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Payments (PIs) and electronic money institutions (EMIs) should be able to access payments infrastructure in Europe, a joint letter to commissioner Mairead McGuinness says, as firms push for an amendment to the Settlement Finality Directive (SFD).
A joint industry letter signed by key fintech and payments groups has pushed for an amendment to the EU’s SFD alongside the implementation of the instant payments proposal.
“We urge European policymakers to address this matter in a timely fashion by amending the Settlement Finality Directive before the implementation phase of the instant payments regulation, enabling all types of payment firms to choose to directly access the designated payments infrastructure,” the letter says.
The SFD is a relatively old piece of EU legislation, having been adopted in 1998. The law is aimed at minimising risks associated with the transfer of financial instruments and payments, especially those risks which are linked to the insolvency of transaction participants.
"Before PSD1, payment and credit institutions were functions of the same institution. PSD1 created the distinction and introduced significant competition and innovation in payments. But PIs still to this day cannot access systems like TIPS or national payment systems,” pointed out Andrei Cazacu, EU policy chief at TrueLayer.
Cazacu explained to VIXIO that this is because of Article 2(B) in the SFD, which lays out what type of institutions can access payment systems, and payment institutions are not part of that list. “So the SFD needs to be amended to give them the option."
“Right now, banks remain the gatekeepers to the payment system,” Magali Van Bulck, policy chief at Wise, said. “Requiring a banking licence to make payments, and not, say, a payments licence, is no longer fit for purpose.”
She told VIXIO that democratising access to payment systems should be a no-brainer, explaining it would reduce costs for consumers.
“Right now, non-banks like Wise need to find a sponsor bank, often a direct competitor, to be able to clear and settle payments on their behalf. Those sponsor banks charge well above the wholesale cost per transaction, so the end user is the one losing out.”
“It would also increase speed. Banks have had time to implement instant payments since 2017, and many still haven’t done it,” pointed out van Bulck. “When a sponsor bank doesn’t offer instant payments, it means the non-bank that depends on them for their payments can’t offer instant payments to their own customers.”
In that sense, banks are bottlenecks for innovation, she said. “If non-banks were able to directly access the payments infrastructure, they’d be able to adopt the latest payments innovation without constraints, and it would put additional pressure on banks to avoid lagging behind.”
The European Commission has already contemplated changes to the SFD, having proposed widening access in a 2021 consultation. However, not much else has come of that since.
The trade associations’ letter argues that an amendment to the SFD will create a true level playing field for all actors in the payments market.
Existing legal barriers in the SFD prevent EMIs and PIs from directly accessing the EU's payment systems, which is partly why these types of firms were not included in recent instant payments proposals.
This is also why many in payments have become resentful that banks, often their competitors, hold all the power here.
“Contrary to many banks, fintechs would like to implement and provide instant payments,” said Ralf Ohlhausen, chair of the European Third Party Providers Association. “So rather than excluding them from the obligation, as suggested by the regulatory proposal, they should be enabled by amending the SFD to give them direct access to the relevant national and regional payment systems.”
Using indirect access via banks instead was never a good alternative and actually got worse over time, said Ohlhausen. “Less and less banks are offering it all, and many of those either charge excessively or found other ways to hinder unwanted competition.”
For van Bulck, an amendment would reduce de-risking and systemic risk to the financial system.
“Right now, banks can decide to offboard a non-bank, leaving their customers stranded without access to their usual payments provider. Direct access would reduce this reliance on banks and would also ensure that fewer non-banks cluster around the same banks for access to payment systems.”
Although she said it is important that indirect access remains an option for smaller players who cannot justify the investment to become a direct participant, direct access should be opened up. “It’s the only way we can create a true level playing field.”
EU falling behind?
The EU is falling behind in this space. For example, Brazil, India, Singapore, Switzerland and the UK have facilitated direct access for non-bank payment service providers to payment systems and have not reported any increased risk in the process.
Some countries in the EU, such as Hungary and Lithuania, have also done this, but, for now, no harmonised approach exists.
“We firmly believe that providing non-banks with the option to directly access the fundamental clearing and settlement infrastructures for payments is vital not only to create a level playing field but also to make instant payments a true success in Europe,” said Emőke Péter, speaking on behalf of the EDPIA. “This would make instant payments accessible to more consumers and give more businesses access to instant liquidity.”
The lobbyists have also acknowledged that this amendment could be brought forward as part of the Payment Services Directive review, anticipated to be released in Q3 2023.
However, they note that it could take time for negotiations to finish and years for changes to be implemented.
“The upcoming European elections in May 2024 and the end of the commission’s mandate could negatively impact the timelines,” the letter says. “We are concerned that this could result in a substantial time lag between the application of this current legislative proposal on instant payments and the point where non-bank firms will have legal clarity on their ability to really make the most of instant payments.”
The industry letter was jointly co-authored by the European Digital Payments Industry Alliance (EDPIA), European Digital Finance Association (EFDA), European Fintech Association (EFA), European Payments Institution Federation (EPIF), Electronic Money Association (EMA), European Third Party Providers Association (ETPPA), Open Finance Association (OFA), PayBelgium and Smart Fintech Association.
