Open banking could allow banks to get out of the payments business

For many banks, especially midtier institutions, payments isn’t a core business — and their batch processing-based legacy systems weren’t designed to deliver real-time payments.

Banks have long provided business and consumer payments, often simply for regulatory reasons and because their customers expected them to do so. But, as more fintechs provide API-based services to help banks deliver on U.K. and European regulators’ vision for open banking, incumbent banks encumbered with legacy systems are looking to payments-as-a-service providers to replace manual processes and provide real-time payments execution and transaction reporting to clients.

Banks are also using payment-as-a-service providers and vendors of open banking APIs to help them comply with regulatory requirements such as the September 2019 PSD2 deadline to open banks’ APIs to trusted payments providers which are allowed to initiate consent-based payments from customers’ bank accounts.

Providers include Starling Bank, whose clients include RBS and Barclays; U.K.-based Modulr; Natixis Payments, owned by France’s BPCE; and Germany’s Fidor Solutions, also a subsidiary of BPCE.

The distinction between API-based payments-as-a-service providers and open banking API vendors is that the latter don’t execute payments on their clients’ behalf, but just provide payments initiation and customer data retrieval APIs. Examples include TrueLayer, Token, and Yapily, which is currently connected via API to 35 of the biggest European banks.

Banks’ purchasing departments may struggle to quantify the ROI on implementing technologies to upgrade their existing payments systems, but new fintech entrants often lack the baggage of legacy systems.

One example is Dutch private bank Van Lanschot, which uses Fidor’s Payments Avenue payments-as-a-service platform.

“Van Lanschot realized their payment system was costing tens of millions of euros,” said Sophie Guibaud, Fidor Solutions’ managing director for Europe. “But they didn’t want the cost of upgrading their system to comply with new regulations. So we replaced their core banking system, added our middleware, and took over their payments function for them. This enables van Lanschot to focus on wealth management, while complying with current regulations like PSD2.”

The growing availability of payments-as-a-service has changed the landscape, said Julian Sawyer, who at the time of speaking with PaymentsSource was head of banking services at London-based Starling Bank. This means payments-as-a-service is moving to a payments-as-a-utility model without big upfront costs.

“Consumers don’t care who provides utilities like electricity,” Sawyer said. “Similarly, the customers of our payments-as-a-service clients don’t need to know that Starling executes their transactions. We provide banking/payments-as-a-service as a utility and priced as a consumable. If our bank or fintech clients use us to execute payments or open accounts for their customers, they pay us. Otherwise, they don’t pay.”

While payments-as-a-service providers can help banks, they are a competitive threat. This is because regulations such as the EU’s E-Money Directive, PSD2 and Open Banking, put banks on a level playing field with new entrants. Also, U.K. fintechs approved by the Bank of England can enjoy direct access to the country’s Faster Payments scheme, instead of depending on banks for access.

Starling is a direct member of Faster Payments and other U.K. payment schemes through its direct connection to the Bank of England. Although Starling started as a digital challenger bank, it saw opportunities to white-label its banking and payments technology for other companies.

“We can do this, as we built Starling as a technology company, not just as a bank,” said Sawyer. “What differentiates us from incumbent U.K. banks who still do batch payments, is that we provide real-time payments as a core business. Secondly, we’re totally based on APIs, so it just takes a few days for clients to integrate with us.”

Starling’s payments services customers include the U.K. government’s Department for Work and Pensions, Mastercard U.K., and fintechs such as InstaReM. In June, Bottomline Technologies announced a partnership with Starling to launch the Real Time Payments Express Service. With Bottomline providing API access and real-time monitoring and Starling managing the banking functionality, the service enables banks and corporates to send and receive payments in real time to any U.K. bank account.

As well as serving regulated fintechs, Starling provides banking/payments-as-a-service for nonregulated entities which don’t hold licenses from the U.K.’s Financial Conduct Authority (FCA) but want to offer financial products. For nonregulated clients such as savings marketplace Raisin, it charges fees for onboarding of customers and for KYC and AML compliance. Starling holds Raisin customers’ savings accounts on its own balance sheet, providing full Financial Services Compensation Scheme depositor protection.

Modulr is licensed by the FCA as an E-Money Institution, so it can offer payments accounts with IBANs, although these aren’t bank accounts. It serves fintechs such as Revolut, B.yond (which is backed by Visa and is developing a "bank in a box" platform) and the accounts payable/payroll services firm Sage.

Modulr uses APIs to integrate its payments accounts with its clients’ systems, giving them access to multiple European payment schemes. “We’re a payments hub, so our clients can receive international payments and make payouts using the IBANs we give them,” said Myles Stephenson, Modulr’s CEO. “Through us, they can connect to SEPA and, in the U.K., Faster Payments, BACS and Direct Debit.”

Between early 2017 and May 2019, the total value of payments in and out of Modulr’s platform exceeded £10 billion.

Both Starling and Modulr offers their clients an alternative to using bank-operated payment services, as they enable their clients to issue virtual subaccounts with IBANs to their customers. These subaccounts can be used for managing and reconciling receivables and disbursements. “For example, credit cardholders can be given an IBAN by their issuer for paying their bill,” said Sawyer.