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