The Bank of England (BoE) announced a framework to open up its interbank payment system to fintech firms.
The UK interbank payments landscape is currently dominated by CHAPS, a same-day sterling settlement service used to transfer large amounts between businesses, as well as for property purchases.
CHAPS’s central position in the market, processing 92% of interbank payments, however, represents a degree of risk to financial stability. In 2014, the system was suspended for several hours due to technical problems. This resulted in payments being held up and caused delays for house buyers as payments were not processed on time.
Newer fintech companies and challenger banks are also concerned that they will be at a disadvantage when working with the company, as it is owned by the UK’s four biggest banks.
In response to these concerns, the Bank of England last year announced a plan to widen access to its real time gross settlement (RTGS) payment service, the system which enables large sterling transfers on a real-time basis. This will allow non-banks to bypass systems like CHAPS and access a range of payment services directly from the BoE.
This week, the Bank took the next step with the release of a detailed technical framework for how the new system will operate.
Under the plans, a payment service provider (PSP) will be given access to the RTGS system) if it can demonstrate appropriate anti-money laundering checks and can keep customers money safe.
The Bank hopes this new approach will relieve some of the financial stability pressures from CHAPS, while giving smaller PSPs more confidence in their payment service relationships.
The move is a further boost to the growing retail fintech sector. Combined with the European Union’s second payment services directive (PSD II) next year, it will help to put these companies on a more even footing with their bigger competitors and open up competition in retail banking services.
With greater access to customer data through PSD II, and the ability to transfer large payments in real time, fintechs will now be able to compete far more effectively with their larger rivals.
The effect could be to push greater innovation from both banks and fintech companies. This can only be a good thing for end users.