Understanding why we have non-bank payment providers

Historically banks provided both banking and payment services. In the early days banks held the money in a vault and pay out the money at the branch or use the telegraph network to “wire money” to the client’s payee. Since 2015, eight years ago, the UK has seen half its bank branches (7,000) closed. COVID accelerated the use of online banking and significantly reduced the use of cash, King Charles III image in 2023 will appear on 15% currency than that of Queen Elizabeth II.

In recognition of changes in technology and to increase competition, regulators created a new category “payments services” by separating payments from banking activities. This allows companies that are not banks to make payments. This new area is now serviced by Payment System Providers (PSP) and are regulated by a country’s financial authorities.

This usually includes the central bank and the financial regulators. In the UK, for example, The Bank of England, Financial Conduct Agency (FCA) and Pay.uk alongside The Payment System Regulator look after the PSPs making them accountable for the high quality of payment services. The BoE operates CHAPS, a real time payment scheme, while Pay.uk operates Faster Payments and BACs (automated Clearing House) all with known standards.

The opening up of traditional bank to bank payment schemes has allowed a dramatic growth in non-bank PSPs. This, in turn has created a more diverse and flexible payment arrangements with fewer single points of failure. That is a country’s payment services becomes less reliant on a few major providers and gives greater choice of vendors (PSPs) becoming safer, securer, and cheaper for all concerned.

The financial structure of bank and payment operations is to ensure ‘client funds’, i.e., the client’s money in transit is not used as company money. These funds cannot be comingled with company money as per the legislative country’s framework.

Each country has its own Supervisory Assessment with which PSPs need to be compliant. One key area is anti-money laundering (AML) for which each PSP must have knowledgeable staff and show to the regulators on going reviews.

Many banks have themselves created their own PSPs from their payment infrastructures. Here when using the bank’s payment own service, the payment department at the bank is covered by separate regulations.

PSPs are leading the drive in providing a range of online payments from apps, debit and credit cards and e-wallets. With the fees on domestic payments (payment not involving a second currency) moving towards zero, PSPs are enabling programs like OpenBanking to become mainstream. Open Banking allows anyone with many banks accounts to move money from bank accounts at different institutions through a Trusted Third Party (TTP) to where the money is best suited to them. That is, where the money costs less to store, or savings’ interest rates are higher.

The non-payment provider enables cash management to be more cost efficient and easier to manage through a TTP. In the UK there are over 6 million users enabled to move the money on time and instantly.

PSPs, with Openbanking, are accelerating payments into our online universe. Soon before we pay for a service or product we’ll be asked – “By Bank Payment” or “By Credit Card Payment”. The money is safe, secure and can be managed in real time and with a choice of payment method best suited to your financial situation.