Session 18 - The UK payment schemes (Access to UK Payment Schemes for Non-Bank Payment Service Providers)

The UK payment schemes 

Information on the UK’s payment schemes can be found in An Introduction to the UK Interbank Payment Schemes. In summary, non-bank PSPs may want to use one or more of the following schemes:

 CHAPS – the UK’s same day payment system used for wholesale and time-sensitive retail payments. 

 Faster Payments (FPS) – provides real time payments 24/7 and is used for standing orders, single immediate payments, forward dated payments, return payments, such as for internet and telephone banking payments as well as mobile payments (e.g. through Paym).

 Bacs – the ‘automated clearing house’, which processes Direct Debits and Bacs Direct Credits across a three working day cycle. 

 Image Clearing System – Cheque imaging is the process that enables images of cheques to be exchanged between banks and building societies, through the Image Clearing System, for clearing and payment. CHAPS is operated by the Bank, while FPS, Bacs and the Image Clearing System are operated by Pay.UK.

Payment schemes require a settlement service provider (SSP) to provide final settlement of the various payment flows between the direct participants of a payment scheme. For these payment schemes, the Bank is the SSP, providing settlement via a transfer of funds between settlement accounts held by participants in the Bank’s Real Time Gross Settlement (RTGS) system. The Bank offers settlement services in order to promote both monetary and financial stability, as settlement at a central bank mitigates credit and disruption risk for the participants as well as end-users of the payment schemes. 

CHAPS settles each transaction individually, in gross and in real-time across settlement accounts. In the Deferred Net Settlement (DNS) payment schemes (Bacs, FPS, and the Image Clearing System), end-users make payments during a ‘clearing cycle’ and payment settlement occurs at the end of this cycle. The payment scheme calculates the amount each participant owes/is owed as a result of transactions made during each cycle. This is sent to the Bank, which then simultaneously debits or credits each settlement account this amount. Note: The Bank also provides net settlement services to the LINK ATM Scheme and Visa Europe. 

While LINK is covered in An Introduction to the UK Interbank Payment Schemes, neither it nor Visa are further covered in this guide for non-bank PSPs. The required supporting regulatory and legal arrangements are not currently in place to support settlement in these systems. How have non-bank payment service providers accessed the payment schemes previously? In the past, non-bank PSPs were only able to participate in these payment schemes as a directly connected non-settling participant or as an indirect participant. 

This type of indirect participation is still available to non-bank PSPs as a participation option. Directly connected non-settling participants have a direct connection to the payment scheme’s central infrastructure where they can submit and receive payment messages, scheme messages and transaction reports. However, they use a sponsor bank (an existing direct settling participant) to settle on their behalf, using the sponsor’s settlement account at the Bank. Directly connected non-settling participation is not available in CHAPS.

Indirect participants send their payment instructions via a direct participant. The direct participant’s settlement account at the Bank is used for settlement on behalf of the indirect participant. Information on these two access options can be found in An Introduction to the UK Interbank Payment Schemes, or by contacting the relevant payment scheme.

Why does the Bank allow non-bank payment service providers to access payment schemes directly?

 The UK is a world leader in payments innovation, which is reflected in the dramatic growth in the number of UK-authorised non-bank PSPs. 

These institutions are competing with banks to provide payment services. However, until access to settlement accounts was extended, they were only able to access the UK payment schemes indirectly – through the very banks they are competing with. The Bank allows non-bank PSPs to open settlement accounts, subject to appropriate safeguards. This means they can meet one of the key entry criteria to become a direct settling participant in UK payment schemes that settle at the Bank. Access to the UK’s main payment schemes allows non-bank PSPs to compete on a more level playing field. They will be less dependent on competitors and will be able to offer a wider range of payment services. These factors all help to increase competition and innovation in the market for payments. Longer term, the innovation stemming from expanded access should promote financial stability by:  creating more diverse payment arrangements with fewer single points of failure;  identifying and developing new risk-reducing technologies;  expanding the range of transactions that can take place electronically and be settled in central bank money. 

 

Which non-bank payment service providers are eligible for direct access?

 

There are two types of non-bank PSPs eligible for direct access – e-money institutions and payment institutions. E-money institutions are regulated by the Financial Conduct Authority (FCA); payment institutions are regulated by the FCA and also in some cases by HM Revenue and Customs (HMRC), for anti-money laundering purposes (depending on business model).

 

Only authorised e-money and payment institutions are eligible to hold settlement accounts at the Bank (see page 7). This means that small e-money institutions and small payment institutions, that are registered only (as opposed to being authorised), cannot hold a settlement account at the Bank and consequently are not eligible for direct settlement access to the payment schemes.