Next Generation Agency Services for Digital Banking

In the UK, about 55 million individuals and six million businesses have a bank account. Roughly 85% of these accounts are held at just four banks, and over 95% are held in the eight largest banks.

Such is the depth of UK financial services, these eight banks are only the tip of the iceberg. The Bank of England’s most recent (May 2021) list shows 159 banks are incorporated in the UK, another 86 branches of foreign banks are authorised to accept deposits, and a further 83 EEA banks operate in the UK under the Temporary Permissions Regime. There is a choice of 328 banks which accept UK deposits, and provide a wide range of financial services from everyday banking to mortgages to private banking to foreign exchange to remittances to transaction banking to property and other specialist lending.

UK Payments

All these banks have a common need – they need access to the UK payment systems, in particular to Faster Payments (FPS), CHAPS and BACS, to accept and withdraw deposits. Some banks (around 40) have direct access to these systems, but only 11 have direct access to all of them and of those 11, only 5 offer their access on an agency basis.

Most UK banks use other banks to provide their payments capability as an agency banking service, with indirect access to the UK payment systems. The same four banks who hold 85% of current accounts, also provide almost all agency banking services for clearing payments.

Constraints in UK Banking

Payments in the past have been treated as a commodity with little potential for competitive advantage, with agency payments being concentrated into a small number of banks even though they also compete with the banks they serve - for customers, for deposits and other financial services.

However, in today’s digital economy, always on and instant, payments are a pre-requisite to provide differentiated services to consumers and businesses, specifically real-time payments, immediate confirmations and real-time balances. Even so, agency services provided by the big banks remain in a legacy world and are falling behind the needs of the digital economy.

This started with the introduction of FPS in 2008, where in the rush to implement, the banks neglected their FPS agency offering, and little has changed since. Even today, despite FPS processing real-time payments, many agency services for FPS have a two-hour payment delay and have regular outages for maintenance overnight and at weekends.

In ClearBank’s survey of agency banking published in March 2021, users of agency banking services from the incumbents also complained of services going down without warning, a lack of transparency of funds, poor access to open banking infrastructure, complex integrations and even regulatory interventions caused by their bank. Frustratingly for users, often they have poor visibility of incumbents’ roadmaps and payment scheme changes.

Repositioning for Digital

Consequently, new entrants such as ClearBank have entered the market to provide the services that the incumbents are failing to provide. In the past, banks have seen switching agency provider as cumbersome with little benefit, apart perhaps from better pricing. Today though, the imperative to switch to these new entrants is urgent.

The digital economy is growing relentlessly, and the UK Government is set to announce its digital strategy later this year, further accelerating growth. In this environment, offering anything other than a customer experience with 24/7 real-time payments is a showstopper to growth. Additionally, current account deposits are the cheapest source of funding for a bank, but they can only be grown if accessible through real-time payments.

UK payments are also in the throes of massive change, with the new Bank of England RTGS due to enter service in 2022, the roadmap for the New Payments Architecture imminent and an industry migration to ISO20022 underway. These are each large programmes of work for the incumbent banks, likely to push any investment in their agency offering further down their list of priorities.

Those EEA banks in the Temporary Permissions Regime have an individual time allocation from the FCA to submit their application for UK authorisation. Unless their UK business is small (typically < £100m in deposits and <5,000 accounts) they have a big decision to either leave the UK market or register to be incorporated in the UK. Incorporation means investment to meet UK regulatory requirements – in the management team, regulatory capital, IT systems, security, resilience, resolution procedures and so on. Such investments will be wasted unless at the same time a move is made to a next generation agency banking service to enable customer offerings to compete and grow in UK banking.

For banks already incorporated in the UK and for EEA banks planning to incorporate, now is the time to switch.