Should your payment company go direct to rails?

Contextualizing the decision on a high level

Every scaling payments company will face this question at some point. The allure of direct access to payment rails (Faster Payments, SEPA, etc.) is undeniable: lower transaction costs.

But if cutting out the middleman (i.e. banks) was as simple as snipping a thread, why isn't everyone doing it?

The Complexity Behind the Cost Savings

At first glance, going direct to rails slashes transaction costs. However, this decision isn't as straightforward. Here's what you need to consider:

More Headcount: You'll need to expand your team significantly across Engineering, Compliance, and Operations to execute and maintain the direct access.

Running Scheme Costs: In the case of Faster Payments for example, there are running annual scheme costs in the 10s of thousands of pounds.

Collateral Requirements: Going direct often means you'll need to hold more in reserve depending on your daily throughput. This will likely be far higher than what a bank requires you to hold.

Licensing Requirements: At a minimum, some sort of payment institution (PI) or electronic money institution (EMI) license is required. Some markets like the SEPA region in the EU require a full banking license (credit institution) to have direct access to rails, although that’s changing in 2025 whereby non-bank PSPs will be able to connect into RT1 and Step2, and then apply for their own Target2 accounts.

Implementation Timeline: This isn't a quick switch. From regulatory approvals to system integrations, expect a multi-year commitment. It's like building a new highway; it takes time to construct before you can drive on it.

The Benefits

Despite the challenges, the benefits can be substantial:

Lower Cost Per Transaction: the holy grail for any payment company. Lower settlement costs can significantly boost margins, especially at high volumes.

Control Over Risk: You define your risk parameters, not a third-party bank. However, this doesn't mean you're above the law; you still dance to the regulator's tune but with more freedom in your steps.

Higher interest rates on balances: You receive the full overnight rate on balances. In other words, you don’t have to share the interest earned on your balances with a bank.

The Financial Equation

The best way to think about direct scheme access is that you’re getting lower variable cost in exchange for much higher fixed costs.

Each company will need to determine its own threshold for accepting that trade-off.

The math changes with scale and geography. Speaking purely from a European lens (FPS / SEPA), if your company processes over 5 million transactions monthly, it’s worth thinking about going direct. But for real net savings, you likely need to surpass 8 million monthly transactions - roughly 100 million transactions annually. That's when the initial investment in the infrastructure starts to truly pay off.

Consider the Broader Strategy

Here's the core question for every payment company to answer: Do you want to go deeper or broader?

If you’re specializing in a specific market like the UK, it makes sense to eventually seek an absolute cost advantage on your transaction economics. An absolute cost advantage is always a useful moat in the long-run.

If the strategy is to be multi-geography, going direct-to-rails will always be weighed against pursuing new markets or products. In this instance, its better to pursue partnerships with the right acquiring banks and work with them to improve your settlement cost over time. Better to focus your time, money, and talent on expansion.