Building a new financial services proposition, or extending an existing product, can present a substantial challenge for firms. There are many potential account types, account structures and multi-currency support, as well as the payment and clearing schemes, each with their complexities and quirks.

Building the accounts and payment scheme connectivity requires substantial investment in technology, compliance, and personnel, which can be especially burdensome for startups and smaller fintechs. Moreover, the ongoing maintenance and upgrading of these systems to keep pace with evolving technologies and customer expectations further escalate costs and operational demands.

This is where agency banking comes in. Also referred to as indirect access or indirect scheme access, the agency banking model provides firms with a route to offer accounts and payment services to their customers without requiring the resources and costs associated with joining a payment scheme directly. 

Put simply, agency banking is when a firm offers its customers a financial experience that’s provided by an authorised third-party bank acting as the ‘agent’ of that service. This model is highly beneficial for fintech companies. It allows them to offer banking services without becoming a fully licensed bank or a direct member of a payment scheme themselves, which can be an intensive and prohibitively costly process.

Today, most agency banking services include providing customer accounts and access to payment rails such as the Faster Payment System (FPS) in the UK or SEPA Instant in the eurozone.

This access is crucial for facilitating fast and efficient transactions, enabling fintechs to cater to the increasing demands for real-time payments from their customers. By utilising the established infrastructure and regulatory compliance standards of partner banks like ClearBank, firms can focus their resources on innovation and enhancing customer experiences.

This strategy reduces operational complexity and helps to accelerate the time to market for new financial products, supporting firms to remain competitive in a rapidly evolving landscape.

Agency banking is sometimes referred to as ‘indirect payment scheme access’ and differs from direct access in some crucial ways.

• Direct access: Participants join a payment scheme via an arrangement with a payment system operator, for example with Pay.UK for Bacs and FPS, which involves meeting region-specific regulatory and licensing conditions like holding a banking or e-money licence.
• Indirect access: Participants have a contractual arrangement with a financial entity with direct access, like ClearBank, to payment schemes.

With the indirect model, the onboarding process for participants is streamlined, eliminating the regulatory and compliance hurdles that come with direct access. This offers firms a flexible and accessible avenue for growth, especially when they are just getting started.

The UK payment schemes available through agency banks are:

• Bacs: handles both credit transfers and direct debits, used for bulk and regular payments.
• Faster Payment System (FPS): allows instant, real-time payments between UK bank accounts.
• CHAPS: facilitates high-value, urgent payments, though less commonly used in agency banking due to its higher cost.

The EU payment schemes made available with agency banks are:

• SEPA Credit Transfer: generally used for one-off transfers as Payment Service Providers (PSPs) move funds from one bank account to another within the SEPA network.
• SEPA Credit Instant Transfer: supporting instant bank-to-bank payments across the eurozone.
• T2 (TARGET2): the real-time gross settlement (RTGS) system that facilitates high-value euro payments.

Agency banking services extend beyond transactions – the ability to move money – to also include account offerings that provide different ways to hold money, whether their own or that of their customers.

The types of accounts offered by agency banks are:

• Operating accounts: where you hold your own business's operational funds.
• Customer segregated accounts: where your customers' accounts sit alongside your operating accounts, keeping your customers' funds separate from your own.
• Client money accounts: accounts that let your business receive and hold money for (or on behalf of) your customers. These accounts separate your customers' CASS 7 investment funds from your own operating accounts.
• Multi-currency accounts: holding multiple currencies within one account, whether operating, segregated or client money.
  

Agency banks also offer different account structures, either ‘real’ or ‘virtual’. There’s a wide variety of accounts a firm might use depending on the products and services they offer. The question of real vs virtual then becomes a decision about the best way for a firm to structure those accounts based on its needs and future requirements. You can learn more about these structures here.

There are many advantages delivered by agency banking services including:

• Faster time to market: Partnering with an agency bank provides an easier path for new firms to gain access to accounts and payment schemes that underpin their services. It also supports established firms to build new services on top of their agency partner.
• Cost effective market expansion: Partnering with an agency bank allows businesses to gain access to new markets without the large costs associated with direct access. For example, a UK firm also looking to access SEPA or TARGET2 (T2).
• Lower operational overheads: Agency banking reduces the operational, and developmental challenges of directly integrating with a payment scheme.
• Heightened customer satisfaction: Existing customers also gain value from agency banking services as they can utilise the UK’s banking schemes, ensuring near-instant payment processing for transactions.

Most firms access agency banking services through traditional high-street banks. However, the outdated technology architecture of incumbents creates problems for tech-savvy fintechs. Integrations are complicated due to a lack of APIs or payments are processed in batches rather than real-time. This adds up to a poor user experience for the customers of fintechs who expect fast, flexible and real-time interaction as standard.

These issues have been highlighted in our recent research, ‘How well are fintech served by banks? The state of agency banking in the UK and Europe’.

As a result, agency banking has evolved through the rise of a new model, Banking as a Service (BaaS), where authorised firms offer services to third parties, via an API, to power their products and services.

While agency banking services tend to be limited to bank accounts and payment rails, BaaS offers a wider range of banking services, such as providing an account directly to a consumer or business and payment services like a card or wallet. The fintech can then provide value added services that will flow into and out of the account provided by the BaaS provider.

A raft of BaaS providers has entered the market, competing with traditional banks to power the banking services of fintechs. However, it’s important to note that not all BaaS providers are regulated banks, as these services can also be offered by Electronic Money Institutions (EMIs).

ClearBank offers BaaS capabilities through our Embedded Banking proposition. Embedded Banking powers firms with banking and payment infrastructure including bank accounts, savings accounts and access to payment schemes, enabling them to enrich their services and provide a better customer experience.

Embedded Banking underpins clients’ environments and their customer-facing portals, empowering them to offer a variety of bank services without facing the process and costs of becoming a bank themselves. Organisations leverage ClearBank’s banking licence to offer financial services, improve customer experience, and drive growth on their terms. As ClearBank is a regulated bank, this means it can also offer Financial Services Compensation Scheme (FSCS) for eligible deposits.

To find out more about the benefits we deliver, including pay back in just 10 months, download 'The Total Economic Impact Of ClearBank Embedded Banking.'