|Source: City Archive Amsterdam|
Dutch bank registers show that, since the end of April this year, Dutch payment institution Adyen has officially acquired a banking license. This is clearly part of a bigger picture that shows ICT-based companies moving in a similar direction. Many years ago we could already witness the e-money institution Paypal become a bank in Luxembourg. Most recently Klarna also turned from payments institution to a bank. Now what could be driving these companies towards the bank license?
A ‘payments bank’
A closer look at the register tells us that Adyen is licensed for: taking deposits, providing loans, payment services, issuance and management of other payment instruments, foreign currency and issuance of e-money. I would call this a ‘payments bank’ as it demonstrates a clear focus on facilitating payments rather than covering all financial services (which is the case for challenger bank Bunq).
The move towards a bank does of course mean that own capital needs to be increased and some further obligations kick in, such as registering for the deposit insurance scheme. Also, despite the focus on payments, Adyen will need to provide some loans, in order to fulfil the definition of a bank in the legal sense: taking deposits and providing loans.
Now, let’s also look at the further practical consequences:
a- scope discussions for payments solutioning,
b- connections to clearing and settlement,
c- counterparty risk for corporate customers.
a-scope discussions for payments solutioning
Payment institutions that operate under the Payment Services Directive always need to be aware of the nature of the services that they provider. Does it qualify as money remittance, executing payments, executing payments with a credit line or placing money on an account? For each customer that seeks a bespoke solution to a business problem, the service offering needs to be qualified and business rules need to be applied accordingly. Banks on the other hand can more easily engage in the solution domain, given that any setup that involves holding funds and transferring those, will be possible under that license.
Now, payments institutions may of course be well accustomed to the scope and qualification work, so at the end of the day, this part of new business development may not be the source of a lot of head-ache. Still, it might be helpful to bring an end to discussions with local supervisors in Europe that might have their own opinions on the exact content of the payments institution license.
b-connections to clearing and settlement
One big difference between banks and payment institutions is that payment institutions are barred access from the RTGS-system of the ECB. The reasons is that the Settlement Finality Directive does not allow for PIs to become a direct member of designated systems. Even though already 5 years ago, the Dutch Ministry of Finance has made it clear that from a policy perspective the Settlement Finality Directive should change in this respect, no further action can be seen on the EU-level.
This is remarkable, as it is clear that we have a deep market for payment institutions, in which values of funds flow (or future funds flow) that may be quite significant. For example, the € 80 billion value of transactions that flow annually via Adyen (2016) comes close to the total value of transactions at the Dutch point of sale which is somewhere near the € 100 billion mark. There seems to be little logic to exclude these flows via payment institutions, from the scope of the Settlement Finality Directive.
In addition, we should not forget that the prohibition to have an account in TARGET2 has an impact on the future instant payment schemes as well. The settlement leg of most instant payment schemes will be organised in such a manner that only participants with access to TARGET2 can be direct members. The implicit competitive advantage of direct access to clearing and settlement is thus carried over into the new world of instant payments as well. Unless of course, the payment institution should choose to become a bank (or the settlement finality directive changes).
c-counterparty risk to corporate customers
In the classic design of a payment institution, the PI holds the customer funds in a separated account at a financial institution. Yet, if the bank where those monies are held goes broke, there is no recourse to the funds whatsoever. So the PI-business model means that all corporate customers have an inherent counterparty risk against the bank(s) that the PI has chosen to use to channel the separated payment flows.
It is well known that in particular larger companies dislike such intermediate counterparty risks. We’ve witnessed this before when Kasbank in the Netherlands was the only settlement bank for the transactions at the stock exchange. That model was eventually phased out.
In a similar vein I could imagine that the possibility to eliminate this counterparty risk for its customers, may have also been one of the considerations for Adyen to move towards a bank license. In addition, the increased capital base that comes with the bank status could also help in comforting corporate customers. For a company that processes so many transaction annually, the obliged minimum capital base of € 125.000 appears to be somewhat thin.
The new bank is not a bank any more
As the digitalisation of our economy allows for further modularisation of all kinds of services, we see the same thing happening in the financial sector. We can also witness banking and payments regulation adapt to this reality. The first wave of ‘bank-light’ regulation in 2002 allowed for e-money institutions and the second one in 2009 for payment institutions. In both categories the larger players have gradually chosen to obtain a banking license, while some players have started a digital bank from scratch.
With the renewal of the Payment Service Directive and its obligatory open access, it is clear that for payments services the modularisation of services has become the norm. And it may be only a matter of time before we see the other bank business lines open up all the same. With that, the mental image of the bank as a full service provider will gradually disappear. We will undoubtedly see many more new focused banks, such as Adyen, who each excel at their own game within the bank sector.
The new bank is not a bank anymore.