What direct access to the Bank of England means, and why it matters

Modulr By Modulr on 2 January 2020   •   6 mins read
<span id="hs_cos_wrapper_name" class="hs_cos_wrapper hs_cos_wrapper_meta_field hs_cos_wrapper_type_text" style="" data-hs-cos-general-type="meta_field" data-hs-cos-type="text" >What direct access to the Bank of England means, and why it matters</span>

Update: Please refer to 

We're delighted to announce that our work gaining direct access was awarded 'Best Initiative from an SME' at the prestigious Card & Payment Awards. It's great to receive industry recognition for our hard work driving efficiency and reliability for our customers through direct access. Read on to find out why.

We recently announced our direct participation in the Faster Payments Service (FPS), allowing Modulr to hold an account at the Bank of England. 

That’s great for Modulr - we’re no longer beholden to a directly connected commercial bank to settle Faster Payments – but (what does that mean and) how does it benefit our customers?  

What does direct access mean? 

Let’s start with the basics. Direct access to the Faster Payments Service means Modulr FS Limited - FRN 900573 (our regulated entity) - is technically integrated into the Faster Payments Service (FPS) and Bacs schemes. It means we can hold an account in the Bank of England’s Real-Time Gross Settlement (RTGS) system so it can settle directly with other participants. 

Fundamentally, that means we’re one of a few non-bank payment service providers (PSPs) to have direct access to FPS (here’s a list), removing our reliance on another bank to indirectly access FPS.  

Why should our customers care if we’re no longer reliant on a commercial bank for access? 

This is the crux of the matter for us. Modulr no longer being reliant on a third-party provider has these four important benefits. 

Too many cooks 

While you’re indirectly connected via your commercial bank, they could decide to cut you out or they might decide they don’t want to do business with your customers anymore overnight.  

It’s called debanking and it’s been happening over the last few years. Barclays cut out a number of FX and international payments companies. 

And that’s no good if you’re a new company with an innovative yet compliant business model needing to make Faster Payments or access the payment schemes. Without a reliance on a commercial bank’s policies, there are fewer parties to rely upon. 

A smaller tech chain reduces IT failure 

With fewer tech players in the chain, there is a reduced likelihood of IT failure, as our own technology stack is less dependent on others. This means we’re now able to divert resources to focusing on our own platform rather than maintaining our technological connection to other parties. 

The financial services sector has seen its fair share of IT failures as recently demonstrated by the BBC who compiled a list of every outage in 2018 and 2019. By minimising the number of parties offering technological support, it makes us more resilient in providing an even better service. 

We've done the hard graft to make it easier for our customers 

For many companies the investment to gain access to the scheme is too costly, laborious and lengthy, especially when time is of the essence to capitalise and get your products to market. You don’t have that time to spend building the infrastructure, so we’ve done it for you. 

It made strategic sense for us in our mission to support forward thinking companies who need easy and quick access to payment services to the benefit of the end consumer. But to do that, we needed to shed our own agency banking reliance and the attention it took away from our customers. 

Since inception in December 2015, we’ve been busy ticking off regulations and jumping through the operational and resiliency hoops required by the regulator to gain direct access. 

To gain direct access approval you first need to prove to the FCA and the schemes that you are operationally and commercially mature. Meeting the regulations and the technical capacity requires careful planning as it takes a long time to do so. As a four-year-old company, it’s been our strategy since day one. 

We’ve spent those four years building up and proving our technical and operational credibility and status to the regulator and schemes, and that we’re well established and ready to handle large and complicated payment volumes.

You have to prove you’re not a systemic risk and that you can meet the service levels that Faster Payments is framed around. This consisted of an assurance process and hundreds of pages of questionnaire providing evidence for every single point before it’s signed off by a third-party auditor. 

Then there’s the raft of regulations. In September 2016, we received our status as an Authorised Electronic Money Institution (AEMI) which took 9 months of application planning and execution to complete. We were regulated under the second Electronic Money Directive (2009/110/EC) and, when PSD2 came along, we had to reauthorise ourselves which effectively raised the bar one step higher in 2018. There are also additional regulations like the Proceed of Crime Act 2002 (POCA) and the money laundering directives (MLD, including the upcoming 5AMLD) with which to comply. 

It is only at this stage, with the necessary regulated status and the proven track record of operational resiliency, that we were able to begin preparations to gain direct access. While there are many AEMIs in the UK, very few have gone the whole hog to put themselves in a position to pursue direct access.  

We’re experts in the field of payments and, as such, our customers can leverage our direct access and the operational benefits it passes on, allowing them to focus on their own customer proposition. 

Ultimately, direct access means we can compete with the established players 

Now that we are directly connected in our own right and no longer reliant on a third party it means we can drive more resources to providing and maintaining a higher quality service for our customers who strive to bring innovative products and services to market.  

The forward-thinking companies of the Instant Economy choose to integrate and use business services (such as payments) in new and flexible ways to deliver superior and immediate customer experiences.  

As these companies look to generate new revenue streams, bring innovation to the financial services industry and cause disruptive competition, we firmly believe that the new wave of infrastructural fintech – of which we are a part – will prove fundamental where banks and smaller providers have failed to do so. 

It’s a false dichotomy. Those who do not engage with infrastructural fintech cannot achieve the technological scale needed to serve their customers in the Instant Economy. It’s why Gartner has predicted 80% of existing financial services will be made redundant by technology by 2030.  

The financial services sector has opened up in the last decade, but it is only now that we’ve seen an industry in which a four-year-old FinTech (us) can become fully embedded in payment schemes. We are a true financial player and a true technology player.