I am delighted to welcome Rich Wagner chairman of the Emerging Payments Association to discuss “fair access to the payments network for Fintechs”. The EPA which is based in London, in passing houses the worlds only incubator for PayTech Fintechs
This is a real hardcore topic a long way aways from the fluffy bunnies and the cheerleaders in their short skirts. Which I have to say IMHO never look that good on men anyway 🙂
So where to start?
One simple way in is to refer to LFP046 – Payments -Theory, Practice & Laughs with Hiroki Takeuchi CEO of GoCardless. There he split payments mechanisms into credit cards, push and pull. GoCardless specialise in pull [Direct Debit to folks in the UK] and to do that, as he explained they need to build relationships with the banks. The factoid that stuck in my mind is that to integrate say Canada into their pull-network would take a year.
Which gives you some feel of how hard it is for a bank.
Another angle is the establishment of the PSR – the Payment Systems Regulator – which uniquely in UK FS is an economic regulator alone and focused on opening up access, at a much lower level of the infrastructure, to non-banks.
Rich Wagner was the star of LFP031 – Payments & Non-Bank Banking and is the CEO of Advanced Payment Solutions. They, a non-bank formed 12yrs ago, have processed over £4bn of payments, have over 1.2million cashplus cards out there and provide banking solutions for 30% of UK local authorities. So another real hardcore player.
Such is the power of the London Fintech Podcast that Rich subsequently also became the Chairman of the Emerging Payments Association and it is wearing that hat that he appears today. They recently released a report entitled “Payment Infrastructure: A Call For Fair And Equal Access For Fintech” which sums it all up rather nicely.
He is an ideal guide to explain to us the changing landscape of payments systems that were designed a long time before Fintech was ever thought of and need to operate with roughly 99.99999% accuracy every day for zillions of pounds. Clearly you don’t want just any old startup API-ing into that. But neither should banks have a monopoly over payments (which to cut a long story short is where the PSR is coming from).
There is also the context that the current system is creaking One incident last year resulted in a high street bank having to disclose 600,000 missing payments in the Faster Payments system (and I personally have heard of worse). Imagine being a payments fintech that happened to have been running on the “rails” of that bank.
Furthermore there is also a pricing angle – the number 600 cropping up again in terms of up to 600% mark-ups being paid for access to the systems.
In this episode we discuss: – Cuba, passports and Oliver Stone’s Untold HIstory of the United States
– the EPA has 75 members, and is a trade body++ also educating folks in the details of payments and the reasons why things are the way they are as well as how to change things (rather than just lobbying that things should change)
– although the EPA (and PSR) is focusing just on the UK, in practice the same dynamics apply in all other countries
– the UK is one of the leaders in moving towards real-time payments (being eg far ahead of the US payments systems)
– for the push and pull mechanisms – FSP, BACS and DD in the UK – 12-18mts ago only banks could access the schemes
– and in this context not specifically “banks” but only “clearing banks” – which you can count on one hand. So actually the increased access model here applies to banks (outside the magic inner circle) as well as to Fintechs
– moving to the present there are still only 10 members of the FPS (same day “push” payments); most of them are only processing their own payments and not allowing the likes of APS to use their “rails”
– interestingly the three challenger banks – Metro, Aldemore and Shawbrook – also do not have access to the payments systems. The majority of banks in the UK do not have access to the payments systems.
– the relevance of all this to overly-simplistic concepts of “banking” one hears all the time in Fintechdom
– the report calls the current IT for payments as a “convoluted mess of system upgrades on top of an antiquated architecture” 😀 … winning prizes for clarity as well as directness 🙂
– its not just the problems (such as the 600k missing payments mentioned above) but the hugely long timescales it takes to sort out such a mess – well beyond any reasonable clients expectations
– to be clear the messy systems are usually from the existing High Street Clearing Banks
– now there are new technology enablers to enable better access outside of legacy systems (see good article in re on Finextra) – which has huge implications in terms of access and price
– payments are essentially centralised (cf client-server) – all payments going through a central point (be it eg FPS or BACS)
– Vocalink is owned by the banks [and as wiki says “designs, builds and operates the UK payments infrastructure, which underpins the provision of the BACS payment system, the Direct Debit system, the UK ATM LINK switching platform covering 65,000 ATM’s and the UK Faster Payments systems”]. It is this that the PSR is seeing as having anti-competitive implications
– the historic (and current) model for the likes of APS and GoCardless is indirect access – going through a bank which is connected to the systems
– a new model is direct agency access via a sponsoring bank [recently promoted by Raphaels Bank]
– a third ultimate model would be direct access [where you would get the same access as a clearing bank]. The cost of this at present though is staggering – in the order of £millions for BACS access and ~£0.5million for FPS … and 4-5 months of certification
– to be clear all these conversations about FS-regulated entities [for simplicity lets call them “non-bank banks” (credit institutions, e-money institutions, payments institutions)] accessing the systems
– banks will remain but there is so much they do that someone else could do better – hence the need to allow wider access to increase choice and lower cost for consumers
– why is all this hard to achieve:
- why would the clearing banks want to let others in (pre PSR)?
- membership of the schemes has been restricted – this is now lifting especially with the FPS
- the cost of joining in – lowering due to technology aggregators
- Bank of England Settlement accounts – all the schemes are predicated on settling through a BoE account
– the BoE accounts are a current roadblock as the BoE rules do not allow non-banks to open accounts with them. This may take some time to change (~years), but in the meantime channels like using the Raphaels BoE settlement account as a near-term workaround
– it’s ironic that the BoE doesn’t allow less risky FS-credit/payments organisations than banks to open accounts with it…
– the EPA fly the flag for all PayTech and have three strings to their bow:
- Project Rome (the increasing access project)
- Speaking/education about the space
- Project Catalyst – the incubator for new PayTechs
– if you are a PayTech you really should be checking out the EPA 🙂
And much more 🙂