Direct access to a payment system requires opening an account at a central bank. There are two main account types:

1. Settlement-only account that is used only for transactional purposes (participants are unable to hold balances beyond those necessary for effecting payments).
2. Reserve account or overnight account that gives participants access to additional central bank services (such as deposit and credit facilities, including access to intraday credit or to overnight deposits).

Non-bank PSPs are reliant on banks to submit payment instructions on their behalf and to hold client funds in safeguarded accounts. Access to a settlement account would ensure that non-banks can process payments themselves and would no longer have to rely on banks. However, non-bank PSPs would likely need a reserve account or an upgraded version of a settlement-only account that would allow for holding balances, i.e. client funds, for longer periods.

As set out in the Settlement Finality Directive (art. 2b), only certain types of institutions - mainly banks - are eligible to open an account at the central bank and directly access payment systems. This narrow interpretation of who is eligible (which dates back to 1998!) is the current legal blocker for non-bank PSPs to directly access payment systems in the EU. However, it’s worth pointing out that some countries have found ways around this issue, including Hungary and the UK.

In addition, a CPMI (BIS) survey of central banks on access arrangements, which covered 184 payment systems reported in 76 jurisdictions, shows that there is a growing number of payment systems worldwide which are expanding or are considering expanding direct access to other types of participants, including non-bank PSPs. This is due to several factors including the changing mindset of central bankers, de-risking and an increasing interest from non-bank PSPs in gaining direct access to the payment system. For half of the payment systems in CPMI jurisdictions and more than one third payment systems in non-CPMI jurisdictions non-bank PSPs expressed an interest in becoming direct system participants (table 1).

Around 60% of payment systems reviewed would consider to expanding access within the next five years, with the aim of fostering innovation and competition. However, few payment systems currently have concrete plans to expand access (table 2).

The CPMI (BIS) report showcases how different countries, such as Brazil, India, Singapore, Switzerland and the United Kingdom facilitated direct access for non-bank PSPs to payment systems and succeeded in overcoming legal and regulatory, financial, operational and technical barriers. 

Importantly, the CPMI (BIS) states that “jurisdictions that have expanded their access policy, particularly to non-bank PSPs, did not report major negative impact to the structure or operation of their payment systems. However, next to a growth in transaction volumes, several payment systems reported increased need for help desk support and a rise in operational incidents (including cyber attacks) as an impact of a change in the composition of participants accessing the payment system.”

The lack of direct access to payment systems causes a wide range of obstacles for non-bank PSPs. 

These include:

• Slowing the pace of innovation: Some payments innovation can only become available to a non-bank PSP’s customers, once their sponsor bank has adopted it. For example, the uptake of instant payments would likely increase if non-bank PSPs were able to settle payments themselves and become participants in instant payment schemes and payment systems directly, as voluntary bank adoption of instant payments has been slow. This would increase pressure in the market to adopt the latest innovation, as companies that do not provide these innovative services will negatively stand out. 
• Barriers to competition: Today, non-bank PSPs have to enter into a commercial agreement with a direct participant (often a competitor) who can dictate the price of access. This price is often set significantly higher than what the direct participant pays to the system operator, even when taking into account the investment costs needed to gain the access. It is also up to the bank to determine their risk appetite, which can translate into refusal of service (de-risking) or requests for changes in the operating model of the non-bank.
• Credit, operational and financial stability risk: Non-bank PSPs are operationally reliant on direct participants to make payments on their behalf, which entails exposure to credit risk where receipts of funds are held with the direct participant (e.g. due to different bank holidays), operational risk, if/when the direct participant has an outage or the direct participant has to stop all payment operations due to a regulatory bank moratorium. In addition, the CPMI (BIS) highlights that the direct vs indirect participation arrangements could “pose a risk of spillovers if a direct participant’s risk to default increases due to the transactions of indirect participants and this could pose risks to financial stability, if systemic, in terms of activity or size (albeit in Systemically Important Payment Systems, this is monitored closely via a tiering analysis carried out on a yearly basis). Increased direct participation in the payment system could reduce these risks, which has led some authorities, such as the Bank of England, to work in this direction.” 
• Less transparency: For regulators and oversight bodies, direct non-bank PSP participation in payment systems could provide greater transparency, improving the management of compliance (including with AML/CFT regulations) and reputational risks. It would mean they have a more detailed understanding of and oversight over participants, allowing them to make more informed decisions.
• Slower and more expensive payments: Indirect access leads to longer transaction chains, which slows down the payment and increases cost as more intermediaries are involved and take a cut. In addition, indirect participants are dependent on direct participants from a technical and business perspective.

However, it is worth clarifying that for many non-bank PSPs direct access, for various reasons, won’t be a viable option to pursue. For example, a non-bank PSP may not believe the investment in obtaining direct access and financially contributing to the maintenance of the payment system is justifiable if their transaction numbers are low. It is therefore crucial that indirect access remains an option.

• Harmonised regulatory frameworks: Payment system operators (PSOs) rely on supervisory and regulatory regimes applicable to credit institutions to ensure their payment systems operate smoothly, a core principle for payment systems. This reliance on supervisory and regulatory regimes makes operating payment systems more efficient and cost-effective. Any lack of harmonisation of technical, operational, financial, governance and risk management (among others) regulatory requirements applicable to bank and non-bank PSPs will have to be addressed by additional verifications and validations by payment system operators, which will increase cost.
  
  
• Risk assessment: In order to grant direct access to payment systems for non-banks, we should assess whether new types of participants introduce new risks to the payment system (if any). Their participation should subject to a robust risk assessment by the Commission and by the European system of central banks. 
  
  
• Non-bank contribution: Today, indirect participants don't bear the investment costs of connecting directly to the payment system, nor the operational, technical and regulatory costs associated with running and maintaining the infrastructure. If direct access is a viable path, non-banks will need to be required to contribute to the maintenance of the payment system.

Today, non-bank PSPs are in a disadvantageous position compared to banks - their direct competitors - (figure 1) as sponsoring banks need to process the non-bank's payment on their behalf.

Source: Górka J., 2016, IBANs or IPANs? Creating a Level Playing Field between Bank and Non-Bank Payment Service Providers, in Górka J. (ed.) “Transforming Payment Systems in Europe”, Palgrave Macmillan, London, p. 199.

This also means that sponsoring banks have a disproportionate say in the non-bank's daily operations, business model, compliance programme or even product suite. They can express concerns about compliance with money laundering and terrorist financing laws in the EU and other jurisdictions, which has led to de-risking (i.e. a bank refusing to provide services to a non-bank). The European Banking Authority (EBA) found that banks in the EU refuse to start, or decide to unilaterally terminate, business relationships with some types of customers (often including non-bank PSPs), which they judge to be associated with higher ML/TF risk. Blanket de-risking of an entire category happens most frequently in relation to so-called non-bank PSP money transmitters, negatively impacting remittance senders and in-country recipients.

Unwarranted de-risking can have serious consequences. In a worst-case scenario, it can put non-bank PSPs out of business, as banks can choose to terminate relationships with very little advance warning. This means that the PI’s or EMI’s customers have to find an alternative payments provider at short notice, which can lead to a suboptimal customer experience. The EBA found that unwarranted de-risking occurs across the EU. This has a detrimental impact on competition in the single market, fighting financial crime effectively and promoting financial inclusion.