E-money providers are a growing threat to the U.K.’s high street banks, with international instant payments provider Transactive Systems recently becoming the latest fintech to receive a license from the Financial Conduct Authority for providing payments services in the U.K. and across the EU.
While the U.K. has nearly 200 traditional banks and building services, since 2011 they have been joined by a growing number of companies developing technologies to offer alternative solutions for making electronic payments. In the past couple of months, first TransferWise and now Transactive Systems have become the non-bank payment service providers in the U.K.’s Faster Payments system.
Transactive also offers a range of services from virtual bank accounts to direct debit. Specifically targeted at businesses operating in the gig economy, Transactive uses its newly developed transaction processing software to send and receive payments over multiple channels, and in multiple currencies. This enables businesses to process payments to accounts across the EU. in a matter of seconds, and at a fraction of the cost of traditional banking services.
So what are the factors giving rise to the proliferation of these new e-money start-ups?
“There’s two main reasons,” says Thorsten Beck, professor of banking and finance at Cass Business School. “Firstly, in Information and Communication Technology in general, speeds have gone up enormously in recent years, which makes the technology behind these new systems feasible and commercially viable. And also, there’s a huge demand. In the U.K., there’s a very concentrated banking system but relatively few options, and it’s heavily overpriced for international payments. And I think that gives an opening to these small start-ups which can offer these cheaper solutions.”
Since their inception, e-money services such as Apple Pay have largely targeted the retail market. But with increasing numbers of alternative providers like Transactive gaining licenses to provide payment services aimed specifically at businesses, Beck predicts the pressure on the banks to offer faster and cheaper services is going to substantially increase.
“Until five years ago, the only options available were to go from one high street bank to another so the banks have not really had an incentive to lower costs because they have a captive clientele,” he says. “But with the emergence of these alternative providers, I expect them to reduce their margins and for payment costs to come down in the banking system. It’s not going to happen overnight but good things always come through competition.”
Transactive provides an open API, meaning that the payments technology can be added to a third-party service, and Beck predicts that another likely occurrence is that if Transactive or other similar fintechs gain significant traction in the marketplace, the major banks would absorb them. While this would undoubtedly lead to quicker payments, whether the banks would then also cut costs is an open question.
“This is something we’re increasingly seeing,” Beck says. “Often the banks are very happy to see this experimentation going on outside the main banking system, and eventually they just buy up one of these small startups and use the technology themselves.”
Third parties have always been thought to be operational or hacking risks, but Beck points out that many of these concerns have so far proven unfounded.
“Most of these fintech startups are ahead of the curve, so things like hacking haven’t been a particular problem,” he says. “The one worry I would have is that if these companies expand into non-payment services such as short-term loans or taking deposits, there could be more stability concerns.”