What are the disadvantages of accounts in payment systems that everyone is silent about?
Opening an account in the payment system for a foreign company is an extremely popular solution today. This is not surprising, given the difficult situation with the opening and operation of current accounts in classical banks. On the topic of the advantages of an account in a payment system, you can find a lot of information – from banal advertising of the payment systems themselves to various profile (and not only) articles. At first glance, accounts in payment systems really seem to be an excellent solution for any business, but looking at them without "rose-colored glasses" it will become clear to you that such accounts have their own (sometimes significant) disadvantages. What should be taken into account when opening an account in a payment system, how to choose a suitable payment institution and for whom an account in a billing system definitely will not work – the answers to these and other questions are further in the article.
Disadvantages of accounts in payment systems
Given the scant information on this topic, you might think that there are almost no shortcomings in the billing account, but this is not so – it's just not accepted to spread much on this topic. Next, we will analyze in detail all the inconvenient issues in the work of payment systems:
1. As a rule, funds on the accounts of payment systems are not protected by the state deposit guarantee.
Since payment systems are not banks, but operate under other licenses, they are usually not subject to the obligation to become a participant in public (or private) deposit guarantee funds. For example, many payment systems operate under Electronic Money Institution (EMI) licenses. Let's take one of the many financial companies in the UK with such a license (we'll replace the name with “XXXXXX” for privacy reasons) and look at the documents and policies that the payment system customers automatically agree to when opening an account (all information is publicly available):
... XXXX Account is issued by XXXX and it is not a bank account. Although it is a product regulated by the FCA, by accepting the Terms and Conditions, the Client acknowledges that XXXXXX Account and the electronic money stored on it is not covered by the UK's Financial Services Compensation Scheme. No other compensation scheme exists to cover losses claimed in connection with the XXXX Account ...
You can translate this fragment of the Terms of Service as follows:
... An account in the XXXXXX payment system is opened by the XXXXXX company and is not a bank account. Although this account is a product regulated by the FCA, by accepting these Terms, the Client acknowledges that the Account in the XXXXXX payment system and the electronic money stored on it are not covered by the UK Financial Services Compensation System [Author's Note: The Financial Services Compensation Scheme (FSCS) is the British equivalent of the Deposit Guarantee Fund]. There are no other systems to compensate and cover the losses claimed in connection with the Account in the XXXXXX payment system.
Of course, there is no ban on the voluntary joining of payment institutions to the deposit guarantee system, but this happens extremely rarely. Participation is always paid and requires the fulfillment of a number of obligations and requirements, which means that the costs will then need to be included in the cost of customer service, and this may lead to the loss of competitive advantages.
This fact does not mean that you should automatically abandon the use of payment systems, or that all payment systems are unreliable – many payment cards are widely known, have been on the market for a long time and have proven themselves well. This fact leads to the fact that it is not worth opening an account in the payment system for storing funds (especially long-term storage of significant amounts), because this is a rather risky undertaking. Accordingly, it is better to withdraw excess funds from operating accounts in payment systems to a more reliable and secure bank account.
2. The account details in the payment system often do not correspond to standard bank details.
All businessmen and entrepreneurs are familiar with how standard bank account details look like. Most countries in the world have already switched to the international banking standard with the assignment of a universal individual IBAN number to each account. Although this standard has not yet been implemented in Russia, nevertheless, Russian entrepreneurs who have experience working with foreign accounts and clients know about this standard and about how classic bank details should look like in international transfers.
But in payment systems, the situation with the details can be quite confusing. Let's look at it using the example of a real (and very popular) payment system in the EU (the name in this case does not matter, so let's just call it "Payment System 1").
Like most analogues, Payment System 1 operates under an EMI license. When opening an account, the client is assigned an internal number in the system. The systems themselves, as a rule, call it the "Internal referral number of the client" or similar, and in essence it is the number of the client's internal account in the payment system (it has nothing to do with banking, this is important!). It can be used for transfers between clients within this payment system.
In addition to the internal number, the clients of the "Payment System 1" open an account in Euros with the assignment of the usual IBAN number and full bank details. And that's where the fun begins! These details of the client account in Euros with an individual IBAN number are suitable exclusively for SEPA transfers, i.e. transfers in Euros within the Eurozone.
In practice, this means that it is possible to accept payment to these details only from customers with accounts in the EU. An attempt to send a transfer in Euro currency from a bank of another country (non-EU) to these details will lead to nothing – the funds will simply return to the sender.
As for international SWIFT transfers, which are made in any currencies and between any countries, in order to receive them, customers of the "Payment System 1" will have to use the account details opened in a regular bank by the payment system itself. This means that the column "Payment buyer" will not be you or your company, but the payment system itself. At the same time, in the purpose of the payment, the sender must necessarily indicate your Internal referral number of the client inside the Payment system 1, so that after receiving the funds they can be distinguished from the Payment System's own money and credited to your internal balance. When sending funds via SWIFT, the situation will be exactly the same – your partners will receive money not from you, but from the Payment system itself 1.
Thus, users of the payment system really have the technical ability to accept and send payments worldwide in many currencies, but the payments themselves require additional attention from the client to the payment details. In addition, customers and contractors should be warned in advance that the payment will be made through the payment system, because some banks have a negative attitude to sending funds to third parties, even if this person is a payment system. At the same time, difficulties with the details should not become a significant problem if your business is focused on the European Union, and the main currency of payments is the Euro.
3. Vulnerability of all clients of the payment system from the well-being of the common account.
As we have previously considered on the example of "Payment System 1", all international SWIFT transfers are made by users of the payment system through a single account opened by the payment system itself in a partner bank. In this case, we will talk about payment systems in general, and not specifically about the "Payment System 1". Since all customers of the payment system depend on the operation of the same common account in a classic bank, this makes system users vulnerable to potential problems with such an account. This disadvantage of payment systems has two aspects:
• Firstly, all users of the payment system are dependent on each other's "behavior", so that violations as a result of the transfer of one of the clients can lead to the blocking of the main account and stop the settlements of all others. I.e. if one of the users of the payment system makes a transfer, for example, in violation of the rules for combating the financing of terrorism or money laundering, and the bank will become aware of this, this may lead to the blocking of the common account and, as a result, stopping the operations of the remaining innocent customers of the payment system.
• Secondly, if for any reason the bank decides to terminate or restrict settlements on the general account of the payment system (for example, due to changes in internal requirements), this automatically affects all users of the payment system.
Of course, each payment system tries to minimize the risks for its users. Many payment cards have not one, but two or three accounts in different partner banks, so as not to interrupt customer service if there are problems in working with a single bank. In addition, payment systems are increasingly improving internal regulation, trying to delve into the specifics of their clients' business as much as possible and increasing control over compliance with the rules on combating the financing of terrorism and money laundering (KYC and AML).
But it is important to remember about this feature of the work of payment cards and carefully choose a financial company to open an account. There is one sure sign that allows you to determine that any of the payment companies will soon face the problem described above: if such a company is ready to open accounts to almost any customers and types of businesses (especially high-risk ones), then you should think twice before starting cooperation and opening an account in such a payment.
4. The use of an account in a payment system may carry reputational risks that directly affect settlements with customers and partners
Classical banks as a phenomenon have existed for many centuries and have long earned a reputation for themselves. During their existence, they have been constantly developing, and the regulation of their activities has been improved. If we are talking about opening an account or making payments, then banks are the first to be remembered.
Payment systems are a new phenomenon, and, for the most part, have not had time to earn the necessary reputation. The very essence of payment systems, what distinguishes them from ordinary banks, does not allow them (yet) to take their place on a par with ordinary banks. What else, besides youth, affects the public's attitude to payment companies?
• Some banks have a negative attitude towards payment systems. This is especially typical for the CIS countries – local banks (perhaps from an incomplete understanding of the very essence of payment systems) refuse to conduct transactions with them.
• Payment systems are closed more often than banks. Unfortunately, due to various reasons, payment systems are often closed. As a rule, this happens with new projects, because the competition in the market of payment systems is very high.
• Lower requirements for clients when opening an account. Since banks often select their customers more carefully, this weeds out many (but, of course, not all) unscrupulous users. At the same time, many payment cards are less fastidious, which makes their use popular with all kinds of scammers.
However, not all payment companies are the same. Some of them are considered even more preferable option than the classic bank. For example, PayPal has long been a legend in the financial services market. This allows us to make an unambiguous conclusion that reputation is a matter of time, and you should not deprive your business of many benefits from using payment systems just because of this reason. Nevertheless, if reputation is a significant factor for you, then you should consult with experts in the field of payment systems in advance to determine the most suitable solution for you.
5. Payment systems are not completely independent of banks by financial companies.
If we recall the example of the "Payment System 1", about which we wrote earlier, then, for its clients to make international SWIFT payments, she opened a special account in a classic bank in her name. This leads to the fact that any client payment (both incoming and outgoing) is additionally checked at this bank, and the bank, on its own initiative, may suspend any transaction until satisfactory (for the bank) explanations are received. At the same time, the payment system has no influence on this bank!
In addition, the location and reputation of the partner bank also affect the customers of the billing system itself. Consider this situation on the example of a real payment company with a license in the UK (the name in this case does not matter, so let's just call it "Payment System 2"):
"Payment System 2" as the holder of the British license EMI opens its customers direct accounts in Euros with individual IBAN numbers for calculations in the SEPA system. Due to this, there are no problems with bank transfers in the Euro currency within the EU. Moreover, if a British company opens such an account to work in the EU, it will be an additional plus to its reputation, since the company and its account will be formally located in the same country.
At the same time, Payment System 2 has a common account for client SWIFT transfers (used for payments outside the EU or in currencies other than Euros) opened in the Bank of Latvia (Baltic States). Accordingly, when working with clients and partners outside the EU, you will have to give them account details in a Baltic bank, and for many countries such banks belong to the high-risk group and transactions with them are either limited or undergo particularly thorough checks (which automatically means delays in making payments).
How to minimize such a risk? It is necessary to specify in advance in the payments before opening an account with which banks they cooperate. Additionally, it is worth checking whether such banks are suitable for settlements with your key customers and suppliers. But the best way to open any account is to contact qualified specialists who will advise you about possible risks, ways to minimize them and the options of banks / payment systems that best suit you!
Is it worth opening an account in the payment system taking into account possible risks?
The payment system is not a full–fledged replacement or analogue of a bank, but the emergence and rapid growth of payment systems are not accidental - they are convenient for users and open up enough opportunities and advantages for business. At the same time, the decision on whether to choose to open an account in the payment system is ambiguous, there are a number of risks and features that should be taken into account.
Antwort company will help you in making the right decision for your business, taking into account a full analysis of your specific situation and associated risks. We will always find the right answer for you!