Opening up access to payments in the Agency and Challenger Bank sector

For any Agency or Challenger bank, access to payment systems is important for ensuring that its customers are able to make and receive a wide range of payments from their accounts, such as Direct Debits or online banking payments. Without this, it is not possible to offer a fully-functional Basic Current Account.

The ability to provide payment systems is particularly important for many SME customers, given the high dependence on electronic payments in today’s economic climate.

For a bank wishing to access payment systems, it can do so directly through membership of the payment schemes or indirectly through a sponsoring clearing bank, which has direct access. However the levels of criteria these smaller banks need to meet in order to gain sponsorship are extremely high. These can include meeting the schemes’ technical and operational requirements and contributing to the costs of maintaining and developing part of the scheme.

The fact that many of the payment systems are controlled by the larger retail banks raises the possibility that conditions for membership are potentially favoursome to incumbents at the expense of new entrants, by making the process time-consuming, and expensive.

The above was supported by the OFT’s short review of payment systems in 2013, which revealed that a number of smaller banks had expressed an interest in direct membership of payment systems, but the costs and complexity associated with direct membership were prohibitive.

From First Capital Cashflow’s experience within the Agency and Challenger banking sector, the most frequently highlighted barrier to entry in accessing payment systems was cost. As a result, this has had a huge impact on the ability of these banks to provide a wide range of services to SMEs. A classic example of this is the transaction charges imposed on these banks, which exceed a level they can then pass on to their own customers.

Others banks have highlighted that there is a significant differential between per-transaction charges at the larger banks which were members of the payment systems compared with the smaller providers. However one of the most interesting findings, is that many Agency banks experience a service level that they consider is below that of the service levels experienced by direct members.

Given the above findings, it is not surprising that Challenger and Agency banks are recruiting the services of payment bureaus, such as First Capital Cashflow to help develop payment facilities.

The challenges highlighted above will naturally push a lot of these up and coming banks towards cloud-based payment bureaus rather than shifting sideways to legacy systems, which are a mainstay in traditional bank set ups. Recent findings by banking specialists Temonos, found that banks are seeing ‘cloud banking’ as a strategic move that supports add new business functionality more quickly, innovation as well as cost savings.

In 2013, a well known Challenger/Agency bank approached First Capital Cashflow to become its Direct Debit partner. First Capital Cashflow could offer both the bank’s its own internal Direct Debit collection process (as they were unable to obtain their own sponsorship) and it’s business and commercial customers a cloud-based facility to process and manage Direct Debit payments – a popular, trusted and extremely beneficial form of payment processing and a vital part of any banks product range.

First Capital Cashflow’s unique cloud based platform and team of specially trained staff were able to build a full picture of the bank’s requirements and as a result provide both the bank and its business customers with the ability to process Direct Debit and Credit payments within a short space of time.

According to the Temonos survey, the highest scoring benefit sought from the cloud, at approximately 60%, was to reduce overall costs. Not at all surprising given the challenges these start up banks face when accessing necessary payment systems.