UK: Payments Infrastructure | Breaking Up The Banks' Club?

Last Updated: 9 March 2016
Article by Stephen Ley, Ian Foottit and Valeria Gallo

Most Read Contributor in UK, August 2017

Last week, the Payment Systems Regulator (PSR) recommended that banks sell their shares in the main UK central payments infrastructure provider, VocaLink, to encourage competition.

This was one, but arguably the most controversial, of the proposed remedies published in the PSR's interim report of its market review into ownership and competitiveness of the infrastructure that supports the UK's payments systems - Bacs, Faster Payments System (FPS) and LINK.

These payments systems are currently owned by a very small number of banks, which also own VocaLink, the infrastructure provider that supports them. The PSR has concluded that this common ownership of systems and infrastructure has significantly reduced competition and innovation in the provision of central payments infrastructure services.

The PSR's conclusion is not necessarily a huge surprise. Back in the autumn, in our Payments disrupted report, we predicted that the status quo, in which payments systems continue to be run by and for the major banks, would not last.

The full list of the remedies proposed by the PSR is:

  • Competitive procurement exercises to be undertaken before current contracts for central infrastructure services come up for renewal, or at the next break clause in a contract;
  • enhanced interoperability, including a common international messaging standard, for FPS, Bacs and LINK;
  • divestment by shareholder Payment Service Providers (PSPs) of their interest in VocaLink (currently VocaLink is owned by 13 banks, with five of them owning >85% in total); and
  • measures that separate common ownership of the functions of LINK from VocaLink (already planned by the industry, but not yet implemented).

The extent of the divestment, whether full or partial, and by whom, is now being consulted on, but overall PSR believes it will help address the lack of incentives for Bacs, FPS and LINK to consider alternative infrastructure providers and potential competitors' negative perceptions about the likelihood of winning a competitive procurement exercise while the current ownership structure exists.

The move to a common international messaging standard (e.g. ISO20022), which will require a significant amount of work by the banks, would not only facilitate interoperability, but would also make it easier to add new information-rich payments services (such as bill payment and presentation) and further reduce the barriers to entry.

But who are the potential competitors set to gain from these measures?

For core services (i.e. processing, clearing, and back-office services) the PSR lists some, while acknowledging that in most cases these are already providers of central infrastructure services in the UK, Europe or elsewhere. These are:

  • CGI (Canada) - recently awarded the contract to build and run the central infrastructure of the UK's planned new cheque imaging service;
  • EQUENS (Netherlands, Italy, Hungary);
  • MasterCard (worldwide);
  • Visa Europe (EU wide);
  • NETS (Denmark, Norway, Sweden, Finland, Estonia);
  • STET (France, Belgium); and
  • Others, including ACI, FIS, EBA Clearing, and SIA.

However, VocaLink also provides a wide range of non-core "elective" services to shareholder PSPs and other systems users on a bilateral basis, and under contracts that are different from those to provide core services. Some notable examples are:

  • Payments Data Insights – data analytics services based on the use of payments data.
  • Paym: provision of the platform that supports the Paym person-to-person mobile payments services, which is an overlay service that leverages the FPS system.
  • Zapp: a proprietary service that will leverage the FPS system to allow individuals to send payments to retailers via their own bank's mobile banking app.

These elective services are perhaps where challenger banks and FinTech firms could benefit most (at least in the short term) from increased competition and a broken, or at least a much looser, link between the ownership of payment systems and the provision of non-core services to PSPs.

The PSR considered, but rejected, the option of ring-fencing and separating the core contract function from other "elective" or "value-added" services provided by VocaLink. This could have created even greater incentives for alternative providers to enter the market.

Overall, we think that, combined with entry into force of PSD II back in January, these proposed remedies, if confirmed in the final report, could have a significant impact on the payment landscape and will be another significant and concrete step towards opening up payment systems to competition from a large number and variety of players.

The deadline for responses to the PSR interim report and proposed remedies is 21 April 2016. The final report is expected to be published this summer.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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