By Trevor Clawson

London-based financial technology company, Transferwise has been admitted into the UK’s Faster Payments System, in a move described by the Bank of England as “an important milestone.”

Established in 2010, Transferwise offers a range of payments services to consumers and small businesses, with a particular focus on cross-border transfers. Last week it became the first non-bank provider to obtain access to the Bank of England-administered system that underpins rapid and secure movements of cash between the accounts of financial service company customers.

Attached to the Plumbing

Essentially, this means that Transferwise is now plugged directly into a key section of the UK’s financial services architecture and will not be reliant on partnerships with banks to facilitate money transfers. This will, in turn, allow Transferwise to strip out a layer of cost while also offering enhanced services, such as instant sterling transfers.

Faster Payment is underpinned by the Real Time Gross Settlement (RTGS) system. As the term suggests, the real-time settlement provides a means for financial service companies to move cash instantly between each other’s systems. In order to ensure this can be done securely, the Bank of England holds cash on behalf of the participating banks. Thus, when a money transfer is executed in real time, both parties can be assured that the funds are available to cover the transaction. In 2017, the Bank announced that RTGS would be open to non-bank Payment Service Providers. Transferwise is the first to take advantage of the new rules.

A Level Playing Field

The opening up of Faster Payments to Transferwise is intended to represent just one point on a journey towards greater competition for the UK financial services market.

Introduced in 2010, Faster Payments were intended to replace the existing inter-bank transfer system known as BACS. Under the new regime, rather than taking up to three working days, money can be transferred between accounts on the same day.

Getting Connected

But the financial services landscape is changing rapidly. Technology-led financial services companies are coming to the market and offering innovative alternatives to the range of products already provided by banks. But until now, specialist Payment Service Providers have been operating outside the technical and regulatory infrastructure that connects the banking sector. That in itself has been seen as a brake on the competition. Both the Bank of England and the Financial Conduct Authority (FCA) have been working together on measures to create a more level playing field, not least by widening direct access to the Faster Payments infrastructure, as such, the admission of Transferwise seems set to herald a quiet revolution.

As Andrew Bailey, Chief Executive of the Financial Conduct Authority put it:

“Connecting non-bank payment firms to the payments systems promotes innovation and competition. Our approach to supervising firms like TransferWise means that they can safely access the Bank’s payment systems and so contribute to a thriving and dynamic marketplace for UK consumers.”

It was a point underlined by Bank of England governor Mark Carney.

“By stimulating competition and innovation, we anticipate increased diversity, he said.“Risk-reducing payment technologies will reinforce financial stability while enhancing customer service.”

A Faster Pace For Fintech

And according to Brian Harris, Chief Product Officer at money transfer company Currencies Direct, by opening up banking systems to fintech challengers, regulators are contributing to a sea change in the financial services market.

“Transferwise, following in the footsteps of Monzo and Revolute by joining the Faster Payments System, represents a shift in the pace of change for the sector, which could contribute to the displacement of traditional banking systems,” he says, “The wider take up of Fintech solutions is accelerating, which we believe is a positive step for consumers, affording them more choice and flexibility.”

But he warns that regulatory caution could curb fintech development.

“It’s important that regulatory bodies and the government ensure they are innovating at the same pace as the Fintech industry. Otherwise, innovation could be stifled by regulatory red tape, limiting advancements in technology and reducing choice for consumers. When compared to the likes of Sweden and Estonia, the UK has some way to go to capitalise on the potential of Fintech solutions to revolutionise payments and banking generally,” he adds.

A Rising Tide

According to industry trade body UK Finance, the value of payment transactions carried out within the UK is set to grow from £38,692 million in 2016 to £41,064 million in 2026. While it is still the case that the bulk of payments are conducted in cash or by debit and credit cards, there is also a huge amount of innovation in both the consumer and business-to-business marketplace – much of it spearheaded by technology-led companies.  According to BobsGuide, an online marketplace connecting fintech buyers and sellers, there are currently around 2,500 payment companies operating in the UK. Some – notably the smartphone-enabled consumer-facing providers – are becoming familiar names. Others provide specialist services to businesses.

And if the sector is to develop, access to infrastructure will be essential.

The Fintech Dividend

Regulators are aware of the importance of fintech. For instance, earlier this year, the Bank of England announced plans to create what it described as a “fintech hub,” to monitor developments in the sector,

Revealing the plan, Deputy Governor, Dave Ramsden argued that Fintech had the potential to play an important role in improving the economic performance of UK PLC.

“I need to be open-minded about the way fintech could impact the economy of the UK. The defining trend of the last ten years has been the weakness of productivity. Given the size of the financial sector in the UK, I can see fintech driving competition and a pick-up in productivity in the medium term,” he said.

Prior to the establishment of the hub, the Central Bank operated what it described as a fintech accelerator – a business development programme in which technology companies were given opportunities to develop their ideas and prove concepts using the Bank’ s resources and market know how.

Developments such as Open Banking  – which requires the ten biggest UK banks to provide current account data to licenced fintech companies – and the opening of the payment system illustrate the commitment of regulators to introduce competition into financial services. More more companies are likely to follow in the footsteps of Transferwise That should mean a broader range of services for consumers and small businesses alike.