Should Central Banks Lock Out Non-Bank Payment Providers?

When the Hong Kong Monetary Authority, Hong Kong's central bank, unveiled its new, faster payments system this October, there was a notable difference from similar rollouts by other central banks. Not only can traditional commercial banks like Bank of China and Citibank join Hong Kong's Faster Payment System (FPS), but so can non-banks and fintechs. For instance, Alipay and WeChat have both opened FPS accounts, as has Octopus, which provides rechargeable smart cards that locals use to take the subway. 

The Hong Kong Monetary Authority’s decision to create an open platform is a break with the past. Around the globe, central banks have traditionally only allowed commercial banks to access their internal payments systems. Non-bank payment providers like PayPal, Venmo, and others have been shut out. They have therefore been forced to rely on banks in order to interact with key central bank clearing and settlement tools. 

With Hong Kong’s FPS opening itself up to a wider variety of financial companies, TransferWise, a global remittance provider, has also applied to join. If it succeeds in getting an account, this won't be the first time that TransferWise secures direct access to a central bank. Earlier this year, it was the first non-bank to get an account at the Bank of England, U.K.'s central bank. This account allows TransferWise to use the U.K. Faster Payments scheme, the U.K.'s version of Hong Kong's FPS. Among the world’s central banks, the Bank of England has been a pioneer in providing non-bank access, an effort that began in 2014 with the publication of a report outlining a vision for a "new access model."

Why might a non-bank like TransferWise want a direct connection to a central bank rather than an indirect one via an intermediary bank? Let’s look at how a TransferWise remittance proceeds. The first step in a remittance — sending, say, British pounds to a euro account — involves waiting for the sender's funds to arrive in TransferWise's British bank account. TransferWise can then process the next leg of the account, including transferring funds from its euro account to the recipient's bank account. Both the funding and disbursing end make use of each central bank’s retail payments system. 

By forcing TransferWise and other fintechs to rely on a bank to access these central bank services, the remittance might move slower than TransferWise prefers. In addition, the bank will also charge its own markup on top of the central bank's base fee, which TransferWise must either eat or pass off to its customers. Lastly, forcing TransferWise to access payment systems through a bank's often archaic technology platform may limit the variety of services that it would otherwise prefer to offer. 

That one set of payments providers gets access to the core payments system while another is shut out seems quite arbitrary to me. Think what this might look like in another industry. Regular folks like you and me can buy food at a supermarket like Safeway or Walmart, or we can go to a restaurant like McDonald’s. These food providers in turn buy their goods from wholesalers. Forcing TransferWise to approach a bank to get payments services would be like forcing McDonald's to buy all of its ingredients from Safeway or Walmart. 

But this would be a silly policy. If McDonald's had to buy meat from Walmart, a Big Mac would end up costing $20! Given that McDonald's is free to go directly to a wholesaler, I don't see why non-bank payment providers like TransferWise should not be allowed that same privilege. 

The main impediment to non-bank access to core payments systems is often the banks themselves. For instance, take Australia’s recently introduced New Payments Platform (NPP), a faster payments system much like those in the U.K. and Hong Kong except operating on the traditional, limited-access basis. A report from the country’s Productivity Commission took the NPP to task for not allowing non-banks to directly access the system as the U.K. does. 

In response, the NPP pointed out that it "requires rigorous standards to safeguard the Platform." The implication is that non-banks are unable to meet these stringent requirements. There is no doubt that security is vital. But I'm sure that some sort of regulatory framework could be built to ensure that non-banks meet the same standards as banks.

The NPP is member-owned, with 8 of 12 board positions taken by Australian banks. Banks stand to lose business if fintechs like TransferWise go directly to the source. One wonders how much of the NPP's policy against opening up the system is due to genuine concerns about upholding rigorous standards, and how much is due to banks’ interest in stifling the competition. 

In the U.S., bank regulators are currently grappling with the idea of issuing special fintech banking charters, which, among other attractions, may allow fintechs to directly hook up to the Federal Reserve. The Fed, on the other hand, has refusedto give any clarity on whether it will allow non-banks with a fintech charter to open master accounts. For a company like TransferWise, the ability to get a master account at the Fed would result in lower costs. According to Bloomberg, TransferWise’s bank might charge around 7 cents per debit transaction whereas the Fed’s debit fee is less than 1 cent. 

This seems like a no-brainer to me. The world is changing. We should be providing new entrants to the payments industry the same level of access to shared systems as the incumbent payment providers enjoy.

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J.P. Koning

J.P. Koning is a financial writer and blogger with interests in monetary economics, economic history, finance, and fintech. He has worked as an equity researcher at a Canadian brokerage firm and a financial writer and publisher at a large Canadian bank. More recently, he has written several papers for R3, a distributed ledger company, on the topics of central bank cryptocurrency and cross border payments. He founded the popular blog Moneyness in 2012. He designs economics and financial wallcharts at Financial Graph & Art.

Koning earned his B.A. in Economics from McGill University.