In this edition of Payments:Unpacked Extra! we feature a point of view from Andrew Smith, CTO, Founding Member RTGS.global and ClearBank.
In his blog Andrew considers whether agency banking is holding customers back.
Agency Banking
If you are new to the term “agency banking” then think of it simply as this, most banks are actually customers of bigger banks. The bigger banks hold their bank customers funds for them, and they will provide access to payment systems like Faster Payments, Bacs and CHAPS. Other services maybe provided too, but for the majority of agency banking customers, this is the bread and butter stuff.
Now, because there are few banks that can clear and settle transactions for themselves, and that number varies between payment systems, most financial service providers in the UK rely on a few of these agency banking providers, of which there is only 5.
Lloyds
Barclays
HSBC
NatWest
ClearBank
ClearBank is the challenger on the block, founded by Nick Ogden (founder of also WorldPay) to enable other financial services providers to enjoy all the benefits of being directly connected to the central bank and payment systems, but without the cost or the hassle. If you didn’t know, I am also a co-founder of ClearBank…
This all means that pretty much every other bank, credit union, building society and FinTech, has some form of dependency on one of these 5 banks. Yes, even your Monzo and Starling, they will use a different bank for certain aspects of their business, typically CHAPs (high value payments) and Bacs (Direct Debits).
Now, there are many benefits of agency banking. Things like, reduced costs for banks, reduced operational complexity, reduced liquidity management requirements, access to payment systems and functionality (even financial products) that they are unable to gain access to or able to support on their own. For FinTechs, they don’t have to get caught up in half as much of the regulatory landscape as one of these clearing banks, nor do they have to have the underlying technology and its operational costs in place. For regulators and payment systems, the agency banking model also makes their life a little easier too. I am quite a fan of the agency banking model, I think it helps all other banks including the central bank, payment systems and regulators.
At this point, you might be thinking where is the negativity towards agency banking then? How is it holding customers back – if everything I have written so far is positive. Well, the issue is simply in the implementation of agency banking itself. By this I mean the service the agency banking provider gives to its banking customers. The price points, and the somewhat conflict in interest that 4 of the 5 clearers have.
Service levels and the lack of real-time
First off, most agency banks provide their banking customers with an awfully dated method for connecting systems. In addition, these methods are not real time, they are expensive, dated and stop the bank that uses these services from being able to innovate or provide service levels we come to expect. I will give you an example, a very real-world example of my own just this past 10 days.
So, 10 days ago, I decided I wanted to change my car. I agreed a sale of my car and had found a replacement. All simple stuff. I then went to a fab company, Charles & Dean for finance regarding the purchase of my new car. I did this as opposed to going to for the typical financial offerings that a dealership has because, well quite frankly the products provided by Charles & Dean are far superior. On Tuesday, I signed my finance plan. Great. My current car went off to the garage on Wednesday and I took that sale as the deposit for my new car. That was instant simply because I sold my car back to the same dealership as where my new car was coming from. However, here is where things and agency banking become a pain.
The underlying bank that was providing my finance took a little longer than expected to “process the payment”. It was clearly quite a manual process, not a digital automated one, but hey, that’s not the big deal here. Everything was geared for the car to be delivered to me on Friday, pending obviously the car being paid for. However, Wednesday finished, no pay-out. Not to worry, Thursday comes along, still no pay-out. Again not to worry, the car isn’t to be delivered until Friday….We go into Friday and yes, the bank confirms pay-out has been made. Great, the car can be released and delivered. Well, no….
The bank may have sent the payment, but here is where agency banking fails, well from 4 of the 5 providers it seems. You may expect the garage to receive those funds in real-time, but sadly I knew better. You see the bank that is providing my finance has made the payment, but that actually means it has instructed its bank (agency banking provider) to make the payment. Did the agency banking provider actually make that payment there and then? I highly doubt it. The chances are the agency bank provider batches payments up before processing them, and it may need to source necessary liquidity if it had insufficient liquidity to make the payments of all its agency banking customers. So, I have no idea if they sent the transaction – nor does the bank providing the underlying finance.
Things get worse when you find out that the dealership uses a bank that also depends on an agency banking provider (note none of these banks are customers of ClearBank). So not only do I not know if the funds have really been sent, but now I do not know if the agency bank that will receive the funds is going to credit the dealership bank in real-time. Again, I strongly doubt it, no doubt that too will be batched up and then sent sometime later.
Come 4pm when the dealership still had not received the funds, I knew that the agency banking providers underneath were not going to get the job done, the dealership wasn’t going to receive its funds.….So that was that, no car delivery……
Now delaying delivery of a car may seem not too bad, but if like me you are totally dependent on a car for school runs, it does start to cause issues. At the moment, on a daily basis we have 4 children to get to school and nursery and like many parents, yes, they aren’t all at the same school, so my wife and I have to split the school run up. The challenge is, I didn’t have a car Thursday, nor Friday and now nor Monday. That makes life very tough. Calling in the in-laws for support, the use of taxis seems to save the day a little but wow, really, all because banks cannot make a real-time transfer???
This lack of service level stops us consumers enjoying experiences we come to expect. It is the 21st century, we faster payments, we have WhatsApp, we have computers in our pockets that have the compute power used in the 60s to put a man on the moon, but hey, we cannot move money in real-time.
What makes it worse is, the agency bank providers, if you bank with them directly would have moved that money in real-time over FPS or at least same day with CHAPS. That means these providers are creating a two tier environment when it comes to user experience – and totally explains why the challenger banks all decided to spend millions on building out technology to become direct participants of Faster Payments. (Which IMHO was wrong and adds far too much needless cost to their bottom line).
Transaction costs
There are set and very specific costs for a transaction through a payment system, there must be under the rules setup for payment systems. That’s great. Clearly though banks have some additional costs associated with making that payment, so I have no issues with a markup on the cost of the transaction – after all the payment system doesn’t provide the UX, the payment system didn’t manage the liquidity, the payment system didn’t check for fraud, AML or any form of FinCrime. So fine. What is interesting though is the costs the agency banks pass on, or should I say, charge their banking customers. All in all, this means to compete, the underlying banks are disadvantaged immediately at a cost level, this is made worse when we look at high value systems or SWIFT based messaging.
Competition, the conflict of interest
The final big issue with agency banking providers is the blatant conflict of interest. As an end customer, the underlying agency banking provider is competing directly with their own banking customers for my custom. This is true for all types of account holders. Because of this, there are horror stories out there, after all, the underlying agency banking provider wants your business. This is true for all the agency banking providers except one, ClearBank. This is because ClearBank was founded on the premise not to compete with its customers, therefore as a small business you cannot go directly to ClearBank for an account. As an individual, you cannot go to ClearBank for an account. ClearBanks customers are simply other regulated institutions that require agency banking services or banking-as-a-service capabilities.
Conclusion, just two choices…
If as a bank, FinTech, Credit Union or Building Society you want to deliver the same user experiences to your customers as the incumbent big banks do, then you have just two investment choices. 1) invest in becoming directly connected to payment systems and no longer dependent on an agency provider or 2) simply select ClearBank.
The two choices have very different cost profiles and investment required – not to mention ongoing costs. I often get asked what I would do if building a new neo bank, a challenger or credit union and I reply candidly, “Use ClearBank for as much as you can, utilise Banking-as-a-Service and simply focus on your own product and what you want to bring to the market. All the banking systems and payment systems access you need, leave to ClearBank, save your money and invest in what makes you different…”
If we look at my own experience these past 10 days, if both banks that depended on agency banking had been customers of ClearBank, then I would have received confirmation that the payment for my car had been made, and a few seconds later I would have received confirmation from the dealership that, payment for the car had been received and it’s now on the truck, on its way to being delivered. Yes, I would have received my car early Friday morning, as opposed to still waiting as I type this, another 3 days later (Monday).
As I said, I think the agency banking model is the right thing, however, sadly, you have just one provider in the market that makes it the right one to select…
Andrew Smith is the CTO and Founding Member at RTGS.global and ClearBank.
You can visit ClearBank at: https://www.clear.bank/
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