Payment initiation services allow individuals to authorise a payment from an account they hold with a bank or other payment service provider (PSP) and are increasingly being used as an alternative to more traditional card payments. These services are often quicker and cheaper for businesses than card payments that are carried out through card payment schemes such as Visa and MasterCard.
Whether you're a startup ready to enter the market or an established business planning to update your payment options to stay competitive, understanding payment initiation services could help your business by offering more payment options to your customers, reducing transaction times and lowering payment processing fees.
In this article, our financial services legal experts break down what this service is, who is eligible to provide them, their benefits, and the important regulations that govern them.
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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. Before this, payment initiation services had been popular in some European countries but had not taken off in the UK, but 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 to ensure that PISPs are able to meet the high standards for operation and security set by the PSR.
To obtain authorisation, your company needs to show that it can handle payments securely and promptly, which means having secure IT systems to process transactions and protect data. You also need to demonstrate 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 show it has clear and fair policies for dealing with customers, covering everything from transparent pricing and terms of service to efficient processes for resolving complaints and 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 is an opportunity to enter the market with an increasingly popular payment method, while established banks see them as a chance to update their payment solutions and stay 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 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 like 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 Payment Services Regulations 2017, 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, and 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 need to clearly understand their legal responsibilities and ensure they keep up to date with legal and regulatory changes that apply to their business. It's important to set up a system for this, which could include regular training sessions for the team, regular checks on how things are running, and assessing risks to the business on an ongoing basis. Staying updated on any changes in legal standards and adjusting practices to align with these changes is also essential.
Key compliance areas for PISPs
- Anti-Money Laundering (AML): Establish robust AML procedures and conduct regular risk assessments.
- 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 in accordance with conduct requirements set out in the PSR.
- Information requirements: PISPs must ensure they comply with the information requirements set out in the PSR including in relation 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 UK GDPR and implement strong 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.
Payment Initiation Services: opportunities for payment service providers
As the financial landscape continues to evolve, Payment Initiation Services represent a significant opportunity for businesses to enhance their payment service offerings. Whether you're considering adding Payment Initiation Services to your business offerings or you're an established provider seeking to ensure full regulatory compliance, expert legal guidance is essential. Our financial services solicitors bring extensive experience in navigating the FCA authorisation process and helping Payment Initiation Service Providers maintain compliance.
