Why the agency banking model is compromising digital transformation ambitions 

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Faced with accelerating digital adoption, competition from neobanks and rising customer expectation, there is a strong imperative for banks and building societies of all sizes to increase their speed of innovation and digital transformation in order to stay relevant.  

Increasing dependency on costly and cumbersome technology  

There was a time when the idea of smaller banks and building societies procuring banking services from their larger competitors would have been a necessary means to an end; providing indirect access to the payment system and an attractive alternative to costly and complex direct payment scheme membership. 

While an enabler in the past, the agency banking model now serves to not only tie smaller banks and building societies to those with whom they compete, but also increases their dependency on the aging, legacy technology on which these larger institutions are built and are unincentivised to innovate. 

Digital transformation ambitions become impossible to achieve, as these smaller banks and building societies find themselves stuck with old, manual processes which impact operational efficiency and fall far short of customer expectation.  

Batch processing that blocks differentiation   

The reality is that the current agency banking model is riddled with inefficiencies, not least the batch payment processing and manual processes on which it relies for the making, receiving and reconciling of payment flows. All of which is time consuming and error-prone and incurs administrative cost. Inbound payments are slow and can take 8 – 12 working hours, or even longer at weekends and bank holidays, before they appear on customer accounts. 

Outbound payments are also managed in batches and the execution of payment files typically only takes place three to four times per working day. This is an inferior experience to a digital banking service and means that customers can wait many hours, and sometimes days should a weekend or bank holiday intervene. 

Without the ability to issue individual account numbers, customers must enter a unique reference with each payment for payments to be reconciled. All too often this is forgotten or entered incorrectly meaning that payments are rejected and returned. Completing payments in this way becomes a cumbersome, laborious and error-prone process. 

The margin of error is further increased by the fact that these accounts cannot be checked by the Confirmation of Payee scheme which can lead to new customers abandoning an onboarding journey altogether as the payee’s bank will not be able to check the beneficiary details and the payee will be shown messages alerting them to possible fraud risks. 

So, if you’re a smaller bank or building society facing the herculean task of delivering new world solutions by using these old world practices, then what’s the alternative? 

 The answer lies in leveraging the power of the fintech. 

From monolithic solutions, to fintech microservices 

Thanks to regulatory changes which have opened up the infrastructural playing field, the agency banking model with its reliance on legacy, monolithic solutions is being rendered increasingly obsolete, as banking enters the technology mainstream of the API economy. 

A small group of FinTechs has emerged that have the same level of access as big banks but crucially don’t compete in the space - for example Modulr connects directly to the UK payment schemes and has a settlement account at the Bank of England. This means banks and building societies have another avenue to connect to payment schemes and integrate accounts and payments functionality into core banking systems, driving efficiency and scalability. 

Small banks and building societies can now seek out partners, who have no conflicts of interest, to provide fintech-driven microservices built on API-enabled architecture. 

Leveraging a robust and regulated payments infrastructure, they can build and launch new financial products quickly – without being constrained by legacy infrastructure, or having to rely on traditional banking partners that don’t prioritise innovation. 

This allows them to move fast and deliver market leading, real-time banking propositions to attract and retain customers. 

Manual, time-consuming processes replaced with real-time digital ones 

Manual, error-prone and time-consuming processes can be replaced with real-time, responsive digital ones, and all with simple integrations. With modern APIs, smaller banks and building societies can incorporate intelligent payment flows, eliminating the error-prone batch files and manual transaction processing of legacy payment solutions. These more efficient processes free up team hours and allow staff to be redeployed in more productive ways. And, payments can be made 24 hours a day, all year round and often fulfilled within seconds; allowing forward-thinking banks to deliver a superior customer service and affording an important competitive advantage over regular banks. 

Modulr’s API is used by organisations to open unlimited accounts with sort codes and account numbers which makes account infrastructure cost effective and agile while also improving internal visibility and control of funds to better manage treasury and reconciliation functions. 

It also gives organisations the ability to eliminate error-prone batch files, use programmable rules and notifications to assign incoming payments to customer accounts, speeding up reconciliation and reducing admin costs. For instance, we provide access to major UK payment schemes to give banks and building societies deep, reliable and uninterrupted access to the national payments infrastructure. We are directly connected participants of Faster Payments and Bacs and we’re a principal issuing member of Visa and Mastercard. 

Banks and building societies can provide customers with a full suite of market leading financial solutions, including payment accounts, cards, Faster Payments, Direct Debits, Payment Initiation via Open Banking, Confirmation of Payee, 24/7 access and instant notifications. This means that they can stand out in the fiercely competitive financial marketplace by offering a full digital banking experience to their customers and members. 

Infrastructural payments technology that’s fit for purpose 

So, to become a first-class player in this world of API enabled banking, smaller banks and building societies need infrastructural technology that’s fit for purpose: agile, adaptable, highly scalable, reliable and robust, as opposed to tying themselves to the monolithic platforms of the past.   

And that’s where the API-enabled FinTechs come in. 

Whether you’re a bank or a building society, companies like Modulr can help you automate and simplify your payments infrastructure and deliver a seamless customer experience. With API-driven platform and regulated EMI status, we’re built to support your payment and account requirements; allowing you to deliver a modern customer experience that outcompetes the competition, without relying on it.