If your business is looking to improve transaction efficiency, reduce processing fees and stay ahead of evolving consumer payment preferences, understanding the regulatory framework around payment initiation services is essential.
These services are not only cost-effective alternatives to traditional card payments but also present a streamlined route for businesses to offer direct, secure transactions. Whether you're a fintech start-up aiming to disrupt the market or an established institution diversifying your payment options, you’ll need to comply with the Payment Services Regulations 2017 and obtain authorisation from the Financial Conduct Authority (FCA) before offering these services.
Our financial services solicitors can support you through the FCA application process, help shape your compliance strategy, and provide clarity on your legal obligations, ensuring your business is well-positioned for long-term success in a regulated environment.
Contents:
- What are payment initiation services?
- Who can provide payment initiation services?
- Key steps to become a PISP
- Benefits for businesses of using payment initiation services over payment acquiring services
- Regulatory landscape and compliance necessities
- Key compliance areas for PISPs
- How can we help with regulatory compliance and authorisation?
What are payment initiation services?
Payment initiation services are a relatively modern way to transfer money, allowing direct payment transactions between a payer (typically a customer buying goods or services) and payee (typically the business providing goods or services), without the need to use a traditional payment method like a debit or credit card that requires multiple parties including the relevant card payment scheme. This speeds up transactions and reduces the associated costs of transaction processing by cutting out the card payment scheme, making it an attractive option for both businesses and consumers.
It officially became a payment service in the UK following the implementation of the Payment Services Regulations 2017 (PSR), which implemented the second EU Payment Services Directive in the UK. Previously, payment initiation services had been popular in some European countries but had not gained traction in the UK. However, the PSR opened up the market in the UK. It also sets strict requirements for providers regarding the security of such services. Payment initiation services are now increasingly offered by many businesses and organisations as an alternative payment option.
Who can provide payment initiation services?
To be a Payment Initiation Services Provider (PISP) in the UK, you need to be authorised by the Financial Conduct Authority (FCA). This authorisation helps ensure that PISPs can meet the high standards for operation and security set by the PSR.
To obtain authorisation, your company needs to demonstrate that it can handle payments securely and promptly, which requires having secure IT systems in place to process transactions and protect data. You also need to prove that you are financially robust, can maintain sufficient capital as required under the PSR, and have appropriately experienced senior managers to run your business effectively.
When it comes to consumer protection, your company needs to demonstrate that it has clear and fair policies for dealing with customers, encompassing everything from transparent pricing and terms of service to efficient processes for resolving complaints and addressing issues.
You must also establish internal measures to mitigate risks associated with your business being used for money laundering and terrorist financing. This includes systems to monitor, detect, and report suspicious activities within your business.
Both fintech startups and traditional financial institutions can become a PISP if they meet these requirements. For startups, offering payment initiation services presents an opportunity to enter the market with an increasingly popular payment method. At the same time, established banks view them as a chance to update their payment solutions and remain competitive.
Key steps to become a PISP
Preparing for FCA authorisation as a PISP requires significant preparation. It begins with gathering extensive information about your operations, management, and ownership. Your firm must establish the appropriate permissions for your regulated activities and demonstrate compliance with the FCA’s regulatory thresholds. A crucial part of the process is the regulatory business plan, which outlines how your business will manage risks and ensure regulatory compliance.
The process can be complex, so it is important to engage with experts who can help you navigate through the journey, assess your compliance approaches, and keep you informed about regulatory developments.
Benefits for businesses of using payment initiation services over payment acquiring services
Payment initiation services offer several advantages over traditional payment-acquiring methods, such as credit cards and payment processors. These advantages include:
- Cost efficiency: By eliminating intermediary fees, such as transaction and processing fees, payment initiation services reduce costs for businesses.
- Faster transaction speeds: Transactions via payment initiation services are typically completed more quickly than those going through traditional credit card networks.
- Customer choice: Payment initiation services provide an alternative payment method that some customers may prefer.
These benefits make payment initiation services particularly attractive for e-commerce platforms, which thrive on providing efficient and secure shopping experiences.
Regulatory landscape and compliance necessities
In the UK, PISPs are governed by the PSR, and may also be subject to the Financial Services and Markets Act 2000 if they carry out other regulated activities.
These laws require that PISPs obtain authorisation, or registration in some cases, from the FCA to operate. Providing payment initiation services without it is a criminal offence and can lead to significant repercussions, including financial penalties from the FCA, restrictions on business activities, or even legal proceedings.
To stay compliant, PISPs in the UK must clearly understand their legal responsibilities and ensure they keep up to date with the relevant legal and regulatory changes that apply to their business. It's essential to establish a system for this, which may include regular training sessions for the team, ongoing checks on how things are running, and continuous assessment of business risks. Staying updated on any changes in legal standards and adjusting practices accordingly is also essential.
Key compliance areas for PISPs
- Anti-Money Laundering (AML): Establish robust AML procedures and conduct regular risk assessments. Firms must implement measures to detect and report suspicious activity in line with national anti-money laundering obligations.
- Customer due diligence: Implement thorough Know Your Customer (KYC) processes.
- Strong Customer Authentication (SCA): Implement two-factor authentication for all transactions.
- Conduct requirements: Payment initiation services must be operated following the conduct requirements set out in the PSR.
- Information requirements: PISPs must ensure they comply with the information requirements outlined in the PSR, including those related to information provided in customer terms and information provided before and after a payment transaction is made.
- Reporting: Maintain accurate records and submit regular reports to the FCA.
- Complaints. PISPs must establish procedures for handling customer complaints.
- Incident management: Have clear procedures for handling and reporting security incidents.
- Third-party risk management: Assess and monitor any third-party service providers you use.
- Data Protection: Ensure compliance with the UK GDPR and implement robust data security measures.
Navigating financial regulations can be complex, so it's wise to consult a financial services solicitor who can help clarify your legal responsibilities, review your compliance strategies, and guide you through any changes in the law.
How can we help with regulatory compliance and authorisation?
Entering the Payment Initiation Services market presents both opportunities and complexities. With the regulatory demands set out by the FCA and the Payment Services Regulations, expert legal support can save you time, reduce risk, and ensure your compliance is watertight from day one. Whether you're preparing your application, reviewing your compliance framework or handling ongoing regulatory obligations, our financial services solicitors have a proven track record of helping businesses like yours navigate these challenges. We’ll guide you through the authorisation process and advise on practical ways to meet your regulatory responsibilities, so you can focus on delivering innovative payment services to your customers.
