By becoming a Bacs and FPS indirect participant, a regulated fintech company can unlock many advantages including an increased control on payments and customer onboarding, increased speed of payments, reduced payment costs and getting its own sort code and account numbers.
However, becoming a Bacs and FPS indirect participant represents a significant project for a growing company.
In this article, we aim at helping decision makers make the right decision for their company by exploring the steps for a regulated payment institution (PI) or electronic money institution (EMI) to become a Bacs and FPS indirect participant.
There are three main work streams to become a Bacs and FPS indirect participant, which can be run in parallel: sort code acquisition, selection of and commercial discussions with a sponsor bank, and technical integration with a sponsor bank.
Sort codes identify PSPs across the UK and are used by payment systems for routing and settlement of payments. Sort codes are registered and managed by Pay.UK.
To be reachable from other Bacs and FPS participants, a Bacs and FPS indirect participant needs its own sort code.
In the case of indirect participants, the sponsor bank is responsible for allocating one of its owned sort codes to the indirect participant and registering it with Bacs and FPS payment systems as well as the Bank Reference Data. A sort code should be registered for the Bacs scheme at least six weeks prior to any transaction from or to said sort code.
The Bacs and FPS sponsor bank is the most critical partner for an indirect participant. As such, it is present at several steps of a Bacs and FPS indirect participant’s project.
As of the publication of this article, known Bacs and FPS sponsor banks include:
Lloyds Banking Group
The Bank of London
Candidate Bacs and FPS indirect participants can evaluate potential sponsor banks through several factors.
All sponsor banks do not offer all payment methods. For instance, a bank may offer the emission and reception of Bacs credit transfers, but not FPS.
In addition to Bacs and FPS payment-related services, candidate indirect participants should evaluate sponsor banks' offers related to bank accounts.
Just like any PI or EMI, an indirect participant needs a safeguarding and a settlement account (not to be confused with a Bank of England’s settlement account) to process Bacs and FPS payments. Sponsor banks can charge significant costs for the management of these accounts.
It is also critical that the sponsor bank allows intraday transfers between the settlement and safeguarding accounts, to comply with FCA’s safeguarding requirements for PIs and EMIs, optimise treasury management between these accounts and avoid insufficient funds on the settlement account, which can lead to impossibility to process payments.
The ideal sponsor bank should also debit fees from a different account than the settlement or safeguarding accounts to ease the bookkeeping process for the indirect participant.
Other considerations when selecting a sponsor bank are the latter's experience with indirect participation, including how many underlying indirect participants it has and for how long it has been offering this model. In addition, companies should evaluate its support model and team and if it includes value-added services such as fraud detection and its Bacs and FPS payments pricing.
Indirect participation is a commercial offering from sponsor banks. So commercial discussions are part of the process, including the support model, settlement and safeguarding accounts pricing model, payments pricing model and actual total pricing.
After a sponsor bank is chosen and a contract is signed, the sponsor bank will start onboarding the future indirect participant. It includes designating the project team on the bank’s side and giving access to technical integration documentation and a testing environment to ease the development of the integration.
Indirect participants process payments of their customers themselves. To do so, the regulation requires them to use a settlement and a safeguarding account. Note that financial institutions sending and receiving payments on behalf of their customers as bank corporate customers also need a settlement and a safeguarding account. The settlement account has to be opened at the sponsor bank.
The safeguarding account can be opened at any bank, but most of the time is opened at the sponsor bank for simplicity reasons, and the sponsor bank will run their KYC checks on the indirect participant before opening the accounts.
To process Bacs and FPS payments on behalf of their customers, indirect participants need to technically integrate with their sponsor bank.
The Bacs and FPS indirect participant needs to connect with the sponsor bank’s system that will forward Bacs and FPS messages from and to the payment systems. In some cases, the indirect participant must connect to a different system, the sponsor bank’s cash management system, to manage their settlement and safeguarding accounts.
For both integrations, the indirect participant needs to:
Obtain technical documentation from the bank
Develop the connectivity between its systems and the bank’s systems
Develop the logic to translate the bank’s file formats or API messages into its own systems’ managed file formats or APIs, and vice-versa
Develop the logic and interfaces to manage payment errors and exceptions messages
Run Bacs and FPS certification with the bank. The bank will make sure that: 1. All files or messages sent from the indirect participant are conform; 2. All files or messages sent to the indirect participant are processed adequately and on time
Run penny tests in production
When working with technology providers that provide bank integrations, like Numeral, the technical integration tasks of the Bacs and FPS indirect participant are cut down to:
Integrating the technology provider’s API into their systems
Setting up the technology provider’s solution, such as defining batching rules or notification settings
As we saw, the three work streams involved in such projects are not trivial and require careful planning and execution. Most companies going through this journey are assisted by independent experts and consultants that have done it before.
On the technical side, working with technology providers that provide bank integrations, like Numeral cuts down the technical integration tasks of the Bacs and FPS indirect participant to:
Integrating the Numeral API into their systems
Setting up the Numeral solution, for instance defining batching rules or notification settings
Having already integrated with leading sponsor banks and supported financial institutions in their indirect participation projects, we can provide growing fintech companies with more than software on such projects.
If you’re interested in discussing your Bacs and FPS indirect participant project, contact us.