Direct access to FPS, which enables instant payments within the UK at any time, was originally restricted to a few legacy banks with other players required to work with one of these incumbents to use the system. However, since 2014, FPS has been trying to make it easier for new firms to gain direct access in order to increase competition in the financial services industry.
For fintechs like Starling, there are clear advantages to direct access, such as not having to rely on a third party’s infrastructure and associated cost savings. But still, few fintechs have successfully connected to the system. That’s because significant hurdles remain for those that wish to gain direct FPS access:
- Applicants have to have a full banking license. Many nonbank fintechs choose not to pursue a banking license because of the high capital requirements and rigorous compliance standards this entails. This means that a very select group of fintechs is eligible to apply for direct FPS access, especially in combination with several other tough requirements.
- Companies that want direct access have to pay ongoing fees. While the FPS does not charge a joining fee, members have to pay the system’s technology provider for testing and quality-monitoring services. In addition, the fintech may have to pay any legal costs its membership incurs. These may be unaffordable expenditures for many young fintechs.
- The technology is complex. FPS has acknowledged that connecting to its system is technically complicated — one of the changes it has implemented since 2014 was to allow specialist technology providers to build connectivity on behalf of third parties. While most fintechs are more tech-savvy than their legacy counterparts, only the biggest companies will have the time and money to dedicate to the effort.
Fintechs are encroaching on incumbents’ market share by developing more attractive front-end solutions and delivering financial services more cheaply, but they cannot fully capitalize on their advantages without access to underlying infrastructure. And if they have to rely on intermediaries for access to this infrastructure, they will continue to be held back. However, given that the FPS is trying to facilitate access for new players, and that both the UK government and regulators are firmly pro-competition, it seems likely that the system will become more accommodating to fintechs in the future.
In the US, when customers make payments via banks, they’re completed in two ways: via wire transfer, or through the Automated Clearing House (ACH). ACH transactions, which are less expensive for customers and which accounted for 18% of total noncash US payments volume in 2012, can take up to five days to settle because of the way that they are processed.
That’s problematic, because it interferes with consumer demand for convenience and could slow the supply chain or make it more challenging for banks and businesses to get paid in the way they need to conduct operations. As a result, the US Fed looked into the ACH system in 2013, and found that there was no “ubiquitous, convenient, and cost-effective way for US consumers and businesses to make fast payments between banks.
In response, the Fed, NACHA, and private institutions have begun to find ways, together and separately, to modernize the US payments system in order to increase convenience and catch up to many of the country’s trade partners. The Fed has formed a task force, which will resolve potential solutions, while NACHA and private institutions are pushing banks to hit a set of three same-day settlement deadlines through late 2016 and into 2017. Such a system will particularly benefit high-growth spaces in the electronic payments ecosystem, like P2P and B2B payments, which could magnify its impact over time.
Though it’s likely the system could grow ACH volume by making it a more appealing option in these high-growth areas, it could become a hindrance to banks. That’s because the implementation is costly and time-consuming — the Fed find that the business impact is net-neutral to negative for these firms. Instead, the parties that reap these benefits are providers of services in these high growth areas, like mobile bill pay firms or P2P vendors, which means that banks are actually aiding their competitors. That means that Faster Payments could ultimately enhance the impact of digital disruption in the payments ecosystem, rather than mitigate it.
Jaime Toplin, research associate for BI Intelligence, Business Insider’s premium research service, has compiled a detailed report on faster payments that looks at why the US needs a Faster Payments system, explains how the country plans to implement it, evaluates the different areas that are most likely to be impacted by Faster Payments, and determines which parties benefit from such a system and which are hindered by it.
Here are some key takeaways from the report:
- Sluggish settlement of payments in the US is pushing NACHA, the national electronic payments trade group, and the Federal Reserve to reform the system. US payments made via ACH can take three to five days to settle.The Fed’s Faster Payments Task Force and NACHA are looking to implement a same-day settlement program in the US by 2017 in order to increase consumer convenience.
- The number of transactions affected by faster payments will increase over time.Four key areas — P2P, B2B, C2B, and B2C payments — will gain the most from such a system. And these areas, which comprised 12% of US payments volume in 2014, will grow rapidly over time, therefore magnifying the impact of such a system.
- Faster payments implementation will be a mixed bag for banks, because of additional costs associated with the burden of implementation. And the platform is likely to actually boost third-party providers, like P2P app vendors or mobile bill pay firms, by giving them an easy way to increase efficiency, engagement, and volume, without a substantial rise in transaction costs.
In full, the report:
- Explains how the US payments system works and why it needs to be modernized
- Defines Faster Payments and lays out how the country plans to implement such a system
- Explores different high-growth areas in the payments ecosystem and the impact Faster Payments could have on them
- Evaluates whether or not such a system will be useful for banks and financial institutions
- Determines the beneficiaries of Faster Payments and the impact it may have
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