Payments system to be smashed wide open for challenger banks

Small banks have to pay their bigger rivals for access to the payments system, but a new scheme will see technology firms offer the service to challenger banks instead

Small banks currently have to pay bigger rivals for access to the payments system, which the challengers say is an unfair barrier to the market

Big banks' stranglehold over the payments system is almost at an end, as a new initiative prepares to let technology firms in to smash open the market to more competition – in a move which will free Britain's challenger banks from the burden of having to pay their giant rivals for the ability to offer the most basic services.

In the coming months the challenger banks will be able to access the Faster Payments system – which allows customers to make almost instant payments – via fintech companies, rather than the huge incumbents in the banking sector.

The move also pre-empts the findings of the new Payments Systems Regulator's investigations into the sector.

As challengers want to take on the big banks and are competing for the same customers, the new lenders see their current limited access to the payments system as a fundamental barrier to competing on a level playing field. Some have even called the current system a "cartel".

German lender Fidor Bank even had to delay its UK launch because it could not strike a deal with one of the four big banks which offer access to the payments infrastructure.

It can be expensive to set up the systems necessary to access the payments infrastructure, preventing small banks from joining up directly.

Craig Tillotson heads Faster Payments, the network which was launched in 2008 to enable instant payments from bank accounts

“If you are a large player, those fixed costs are spread over a large number of payments, and they become pretty much invisible” said Craig Tillotson, chief executive of Faster Payments.

“If you are a very small player, or a current small player but plan to become a big player, those costs can be quite significant in the early days and if your volumes are low. The time has come to open this up.”

The new idea from Faster Payments is to allow fintech companies to access the system in the same way that the big banks do, then to sell access to the challenger banks.

This should offer a lower cost per transaction to the challenger banks, then when they grow to a larger scale – around 13m transactions per year – the price per transaction is expected to hit roughly the same level that big banks pay for direct access.

“As a new challenger bank or payment service provider, you recognise that real-time, 24/7 payments are an important part of your enterprise, and if you have a choice of vendors you can essentially do a competitive tender for who will provide access into the Faster Payments service,” said Mr Tillotson.

Currently 10 large players plug directly into the system, and around 400 smaller firms pay them for indirect access.

So far 10 fintech firms have signed letters of intent to say they want to create the systems giving access to smaller banks, which include ACI Worldwide, Bottomline Technologies, FIS, Fiserv, Fundtech.

Three are almost ready to launch, with only final technology and reliability testing to take place in the coming weeks, while another three hope to join them soon.

Paul Lynam, the chief of Secure Trust Bank, has complained that challengers have to pay big banks to access the payments system

Mr Tillotson hopes to launch the scheme with several tech firms so there is immediately a range of providers on offer.

He expects as many as 50 of the firms currently gaining access through the big banks could end up switching to the new providers.

Once this system is established, he expects the fintech firms will look to move on to providing the same service for the BACS and CHAPS payments systems, and potentially processing cheque payments too, once the mobile cheque imaging system is adopted across the banking sector next year.

As a result he expects there could be room for as many as six fintech firms to turn this into a long-term, profitable business.

They could even expand internationally.

“Europe is looking at realtime payments, the US and the Australians are looking at it. So there is a strategic advantage to fintech firms, which is that if you are a UK Faster Payments accredited aggregator, that has value to you for bidding for future contracts in the US and Europe,” Mr Tillotson said.

“It reinforces the UK and London as the heart of fintech at the moment.”