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As Payments Canada gears up to launch its new real-time rail (RTR) infrastructure, payments company Square tells the trade association, in an interview on its website, that expanding access is critical to supporting innovation and competition in the market.
According to Square’s industry relations head Grace Jung: “Right now access is most clear for large financial institutions when the RTR launches. For payments service providers (PSPs) to have direct access to the RTR, it will require creating a membership class in tandem with the establishment of the Retail Payments Activities Act (RPAA).”
However, at the earliest, this will take two years. “That’s a long time to wait for something that affects the lifeblood of a business,” noted Jung.
Participation and access model for new payments infrastructure is a vital element, which can have significant ramifications to competition and reach in the market. It is not just a question of the differences between direct and indirect participation, but also recognising the widening class of different potential participants.
Historically, payments infrastructures have been open to financial institutions only, often requiring that participants must have a settlement account with the central bank. In markets such as the UK, until recently, the funding model for participation also effectively restricted access to large financial institutions. Much of the reasoning behind strict participation rules was to ensure the appropriate risks management for these critical functions within a national economy.
In 2015, however, the Faster Payments scheme announced that it would move to a "pre-funding" settlement system, effectively making it easier for smaller challenger banks and third parties to become direct participants. The previous loss sharing agreement deterred smaller participants as they were potentially liable if a larger bank failed. The benefit of direct participation is it has given smaller banks and third parties more control over the payment services they offer and are therefore not at the mercy of larger financial institutions.
In 2018, TransferWise (now Wise) became the first non-bank PSP to become a direct participant of Faster Payments. This was made possible because the Bank of England extended access to settlement accounts in its Real-Time Gross Settlement, a requirement for direct participation in Faster Payments.
The scheme also created an entirely new way to access Faster Payments through an aggregator model, which enables technology vendors to offer PSPs technical access through a managed gateway solution.
In the interview, Square cites the UK’s Faster Payments as understanding the importance of access.
“They astutely realized that access matters. It was not until the U.K.'s Faster Payments made services available on an equal basis to payment service providers by introducing a New Access Model that greater competition and innovation was realized,” said Jung.
In other markets, participation in new instant payments services has been made available from the start to non-banks.
When the Hong Kong Monetary Authority launched its Faster Payments System in 2018, it was able to announce 20 bank participants (representing the majority of retail banks), as well as eight e-money operators.
Arguably one of the most successful instant payments launches of recent years is Brazil's Pix service. In its first year of operation it accumulated 7bn transactions. To put this in perspective, this is more than double the UK's Faster Payments which launched in 2008.
"The criteria for participating in Pix is broad and flexible, focused on the safety and efficiency of the scheme, in order to foster competition within the ecosystem," noted the Banco Central do Brasil (BCB). Participation in Pix is open for all financial and payment institutions licensed by the BCB that offer transaction accounts. In addition, the central bank said that payment institutions not authorized by the BCB can also participate in Pix under specific conditions.
For Square's Jung, although she supports the Canadian government’s introduction of the RPAA as the first step to improve access for PSPs, she is also hoping for more urgency: “As a next step, we believe amendments to the Canadian Payments Act should be priorities for the Canadian government’s 2022 Budge, which should see broadened member eligibility for entities such as PSPs registered under RPAA.”
