For FIs, offering faster payments can be a game changer. However, enabling them isn’t always simple — FIs must choose whether to build a direct, expensive, labor-intensive connection to faster payment schemes or partner with, and become reliant on, a connected FI to gain access. In the latest Faster Payments Tracker, PYMNTS speaks with Starling Bank on why direct connection is a must for challenger banks. Independence from legacy banks and new partnerships with major financial innovators are just some of the rewards.
Purchases of digital music or videos can be completed almost instantly, so one might expect the money involved to move just as fast. Customers may have once been happy to wait an hour for a movie to download, but they are now accustomed to having their selections instantly stream on demand, noted Julian Sawyer, chief operating officer of Starling Bank. That swiftness hasn’t yet become commonplace for payments processing, though, which can still take days to settle.
“We have so much technology that enables us to do so much instantly, and then we go to our bank and say, ‘Can we just pay [a recipient] in the States?’” Sawyer said. “And, it’s like, ‘We’ll do a SWIFT message, and it’ll cost $10, and you may get it on Monday.’ That’s really, really poor.”
U.K. organizations are looking to tackle this problem by leveraging the local Faster Payments Service (FPS). Uptake continues, with approximately 500 million payments processed on the scheme in Q2 2018, reflecting a 25 percent year-over-year increase.
Financial players seeking to offer FPS access to their clients have two options: Join the scheme directly, as 21 FIs have done so far, or partner with one of those participant FIs. The latter option means avoiding the costs and complexities required to join, Sawyer noted. Direct participation was a must for Starling, however, and its decision to join last year made it the 13th FI and first challenger bank to do so.
“It doesn’t make sense to be a bank and be in the world of payments, and then use somebody else to do payments, or to not be in real time,” Sawyer said.
Taking the Direct Connection
For Starling, serving business and consumer clients means catering to the growing demand for instant services. The FI could have turned to a sponsoring FPS participant for the settlement and/or connection needed to use the scheme, but would have been dependent on a partnership with an established legacy bank, Sawyer explained. This wasn’t ideal for the challenger.
“[In that scenario], you’re reliant 100 percent on their technologies,” he said. “You might have this wonderful new kit doing some really nice, shiny stuff on your app, then you’re sitting behind a big [Royal Bank of Scotland] mainframe to do the payments.”
Directly connecting to FPS gave Starling the flexibility and control it needs to be competitive.
“We said, ‘Let’s not be tied up to these incumbents,’” Sawyer recalled.
Impact for Clients
Starling’s decision to connect directly means it can act as a sponsoring participant and include the faster payments connection in its client offerings. The company has since worked to provide a set of application program interfaces (APIs) that support real-time access to faster payments, particularly for financial organization clients seeking to leverage the service for new products.
“We’re sitting behind this infrastructure, [and] providing a service to these organizations,” Sawyer said. “Each one can create [its] own unique propositions.”
Starling has seen the impact through new partnerships with companies like Mastercard. It provides FPS access that enables Mastercard Send to issue real-time bank-to-bank payments in the U.K. and Europe, for example. Meanwhile, a prepaid card issuer can now support loading funds onto the card in real time, which could be useful for paying gig economy employees.
Businesses have their own set of demands, wanting not only faster fund transmissions, but also access to the better data often supported by faster payments schemes.
“If it is a straight-through process and doesn’t have to touch a human, it’s really, really fast and really, really cheap,” Sawyer said. “Some older payment systems have a lot of errors and [require] manual reconciliation, which increases cost and time scale, and the customer experience is just not met.”
FIs are increasingly working to offer customers instant payment services that provide richer data and quicker transactions. Starling seems to be betting on a DIY approach in accessing faster payment schemes. If all goes well, the challenger bank may prove that it pays to be direct.
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