PAYMENT SERVICE PROVIDER ACCESS

PAYMENT SERVICE PROVIDER ACCESS Widening access and choice February 2016 A Bacs white paper

1 FOREWORD This is an exciting time for the financial services industry. As the market evolves, Bacs is keen to respond to the evolution of new Payment Service Providers (PSPs) and the rapid growth of fintech organisations by widening access to our payment schemes. Primarily, we are seeking to offer more choice to PSPs to enable participation and gain access to our products. We want to widen the types of organisation who wish to connect with Bacs, and are considering the eligibility criteria that underpin these connections. This paper is calling on the payments industry to respond and share their thoughts on our emerging model. In order to deliver an access model that works for all participants in this evolving market, we need to weave the industry s insight into our plan, and I urge all of you to share your experiences and thoughts. We want to provide a fair, competitive environment in which PSPs can effectively offer services to their customers widening access to emerging PSPs is obviously central to this. In order to deliver our goals, we welcome your input on the current access provision, and our strategy for developing this further. We believe that the most powerful role Bacs can play in the payments and banking sector is that of empowerment helping end users to achieve their objectives, without dictating the way in which they do so. We achieve this by listening, co-operating and collaborating with end users, peers and governing bodies to achieve the best outcomes. Delivering an effective and competitive market place for new entrant PSPs is a pillar of this empowerment, and we want to engage with organisations to discuss the ways in which we can offer more choice to PSPs. Bacs is undertaking a journey to change both our business and the payments market, and I urge you to join us with your response. David Rigney Chairman, Bacs Payment Schemes Limited 2

2 EXECUTIVE SUMMARY Bacs payment schemes lie at the heart of the UK economy. Moving money is as important for people today as it has always been, and our payment products (e.g. Direct Debits and Bacs Direct Credits) are synonymous with the day-to-day lives of virtually every household. It is against this backdrop that we want to make sure access to our products meets tomorrow s demands. We believe that innovation and choice are essential ingredients for our success. We recognise the strong contribution our stakeholders can make as we investigate new opportunities for meeting the anticipated requirements of tomorrow. This white paper is a step on our journey to ensure we recognise the changing profile of our payment users where the speed of change is greater today than it has ever been. We have led the way for many years by simplifying the making of payments for millions of people from the largest government departments and businesses to individuals. We are currently considering new ways to access and use our services covering different types of PSP. In using the term PSP we seek to encompass all payment, credit and e-money institutions that offer payment services to business and retail customers. This white paper represents our emerging views for your consideration. We want to understand if our users, including potential new users, think these views will support their access to Bacs. In summary, we think the benefits of updating ways of accessing our products will: Enable a wider range of PSP access to the Direct Debit and Bacs Direct Credit payment products Meet demand from non-traditional and new entrant PSPs for easier and direct access to payment products Deliver an improved value proposition when compared with our current membership options Improve the customer propositions for existing Bacs Agency banks Facilitate improved bureau or aggregator access to Bacs Enable aggregators to utilise a single connection for provision of access to Bacs services, including the Current Account Switch Service and Cash ISA Transfer Service Simplify connectivity enabling PSPs to use a single connection to access multiple payment schemes (e.g. Faster Payments, CHAPS, SWIFT) Provide improved choice and opportunities for increasing innovation Safeguard and maintain the integrity of the payment schemes. Do you agree? We are committed to understanding the needs of all our users and welcome responses from across the industry as outlined in Section 7, Consultation. The key questions that we pose are not exhaustive but are intended to provide a framework to help you contribute to our review. The deadline for responses is close of business 9 March 2016. 3

AS THE MARKET EVOLVES, BACS IS KEEN TO RESPOND TO THE EVOLUTION OF NEW PAYMENT SERVICE PROVIDERS (PSPS) AND THE RAPID GROWTH OF FINTECH ORGANISATIONS BY WIDENING ACCESS TO OUR PAYMENT SCHEMES. 3 INTRODUCTION As a core component of our strategy, Bacs is reviewing PSP access arrangements for the Direct Debit and Bacs Direct Credit products. In this white paper we set out some initial thoughts on the types of changes that we are seeking to make to widen the: Range of options for connection to Bacs Eligibility criteria to provide more flexibility and choice to PSPs offering Bacs payment products. Our aim is to offer more choice to PSPs to enable participation and gain access to our products. In using the term PSP we seek to encompass all payment, credit and e-money institutions that offer payment services to business and retail customers. We recognise that in any final proposals for change to access arrangements we will need to consider all the related dimensions required for access. In Section 5, PSP Access, we introduce our ideas for new connection options and participant profiles. In Section 6, Implications, we highlight related areas that we believe we will also need to investigate and identify the appropriate changes to support fully our future vision for wider PSP access to Bacs payment products. The approach we describe in this white paper will enable organisations to provide services to PSPs to enhance the access options for Bacs products, and to other payment schemes. We envisage that from within the existing Bacs landscape organisations such as bureaux, Bacs Approved Software Suppliers, and other fintech suppliers will be attracted to offer these services to enhance their own product offerings in the payments market. As we are forming our thoughts on potential changes to these access arrangements, we are very keen to have feedback from interested parties on these ideas. In particular, having considered your own requirements, it would be valuable to hear the extent to which these initial thoughts would address any issues that you perceive may prevent your usage of Bacs payment products. 4

SINCE ITS INCEPTION, OVER 110 BILLION TRANSACTIONS HAVE BEEN DEBITED OR CREDITED TO BRITISH BANK ACCOUNTS VIA BACS. 4 ABOUT BACS Bacs has been maintaining the integrity of payment related services since 1968, and from Direct Debit to Bacs Direct Credit, our payments schemes continue to underpin billions of transactions from across the UK economy. Since its inception, over 110 billion transactions have been debited or credited to British bank accounts via Bacs. In 2015, over 6.0 billion UK payments were made this way with a total value of 4.6 trillion: this includes new service users such as the DVLA which has processed over 66 million Direct Debits since joining the service in October 2014. Bacs provides simple and efficient ways to process payments, serving banks, SMEs, individuals and large corporates, and Bacs remains committed to widening this franchise. The ongoing success of Bacs is based on its ability to maintain, expand and improve its services for the benefit of PSPs, businesses and consumers, and we have an ambitious strategy for continuing this success. Bacs is a core feature of the UK s economy, supporting the lives of millions of consumers and thousands of SMEs and large corporates with our various services. Through services such as the Cash ISA Transfer Service and the Current Account Switch Service, Bacs serves as a partner to the public, empowering consumers to switch their providers. We believe in progressive change responding to the needs of end users and the opportunities that technological advances bring. As well as augmentation of products and services, our success relies on improving accessibility. We strive to deliver full co-operation and collaboration with all service users, listening and responding to their needs through transparent and open dialogue. This collaborative approach has been hugely successful for Bacs over the years, allowing us to build payment schemes that allow effortless interactions between the public, businesses and government. We are excited to continue delivering services that work in the interests of the UK economy for years to come. 5

WE ARE SEEKING TO OFFER MORE CHOICE TO PSPS TO ENABLE PARTICIPATION AND GAIN ACCESS TO OUR PRODUCTS. 5 PSP ACCESS 5.1 PAYMENT ORIGINATION One of the strengths of the Bacs products is that payment originators, including PSPs, already have the option of direct access for the submission of payment transactions into the central infrastructure of Bacs. Figure 1 represents this: Payment Originators Bacs PSPs Commercial or Bank Bureaux Figure 1: Current payment origination model As part of the evolution of our access arrangements, we envisage Full Service Payment Aggregators (FSPAs) being able to provide an access channel to PSPs. Commercial and Bank Bureaux would continue to be able to offer services to service users. This approach would offer PSPs an alternative connection route as represented in Figure 2: Payment Originators Bacs PSPs Commercial or Bank Bureaux Full Service Payment Aggregator Figure 2: Emerging payment origination model 6

5.2 PAYMENT PROCESSING The current model for the receipt of payment transactions and reports is represented in Figure 3: Bacs Bacs Member Agency Bank Bank of England Figure 3: Current payment processing model In this model a Bacs Member sponsors an Agency Bank providing them with indirect connectivity with Bacs, information to enable them to process their payment transactions and providing them with a settlement service at the Bank of England. To achieve our aim of offering more choice to PSPs we believe our access model should evolve to one based on participation rather than membership. Each type of participant will then be able to fulfil roles appropriate to their business needs. Our thoughts on evolving these access arrangements are represented in Figure 4: Payment Service Providers Payment Processors Direct Participant (Sponsorship) Full Participant (Settlement) Bacs Bank of England Indirect Participant Full Service Payment Aggregator Settlement Participant Figure 4: Emerging payment processing model 7

DELIVERING AN EFFECTIVE AND COMPETITIVE MARKET PLACE FOR NEW ENTRANT PSPS IS A PILLAR OF THIS EMPOWERMENT. 5.3 PSP ROLES In this model Direct, Full and Indirect Participants can perform the role of a payment processor which will enable them to provide access to the Bacs products for their customers. These roles, along with those of the Full Service Payment Aggregator and Settlement Participant, are described below. Direct Participant: Settles their own transactions but cannot sponsor other PSPs. This role may enable simplified requirements for liability, code of conduct and compliance activities potentially making this a less onerous form of participation for some PSPs. Full Participant: Full Service Payment Aggregator (FSPA): Indirect Participant: Settlement Participant: Settles their own transactions and can also sponsor other PSPs providing connectivity and settlement. Provides PSPs (Direct, Full, or Indirect Participants) with connectivity to Bacs. FSPAs may provide access to other schemes (e.g. Faster Payments, CHAPS, SWIFT). Uses services provided under separate contract by a Full Participant or FSPA to receive payment processing information from Bacs. Includes Agency banks that do not want to change their existing arrangements, and may offer a different liability model for PSPs that sponsor service users. Settlement must be provided by either a Full or Settlement Participant. Offers third party settlement services with the Bank of England. Note: The PSP roles described above emphasise the settlement arrangements that may apply. However, we recognise that of equal importance in delivering the PSP roles will be establishing an appropriate liability and sponsorship framework as noted in Section 6, Implications. We recognise the importance of not introducing change where none is required unless there are legal or regulatory reasons for doing so. The key change we envisage to the means of connecting with Bacs is to enable FSPAs to provide aggregation services to one or more PSPs. This will enable FSPAs to provide connectivity to the necessary payment processing information and reports that Bacs delivers to the PSP. Connectivity to Bacs by FSPAs, Direct and Full Participants will continue to adopt the standard Bacs interfaces using ETS (Enhanced Transmission Service) or STS (SwiftNet Transmission Service). The interface between the FSPA and its PSPs will then be agreed between those parties. It will then be for FSPAs to determine whether they wish to provide gateway services to the schemes provided by other Payment Service Operators (PSOs). In addition to connectivity, we seek to enhance the level of flexibility and choice for Indirect Participants in the provision of their settlement arrangements. With the introduction of a Settlement Participant, organisations that hold a Bank of England Reserves Account can offer settlement services to other Bacs participants. 8

5.4 PSP ACCESS PROFILES Table 1 summarises the transition we envisage with the evolution of the access model from the present state to the new model which we believe will provide the building blocks for a simpler, more efficient access model that delivers flexibility and choice. ACCESS PROFILE SPONSOR PSPS SPONSOR BACS SERVICE USERS SUBMIT BACS PAYMENTS DIRECTLY SUBMIT BACS PAYMENTS FOR OTHERS RECEIVE DIRECT OUTPUT FROM BACS SETTLE OWN BACS PAYMENTS SETTLE BACS PAYMENTS FOR OTHERS SETTLE BACS PAYMENTS VIA THIRD PARTY EXAMPLES OF THE TYPE OF ORGANISATION WHICH MIGHT FULFIL THE ACCESS PROFILE Current Model Full member Banks, building societies Agency bank Banks, building societies Emerging Model Full participant Banks, building societies Direct participant Banks, building societies, credit unions, credit card companies Indirect participant * Banks, building societies, e-money providers, credit unions, credit card companies, pre-paid debit card providers Settlement participant AII RTGS participants Full service payment aggregator Fintechs, bureaux, Bacs Approved Software Providers Table 1: Access Profiles *also via FSPA 9

CHANGES OUTLINED ABOVE ARE WIDE RANGING, AND WE ARE CURRENTLY THINKING THROUGH ALL THE IMPLICATIONS OF THESE IDEAS. 6 IMPLICATIONS Changes outlined above are wide ranging, and we are currently thinking through all the implications of these ideas. In this section we highlight these areas to you and ask for your input on aspects that you believe may need to change. 6.1 Eligibility Criteria We shall be reviewing the eligibility criteria for PSPs with the aim of simplifying these without affecting scheme integrity. We will seek to encompass all payment, credit and e-money institutions that offer payment services to business and retail customers. 6.2 Liability Model Underpinning all payment schemes is a transparent liability and sponsorship framework to ensure scheme integrity. Changes to access profiles will require re-assessment of where liabilities should sit with appropriate stakeholders. In proposing change we will need to define a revised liability framework appropriate for each role and access model. 6.3 Take-on/Accreditation We will be reviewing the arrangements for take-on with the aim of speeding-up and simplifying the process. This will include our review of the challenges faced by PSPs wishing to transition from their existing arrangements to a new proposition. We will also need to establish an approach for accrediting FSPAs and an appropriate reduced testing requirement for Indirect Participants connecting via an FSPA. 6.4 Security Security credentials that underpin scheme integrity must be maintained. We will be exploring ways of providing more economic access to PKI (Public Key Infrastructure) solutions. 6.5 Reserves Accounts We understand the challenges facing some PSPs in obtaining a Reserves Account at the Bank of England (often in parallel with applying to join a payment scheme) which is currently required for settlement. We will be consulting with the Bank of England to understand and monitor any proposals for change that it may have in this area that seek to address these issues. 6.6 Settlement Some PSPs face challenges in respect of the requirement for collateral to guarantee settlement, even when limited to cash post-implementation of the pre-funded settlement solution because they may not have access to sufficient cash/liquidity reserves. We will be seeking to support solutions, such as assessing the levels of risk, that might address these challenges. There are other requirements that need liquidity, e.g. collateral or cash reserves, to support the Direct Debit Guarantee that will need to be considered as part of the liability model. 6.7 Code of Conduct We use our Code of Conduct process to help us manage operational risk and sustain integrity of the payments products. We will be reviewing the current approach and its completion requirements to determine whether there are alternatives, aligned to risk that may simplify this process. 10

6.8 Governance In parallel to our access review, we recognise that changes to our access and participation model may require a different governance structure. This will be addressed as a separate piece of work within our Strategy Programme. 6.9 Sort Codes We are aware of issues impacting some organisations in relation to dependencies on Bank Reference Data (BRD) and access to sort codes. We have a separate project that is already reviewing this aspect with a view to simplifying these arrangements. 11

THIS PAPER IS CALLING ON THE PAYMENTS INDUSTRY TO RESPOND AND SHARE THEIR THOUGHTS ON OUR EMERGING MODEL. 7 CONSULTATION This paper shares our emerging views in relation to potential changes to PSP access which must ensure that access to Bacs payment products is open, fair and transparent. Our aim is to provide for users and potential users needing to access our services. Interested parties are invited to feedback to Bacs on these emerging models and their own experiences with regard to PSP access to help inform and shape our thinking on any potential changes we may propose to our services. We have posed some specific questions for your response: 1. Do you think our aims and objectives will meet your requirements, and if so please state which the most important two or three changes would be? 2. Will the PSP roles described fulfil the needs of your business model, if not please describe what additional flexibility would be required? 3. What types of services would you like to see provided by an FSPA to simplify your access to payment schemes, including Bacs, Faster Payments, CHAPS and SWIFT? 4. Do you think that the connectivity access options provided by STS, ETS, existing member channels and an FSPA provide a PSP with sufficient flexibility? 5. Are there any other aspects that you believe need to change to support PSP access requirements? 6. If there are inhibitors in our existing access model can you describe how you would like to see these resolved? We would like to receive comments and feedback by close of business on 9 March 2016 to public.affairs@bacs.co.uk. We anticipate that our review of our access arrangements will enable us to make proposals for change in the summer of 2016. These proposals will then include our implementation plans to enact change in a robust and structured manner to support integrity of Bacs payments products. 12