Payments are at the core of any fintech company. Whether its core product is lending, investments or payments themselves, fintech companies must offer their customers complete and seamless payment options. In the UK, it means supporting Bacs and FPS payments.
There are different ways to access Bacs and FPS and send and receive Bacs and FPS payments on behalf of customers, depending on fintech companies’ activities, maturity and strategy.
One of these access models is to become a Bacs and FPS indirect participant. This model, also called “agency banking”, unlocks many benefits for fintech companies but still represents a significant investment.
This article explores when fintech companies should consider this model to address the UK market.
Most companies access Bacs and FPS as “corporate customers” of their payment services provider (PSP). Being a corporate customer means that a company will rely on one or several PSPs, such as banks or BaaS providers, to hold their customer accounts and send and receive payments from and to those accounts.
When fintech companies enabling their customers to deposit funds on an online account and send and receive payments from these accounts rely on a bank or a BaaS to do so, it means that the bank or BaaS will actually perform these operations. On behalf of the fintech, which itself does it on behalf of the end customers.
In the case of fintech companies working with banks, these companies will work with the corporate cash management department of the bank, and the bank will hold the accounts of the fintech.
We already explored why and when successful fintech companies leave their BaaS provider.
Growing fintech companies will also hit limitations as bank corporate customers.
First, only some companies can even consider becoming Bacs and FPS participants. Indeed, only regulated electronic money institutions, payment institutions, or credit Institutions (i.e., banks), referred to as “financial institutions” as a whole, can apply to participate in UK payment systems. For those regulated companies, the question arises when their volumes grow.
In the corporate customer model, companies are bound to use their bank’s sort code, in their bank’s name.
In addition, more payments mean more edge cases, potential errors, and scenarios to manage. As corporate customers, companies don’t have direct control over the mechanisms to handle these cases and have to rely on their banks. Banks can take time and charge significant fees to manage these exceptions or failed payments.
Finally, companies using the corporate customer model rely on one or more intermediaries to process their payments, meaning as many payment speed overhead, potential points of failure and business counterparts with their own compliance requirements and margins to preserve.
To overcome those limitations, regulated fintech companies can choose to become Bacs and FPS participants.
Becoming a Bacs and FPS participant is a significant project for a financial institution. Operating as a Bacs and FPS participant is also more complex than relying on a PSP to send and receive Bacs and FPS payments.
Financial institutions decide to go through such a project because being a Bacs and FPS indirect participant brings the following advantages.
Bacs and FPS participants have their own sort code and issue their own account numbers, providing the following benefits.
1. Use a sort code associated with your company name
As Bacs and FPS participants, PIs and EMIs will issue account numbers in their name for held accounts. It means that when counterparties receive credit transfers or direct debits from PIs and EMIs or send them credit transfers, they will see the PIs and EMIs’ sort codes with the payment. In other models, these counterparties would instead see the bank’s sort code for corporate customers or PSP’s sort code for PSP agents.
Using official sort code checker tools, end customers can know which institution the sort code belongs to. In an industry where trust is paramount, this can be a game changer regarding user experience and brand credibility.
2. Easier customers migration
Bacs and FPS participants have their own sort code. Their account numbers are tied to their sort code instead of their bank’s in the corporate customer model. This enables them to change sponsor banks without migrating their customers’ accounts and, therefore, without any impact on their customers.
PIs and EMIs relying on third-party PSPs to send and receive Bacs and FPS payments on behalf of their customers can only partially choose the customers they work with.
As PSP agents, companies will be tied to their PSP onboarding rules. These PSPs might refuse to onboard and deliver services to customers from entire industries. They might also refuse to onboard specific customers or execute certain payments for compliance reasons that might not be known to the fintech company.
PSPs offering their services to agents usually refuse specific types of end customers because they work with a wide variety of agents and cannot adapt their onboarding rules to each agent’s specific use case.
By becoming a BACS and FPS participant, PIs and EMIs will be fully responsible for the onboarding of their customers and can define their own onboarding rules that fit their specific use case while complying with the regulation.
Becoming a Bacs and FPS participant gives PIs and EMIs extended controls and visibility on their Bacs and FPS payments. Indeed, it opens access to (and the obligation to support) additional payment flows, including error and exception flows.
Error and exception flows include the ability for participants to send and receive return and recall messages and associated reason codes that most banks don’t transfer to their corporate customers and most PSPs don’t notify their customers of. Error and exception flows enable PIs and EMIs to manage cases like direct debits sent to closed or blocked accounts, incorrect account numbers, or duplicate payments themselves. They can build their own fallback rules when such issues happen and decide their own policy regarding charging – or not – end users at the root of those cases.
Bacs and FPS participants are at least one level closer to the payment systems than a bank corporate customer and possibly several levels closer than a PSP customer.
They process their customers’ payments on their own terms (while complying with the regulation and scheme, of course), only depending on:
Their sponsor bank’s cut-off time for Bacs indirect participants. This is an important topic to evaluate a potential sponsor bank. A sponsor bank offering more processing windows will offer more flexibility to indirect participants.
The cut-off time of the Bacs payment system.
It means that outside of the cut-off times mentioned above, the time between when their customer sends them a payment order and when the Bacs and FPS participant sends their payment messages to the payment system depends solely on the Bacs and FPS participant and their processes, which can be more tailored to their specific use case than those of their bank or PSP.
Becoming a Bacs and FPS participant introduces cost reductions in at least two ways.
1. Cost of payments
Banks charge payments differently for corporate customers and Bacs and FPS indirect participants. While they vary from bank to bank, payment fees will often be 2 to 10 times lower for indirect participants, which can lead to significant savings for companies with high payment volumes.
In addition, as Bacs and FPS indirect participants process their own payments, they manage payment exceptions such as rejected payments themselves. While sponsor banks charge for the specific messages used to manage these exceptions (e.g. Bacs ‘A’ services), fees for these messages are orders of magnitude lower than PSP's fees on payment exceptions.
2. Cost of account numbers
Fintech companies working with the corporate customer model and managing many incoming payments might need virtual accounts to manage reconciliations at scale. Banks charge for this service. As Bacs and FPS participants manage their own account numbers, they can open new accounts with dedicated account numbers or issue their own virtual accounts for free.
Moreover, they can decide to monetise the virtual accounts they issue.
Becoming a UK payment systems indirect participant not only solves major pains for relevant fintech companies, it opens strategic opportunities. While it is a lighter process than becoming a direct participant, it still represents a sizable project.
On the operational side, indirect participants are responsible for running the proper anti-money laundering checks on their customers, whereas the bank manages this process for corporate customers.
In addition, some administrative steps are required, such as getting a sort code from a sponsor bank.
Finally, Bacs and FPS indirect participant applicants will need to connect to their sponsor bank connectivity systems, which always differ from the corporate customer ones in terms of file formats, and sometimes in terms of technical integration.
Numeral helps Bacs and FPS indirect participants connect with their sponsor bank and automate the workflows involved in Bacs and FPS payments processing.
Having already integrated with leading sponsor banks and supported financial institutions in their indirect participation project, Numeral’s platform accelerates the technical side of such projects, virtually enabling fintech companies to be technically able to process Bacs and FPS payments by simply connecting to our API.
The chosen sponsor bank will become a key partner of the Bacs and FPS indirect participant. That’s why we are building a growing number of relationships with the UK’s leading sponsor banks. We believe that the success of Bacs and FPS indirect participation relies on much more than technology. We want to ensure we offer our customers and prospects the correct guidance.
If you are a financial institution exploring a Bacs and FPS indirect participation or a bank looking at expanding its Bacs and FPS indirect participation offer, learn more in our Guide to becoming Bacs and FPS participant.