Fintech win: TransferWise gains access to UK Faster Payments

TransferWise, one of the UK’s most high-profile technology startups, has scored a key win for the fintech space with news it has gained access to the UK Faster Payments Service (FPS).

At a high level, this means the firm will now be able to process money sent to and from UK bank accounts, by its customers, instantly and around the clock without being held up by bank ‘downtime’.

TransferWise has gained direct technical access to the FPS as the tech partner of Raphael’s Bank, an independent UK savings and lending bank established back in the 18th century. It is reportedly the first tech company to access Faster Payments this way, marking an important milestone for the new generation of financial tech companies looking to compete with – and close the gap on – established financial institutions.

CEO/co-founder Kristo Käärmann is describing it as a step towards greater competition in a payments industry monopolised by the big banks.

In a statement, he says this is an important development for businesses and consumers in the UK and that a non-bank getting access to FPS is a stepping stone toward making sending money oversees as easy as “sending an email”.

“The ‘pipes’ of money which make up the payments infrastructure used to be the monopoly of the banking system,” says Käärmann. “Sharing access to this will restart competition, seeding cheaper, faster and more convenient financial products that directly benefit the consumer.”

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So wait. How is this arrangement different to relying on big banks? Tom Hay, one of the lead architects who designed the central processing system for UK Faster Payments –  now head of payments at Icon Solutions – explains that when a payment service provider connects to the Faster Payments Service via a big bank – the so-called “indirect access” model – the level of service they can offer their customers is limited by the connection offered by the big bank.

Where a direct participant can complete a payment in seconds, a payment via an indirect participant might take many minutes depending on the arrangement.

“To compete effectively on service levels, payment service providers must have direct connectivity to the Faster Payments network,” says Hay. “The special arrangement between Raphaels and TransferWise effectively gives the money transfer company direct access to the Faster Payments Service.”

What the F¥€K?

TransferWise partnering with a bank may come as a surprise given that it made a name for itself with feisty anti-bank marketing campaigns protesting hidden fees on money transfer, but the firm has been quietly dialling back on its ‘F¥€K the banks’ messaging for a little while now.

The firm partnered with Estonian bank LHV last year in a deal to build its money transfer services into the bank’s mobile app and website. At the time it said it “realised” some banks are actually looking for new solutions for products like money transfer.

The thawing in its attitude to banks reflects the wider shift from combat to collaboration between fintechs and traditional financial institutions. In this latest case TransferWise needed to partner with a direct member bank to gain access to the FPS.

The companies sent their first faster payment last month and the technology will go live for customers this summer once the final stages of testing are complete.

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Faster payments shake-up

The direct members of the FPS have remained unchanged since its launch in 2008 and Raphaels is set to become the first new direct participant to join since then. UK challenger bank Starling is also set to join this small group, announcing last month it intends to join a direct member later this year.

This has shone more light on how exclusive access to core payment schemes are at the moment.

Current direct members include only Barclays, Citibank, Clydesdale, Co-operative, Northern Bank/Danske Bank, HSBC, Lloyds, Nationwide, RBS and Santander, highlighting the extent to which access to Faster Payments (and other major schemes) is controlled by the big banks.

“One of the main reasons that Raphaels is joining Faster Payments is to offer sponsorship to non-bank payment service providers – something that the bigger banks are often reluctant to do,” says Hay.

“Several other organisations will be joining over the coming months. This will allow the new joiners (challenger banks) to compete head-to-head with the big banks by offering similar service levels to their customers. As well as helping challenger banks compete for customers, it will also increase the choice of sponsors for non-bank payment service providers, so driving down costs to them.”

TransferWise’s deal is possible due to a new access model for Faster Payments which was previewed back in 2014 and designed to open up access to the likes of challenger banks and fintech companies.

“We are delighted to see the world class Faster Payments Service we operate being exploited to deliver new and innovative services for consumers, as a result of our programme of opening up access,” says Nick Caplan, independent chairman of the Faster Payments scheme.

“This is a concrete example of how we are working collaboratively to meet the Faster Payments Scheme’s strategic objective of becoming an increasingly effective innovation magnet for the UK and our economy.”

Democratising access to core systems

Opening up access to Faster Payments and the other two major payment systems (Bacs and LINK) and therefore creating more competition in the market, is at the heart of the Payment Systems Regulator’s (PSR) mission. Hannah Nixon, managing director at the PSR is welcoming the news.

This is a great example of an innovative company taking advantage of open access to payment systems in order to offer consumers new products and services. We hope this will be the first of many such innovations emerging as a result of our work to make access to payment systems easier and faster.”

In the final findings of the PSR’s market review into the ownership and competitiveness of infrastructure that supports the three major UK payment systems it said there was still “no effective competition” for the provision of UK payments infrastructure for the three inter-bank payment systems.

This all comes after news confirming MasterCard is planning to buy VocaLink, the core technology underpinning payments between banks in the UK, from a consortium of banks including the UK “big four” (Barclays, RBS, Lloyds and HSBC) as well as Santander. This happened on the back of the PSR publishing a report earlier this year saying ownership of core payments technology by the big banks was having a negative impact on competition in the market and calling for banks to sell their stakes.

Unsure about what we mean by Faster Payments? Check out out our podcast with Tom Hay, Head of Payments at Icon Solutions for a deeper dive.

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