This is the second of our predictions for the Payments industry in 2018, and it is about New Entrants to the payments business.
The main focus is on Third-Party Providers and Payment Institutions as ordained under Payment Services Directive. We should also mention eMoney Institutions and – more UK-centric – Challenger Banks.
In sum these are the types of innovative New Entrants using new technology that the authorities – at UK and European level – have authorised to open up competition and create new services that reduce the “dominant market shares” of the big banks in the Consumer and SME banking markets. These objectives were the essence of the PSR’s Market Review into Indirect Access to the UK’s payment systems.
Third-Party Providers will prove a damp squib as per our first prediction, as we are still almost two years away from the mandated European technical and operational solution as to how these TPPs should link to banks, and the UK-only solution – Open Banking – is mandated on just nine UK banks, and may be inadequate anyway: the scope of “Account Information” and “Payment Initiation” have been designed by the authorities rather than the marketplace.
The Payment Institution sector has been badly hit by “de-risking” on the part of the banks that might offer them clearing system access, and the Liability under Indirect Access stream of the Payment Strategy Forum has concluded without progress and just more streams of work that beat about the bush.
The main tangible development is that PSD2 requires the FCA to re-authorise the sector with the exception of the “Small Payment Institutions” (the PIs that are registered but do not need authorisation). The re-authorisation process seems set to erase the larger PIs as de-risking has erased the Small PIs.
eMoney institutions that have tried to up-tier and construe their service as the only one needed by a consumer or SME – which is the pathway to profitability – will find that their service has one killer defect: customer monies are not covered by the Financial Services Compensation Scheme. As such, the more they successfully up-tier, the greater the pressure to convert to a banking licence.
Customer monies held in eMoney must be “safeguarded”, but all that means is that they are deposited with a bank in the EU, which could be Veneto Banca, Carige or Monte dei Paschi. It is not even certain that the money would be separated so as to survive the bankruptcy of the eMoney institution, and it is highly questionable whether the type of account the money is held in would be separated from the bankruptcy estate of the EU bank it is held with: it will in any case not be eligible for repayment from the local version of the Financial Services Compensation Scheme.
Finally we come to the UK’s much-vaunted and publicity-hungry Challenger Banks – what inroads have they made actually? Yes they have joined Faster Payments, enabling the Payment System Regulator to claim that their own objectives on Access are being met. They have announced link-ups with this that or the other intermediary market participant.
But how many customers have they got? What are their deposits from customers and what rates are being paid on them? What assets have they invested in and at what rate of interest? Is there a positive Net Interest Income at all? Or are the Challengers invisible and impactless other than in the twilight zone at the bottom end of the mortgage market (pensioner mortgages, second mortgages, buy-to-let…)?
Having endured 10 years since the financial crisis of being told that we all need these Challengers and other types of New Entrant, and that banking needs changing for good, there must come a point where those who have ordained all of this are held to account and asked what the results and benefits have been, for all the legislation, efforts, conferences, round-tables, costs and so on – and the endless press releases.
Or do we just arrive at the same place as 2007, except instead of Halifax-Bank of Scotland, Britannia, Alliance&Leicester, Bradford&Bingley and Northern Rock, we have Atom Bank, OakNorth, Shawbrook, Redwood, Monzo, Starling and many more, bottom-fishing into the nether regions of UK housing – but this time with direct tax-payer backing on their deposits, the exact thing that “Changing Banking for Good” was supposed to put an end to?
New Entrant prediction: widespread recognition that this has both been a complete waste of time and created a major liability for the UK taxpayer through the defective business models of the New Entrants.