready for a licence to carry out financial transactions and other services.

The benefits go beyond merely increasing competition to the UK’s retail banking sector: the UK has seen a proliferation of FinTech platforms and the government has a vested interest to ensure these companies are regulated and compliant.

In June this year, the BoE suggested that over time, it should extend direct access to RTGS to non-bank Payment Service Providers firms granted the status of E-Money Institutions or Payment Institutions in the UK. There is no need to provide access to liquidity support or borrowing facilities to PSPs, instead ePayments Group and other platforms need a regulated environment to store funds at the BoE or any other regulated entity, so that transfers to banks and building societies can be made through settlement processes.

2016 was undoubtedly a year of enormous political upheaval, 2017 might see the economic consequences come to light with greater competition and increased participation from outside the established frameworks that have all too often dominated the financial landscape.