Agency banking provides a way for Banks and Payments businesses to join a local scheme (for example, SEPA in the EU or Faster Payments in the UK), using their own clearing code, Bank Identifier Code (BIC), and account numbers for payments and collections via a bank that is a direct participant of a payment scheme.
Also known as Indirect Access/Indirect Scheme Access, the agency banking model gives financial institutions the ability to offer payment services to their customers in other locations without having to establish a physical presence in, or meet direct access regulatory requirements for that jurisdiction.
What are the differences between direct and indirect access to payment systems?
Typically, there are two ways for Banks and Payments businesses to access a payment scheme.
- Direct access: direct participants join a payment scheme by entering into an arrangement with a payment system operator. This involves meeting regulatory and licensing conditions (holding a banking or e-money licence, for example) and is often restricted to the region the entity is based in.
- A UK-based challenger bank could gain direct access to Faster Payments, Direct Debit and Bacs payment schemes via Pay.UK once all eligibility criteria is met
- Indirect access: indirect access to a payment system involves having a contractual arrangement with an entity that already has direct access to that payment system, for example, another bank domiciled in that region.
- A UK-based challenger bank could gain indirect access to SEPA payment schemes via an agency bank (sponsor bank) without having to obtain a European banking licence itself.
For a very long time, incumbent banks monopolised access to payment schemes. In the UK, direct access was opened up to non-bank providers that were able to meet key entry criteria, which increased competition in the market.
Although the financial services ecosystem has opened up significantly in the last decade, allowing new players to gain direct access to payments schemes in the country in which they are domiciled, when it comes to expanding their services across borders, options are still limited.
Obtaining banking licences in multiple jurisdictions, which usually requires opening a branch or office in each of those jurisdictions, is both expensive and time-consuming. However, this is usually the only way in which a bank or regulated payment service provider can access payment schemes directly.
Additionally, many big banks are de-risking, leaving smaller banks and non-bank financial institutions without correspondent banking partners.
What are the benefits of agency banking?
Partnering with an agency bank allows financial institutions to gain rapid access to new markets without the huge costs associated with joining a scheme directly.
In addition to cost savings and reducing the time it takes to expand geographically, gaining indirect access to payment schemes via agency banking adds value to the sponsored payments business or bank by increasing customer satisfaction and stickiness through new payment services.
Not only that, but the burden of regulatory and operational challenges of integrating with a payment scheme directly is eliminated.
Want to learn how Banking Circle can help Banks and Payments businesses gain rapid access to new markets? Find out more about our SEPA agency banking services, or get in touch with one of our experts here.