The queen of sports and direct access to payment systems in the EU

Athletics is called the queen of sports. This is a magnificent and thrilling sports discipline attractive to spectators. Imagine a situation where a runner is denied access to an athletics stadium and only hammer throwers are allowed to use this facility on the grounds that runners are not that strong and massive as hammer throwers. However, runners are fast and agile, and both are athletes, representing different athletic contests: running and throwing. Nota bene, Poland has been quite successful in both female and male hammer throw, but also has some success in running, although not as spectacular. It would be equally interesting to imagine a situation where runners were only able to access the athletics stadium if permitted by hammer throwers and they could only do so by crossing the throwing circle and meeting certain requirements specified by hammer throwers.

Today, European payment institutions and e-money institutions (non-bank PSPs) still rely on banks to submit payment orders on behalf of their clients and hold client funds in safeguarded bank accounts. As a rule, the only valid option for non-bank PSPs to access designated payment systems in the EU is through indirect access. There is no option for direct access, and therefore no level playing field between banks and non-banks, even though EU law mandates that both groups should be on equal footing as payment service providers. Furthermore, many non-bank PSPs are now as large, or even larger, in operations than banks.

There is agreement within the EU payments community that the introduction of new types of PSPs – such as the category of an e-money institution (EMI) in 2000 in the first Electronic Money Directive (EMD) and the category of a payment institution (PI) in 2007 in the first Payment Services Directive (PSD) – spurred a flurry of innovation in the payments and fintech industry in the EU. However, to fully exploit the potential of non-bank PSPs in operating fully-fledged payment accounts, offering instant credit transfers, and distributing digital euro (and potentially other CBDCs) via their wallets in the future, an amendment to article 2b of the Settlement Finality Directive (SFD) is needed. This would expand the catalogue of direct participants to designated payment systems.

The SFD was enacted 25 years ago in 1998, before the introduction of EMD in 2000 and the PSD in 2007. Therefore, chronologically speaking, this legal act was not able to accommodate the new PSP set-up. However, as much has changed in the payments landscape since then, and given the positive progress made to date, it is high time to update the SFD. This update could be triggered either by the Instant Payments Regulation (IPR) or by the PSD3/PSR. Given that the IPR is less complex and expected to be implemented sooner (hopefully this autumn 2023), it is the best candidate. If induced by the IPR, non-bank PSPs could reap the benefits of direct access earlier, and there is no risk that this matter will be left in limbo.

The benefits of enabling non-bank PSPs to have direct access to payment systems range from more competition and innovation in the payments market, to increased choice for customers, and – resulting from shorter transaction chains, fewer intermediary charges – faster settlement and cheaper payment services, respectively. Non-bank PSPs would have greater bargaining power when negotiating indirect access terms with banks. Additionally, the network effects and service reachability of instant payments and CBDC wallets would be enhanced if offered by more non-bank PSPs operating as direct participants to payment systems. It is worth noting that the EU has thousands of non-bank PSPs in addition to banks, and direct access to payment systems would also contribute to the quality of payment initiation services (PIS) and open finance services.

While there may be some potential (liquidity, contagion, systemic, etc.) risks associated with granting direct access to systemically important payment systems for non-bank PSPs, the experiences of central banks in countries such as Brazil, Hungary, India, Lithuania, Singapore, Switzerland, the United Kingdom, – and lately (2023) Israel – suggest that these risks can be effectively managed. Moreover, the Bank for International Settlements (BIS) and its Committee for Markets and Infrastructure (CPMI) have called on other central banks and payment system operators to improve direct access for non-bank PSPs, and this has been identified as an objective of the G20 cross-border payments programme since October 2020.

In order to address these risks, central banks may need to invest in upgrading their infrastructure and developing new risk management tools (see also a self-assessment framework prepared and recommended by CPMI), such as collateral requirements or stress tests. They may also need to enhance their oversight of non-bank PSPs to ensure that they meet certain standards and comply with regulations. Central banks will need to handle more complexity resulting from more institutions making use of their infrastructure (settlement/reserve accounts, connections to wholesale payment systems). However, these efforts may be well worth it in terms of the potential benefits that direct access can bring to the payments ecosystem, including increased competition, innovation, and efficiency, as well as greater financial inclusion and access to digital payments for consumers and businesses.

One key thing needs to be clarified. The principle of “same activity, same risk, same regulation” should not be misinterpreted. Its sense in this context is not converting runners to hammer throwers, to use the metaphorical athletics comparison from the introduction (see above). Instead, the principle should be understood as providing non-bank PSPs with an appropriate level of regulation that takes into account their specific risks and activities. Some of the risks are identical for non-banks and banks, like for example operational cyber risks, and the same rules and regulations should apply to both, such as robust IT systems and proper security arrangements. However, with regard to their business operations, PIs and EMIs face a different spectrum of risks than banks. They are not deposit-taking and credit-lending institutions and should not be treated as such. In reality, under the liquidity criterion, non-bank PSPs are much safer than banks because they typically keep their client funds as money in safeguarded bank accounts. The difference would be potentially keeping the funds in safeguarded settlement central bank accounts. Thus, non-bank PSPs' payment obligations in the settlement system would be highly (even 100%) covered in liquid funds (a pre-funded model).

Nevertheless, each time a non-bank PSP would apply for direct access, it should go through a robust risk assessment procedure similar to banks to ensure that it has a proper risk management framework in place to mitigate operational, legal, financial, and technical risks. Payment system operators would remain the gatekeepers, setting their rules and requirements in their systems, provided that those do not discriminate against PIs and EMIs and reflect their different business model and risk profile compared to banks. There should be no "free pass" for non-bank PSPs. It would also mean that, considering the effort and costs of applying for direct access, many non-bank PSPs, like smaller banks currently do, will still prefer indirect access.

However, judging by the number of non-bank PSPs using the Lithuanian CENTROlink as a gateway to SEPA payment systems, there is high interest in direct access in the EU. Setting common EU rules by amending article 2b of the SFD would also eliminate this arbitrage, which is not ideal from a pan-European perspective for both euro and non-euro EU countries.

This issue lies at the heart of European non-bank PSPs. In 2023 they formed a wide "EU direct access coalition" (https://www.eudirectaccess.com/). On the website you can find a comprehensive position paper that discusses in more detail different aspects of direct and indirect access. Furthermore, on 1 February 2023, nine European organisations – EDFA, EDPIA, EFA, EPIF, EMA, ETTPA, OFA, PayBelgium, and the Smart Fintech Network – sent a joint open letter to the European Commissioner, Mairead McGuinness, calling for prompt action to create a level playing field for direct access to payment systems in the EU, alongside the IPR implementation. Tackling this issue in a timely manner would have a positive impact on the EU payments market and mitigate the risk of changing priorities for the next European Commission. The EU elections are scheduled to take place in May 2024.

In conclusion, the benefits of enabling direct access for non-bank PSPs to designated payment systems in the EU outweigh the risks. It is time for EU lawmakers and European central banks to end the slow walk and let both runners and hammer throwers access the athletics stadium.

About Jakub Górka

Jakub Górka, Ph. D., professor of finance at the University of Warsaw, Faculty of Management with 18 years of experience in payments, CEO of the Smart Fintech Network, PSMEG expert at the European Commission, advisor to the EESC, author of research paper and books, and sports enthusiast.

About Smart Fintech Network

Smart Fintech Network serves as a platform for exchanging views freely between academia, practitioners and policy makers together with its flagship project – a FinTech Drift Forum that runs on three tracks: research, student and business track.