Accessing the UK’s Interbank Payment Systems

The Payment Systems Regulator (PSR) has published (January 2022) their latest access and governance report showing trends and developments in interbank payment systems for the period 2019 and 2020. 

The report is aimed at anyone with an interest in access trends for interbank systems, and in their governance arrangements. This includes payment system operators, PSPs, existing and prospective indirect access providers and others involved in interbank payments

The full PSR report can be downloaded from the PSR’s website – link: Access and Governance report January 2022.

Whilst there is no substitute for reading the full report (it’s only 38 pages) this blog summarises the three primary areas of the report into a series of ‘quick fire’ key facts.

Access and Governance Report on Interbank Payment Systems January 2022

Normally the PSR publishes an annual report on access and governance aspects of the UK’s interbank payment systems. However due to COVID related constraints, this latest report covers the period 2019 and 2020 with references to 2021 where appropriate. The report is the fifth report issued since the creation of the PSR in 2015. The previous reports were published in 2015, 2017, 2018 and 2019.

The focus and content of this annual report has evolved and reflects the PSR’s revised approach to monitoring impacts and developments in the sector and the development of its strategy.

The scope of the report is limited to the operators of, and access to, the interbank (or ‘account-to-account’) payment systems regulated by the PSR:

  • Bacs (Pay.UK)
  • Faster Payments (Pay.UK)
  • Image Clearing System (Pay.UK)
  • CHAPS (Bank of England).

The other systems subjected to the PSR’s regulatory umbrella are not within scope of this report.

The report is based on data received through formal information requests from six indirect access providers that provide PSP’s with agency and non-agency access to the interbank payment systems. Due to their recent entry as indirect access providers Modulr and LHV Bank were not asked to provide data for this reporting period.

In addition the report is informed by a number of other sources including Pay.UK, Bank of England, the FCA and notifications and complaints received by the PSR.


Direct Access Developments

Key facts within the report:

#1: Number of new direct participants that joined one or more scheme in 2019 was 12, in 2020 it was 6 and in 2021 it was 7. (for 2018 it was 18).

#2: The system operators project that 12 new participants will join the inter-bank payment systems in 2022.

#3: Of these new joiners some have already relinquished their direct access participation status: Bo, N26, Tandem and Intelligent Finance (part of Lloyds).

#4: New models of participation within Faster Payments are being adopted with both Revolut and Intelligent Finance both connecting under the Directly Connected Non-Settling Participant model which requires the scheme participant to settle their scheme obligations via a sponsor PSP.

#5: One of the first non-bank PSP’s (Ipagoo) has left the Bacs and CHAPS systems due to its regulated activities being suspended and entering into administration.

#6: There are 12 ‘go-live’ slots for new participants in 2022 – all of these slots are currently booked. The BoE’s RTGS renewal programme may limit the number of new participants that can join over 2022/23 (supply factor) and, conversely, the delivery of the planned New Payments Architecture may impact on demand from new participants over the next few years (demand factor).

#7: Depending on the payment profile of prospective new interbank system participants, the planned increase in the Faster Payments transaction limit from £250k to £1m could offer the option of a PSP only having to join one payment system resulting in reduced fees and complexity.


Indirect Access Developments

Key facts within the report:

#1: Since 2015 the number of indirect access providers has doubled from 4 to 8, most recently LHV Bank and Modulr have joined the cohort of providers.

#2: The established indirect access providers supply circa 90% of the indirect PSPs although the newer providers are starting to build market share.

#3: The COVID pandemic has impacted the indirect access model in a number of areas including: re-prioritisation of resources, limiting financial risks and a fall in transaction volumes resulting in Pay.UK’s transaction fee increases which were not passed on to the end user.

#4: Clearbank, Starling launched their indirect access offering in 2017, they have now been joined by Modulr and LHV Bank.

#5: BFC have withdrawn indirect access from existing PSP’s and have stopped on-boarding new PSP’s.

#6: There are about 1,797 banking relationships between indirect access providers and PSP’s – a drop of circa 100 between 2019 and 2020. This includes around 200 PSP’s who had a banking relationship with more than one indirect access provider.

#7: Three of the established indirect access providers had fewer indirect access customers in 2020 than in 2019. In 2020 the largest provider had 18% fewer PSP customers than it did in 2015.

#8: When combined two of the new-entrant indirect access providers (ClearBank and Starling) have a market share higher than one established provider and are close to that of another. Modulr and LHV Bank’s figures do not feature in the report but they state that they have significant and growing numbers of PSP’s.

#9: The established indirect access providers plus Starling and ClearBank offer both agency and non-agency access to all the interbank payment systems within the scope of this report.

#10: By value, most interbank payment systems had one or two indirect access providers accounting for most of the payments originated from indirect access. Although one provider made most of the CHAPS payments. This is a reduction from 2018 when two to three providers accounted for most of the payments.

#11: By volume of all of the payments originating from indirect access, one indirect access provider accounted for most payments within Bacs and ICS and for CHAPS and Faster Payments it was two indirect access providers.

#12: The PSR received 121 notifications from credit institutions concerning the withdrawal of access to payment account services in 2019 and 198 in 2020 (111 of these were due to the closure of BFC’s offering) (Ref: 2018: 44).

#13: The PSR received 236 notifications of refusals to grant access to payment account services to a PSP in 2019 and 261 in 2020 (Ref: 189 in 2018).

#14: The PSR are the relevant authority for monitoring and enforcing compliance with regulation. In 2019 they received seven complaints re potential non-compliance and one complaint in 2020.


Governance

One of the priorities within the PSR’s new five year strategy is to ensure the renewal and future governance of the UK’s interbank payment systems supports innovation and competition in payments. As part of that the PSR wants to see Pay.UK deliver against a broader role, actively improving the rules governing interbank payments.

The actions the PSR intend to take will include:

#1: Ensuring funding is adequate to enable Pay.UK to fulfil its objectives, and that funds are allocated in a way which supports and promotes innovation and competition in overlay services.

#2: Supporting developments to Pay.UK’s governance of the interbank rules, so it has greater ability to enforce compliance with its rules and changes in those rules that improve outcomes.

#3: Supporting and promoting coordination between payment system participants where we think it is needed but not happening. 

#4: Developing governance of the interbank rules, with a view to giving Pay.UK a stronger role to lead the development of protections (and other conduct rules), coordinating its participants where necessary.

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