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| 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.
