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Tough Medicine For The UK Payments System – But How Sick Is The Patient?

Tough medicine for the UK payments system – but how sick is the patient?

On 13 November 2014, the UK Payments System Regulator (PSR) released “A new regulatory framework for payment systems in the UK”. This document outlines, and seeks feedback on, the PSR’s thinking on its regulatory approach in the lead-up to becoming operational in April 2015.

The PSR is a new economic regulator that sits within the Financial Conduct Authority and has broad powers to designate payment systems and impose standards. While on paper, the PSR’s powers are not too dissimilar to those of Australia’s own Payments System Board, at first glance, the 13 November consultation paper suggests a much more invasive, and it could be argued ill-conceived, regulatory stance.

The PSR is working towards a “world class” payments system for the UK and identifies limited competition, opaque decision making and lack of innovation as the basis for its reform proposals. While recognising recent innovations such as the new account switching and mobile payment services, the PSR identifies account number portability, digital cheque clearing and messaging standards as areas where progress, to date, has been slow. The PSR has also indicated that it will designate not only the international card schemes but also systems such as Bacs (bulk electronic), Faster Payments and even cheques.

The PSR’s proposed reform agenda includes establishing a Payments Strategy Forum, which will likely displace the UK Payments Council’s industry strategy role; reform governance of existing systems to provide more voice to smaller financial institutions and address “conflicts of interest”; new access arrangements for smaller financial institutions within designated payment systems; and public disclosure by banks of their sponsoring criteria and processes. The PSR also proposes further work on ownership of infrastructure, indirect access and a watching brief on interchange fee regulation emerging from the EU.

The industry response has been muted – with the Payments Council welcoming the consultation but noting what has been accomplished to date – all the while vowing to “press on” with delivering payment system improvements.

At first glance, the consultation paper’s dire diagnosis of UK payments seems at odds with what has been accomplished to date. The UK has been in the fore of developments such as Faster Payments, chip and PIN and more recently account switching and mobile payments.

And the areas requiring attention are curious – for example, account number portability exists nowhere in the world and often feels like a solution looking for a problem.

Further, the consultation paper conceives of payment systems, such as Bacs and Faster Payments, as non-competitive utilities – natural monopolies requiring heavy regulation, needing to opened up and/or broken up. For payment systems such as these, ensuring transparent and equitable access makes sense. And smaller institutions wanting more say and a better deal is to be expected. But whether a regulatory response is necessarily warranted is unclear as is whether this will deliver a faster pace of innovation. The coming years of uncertainty and jostling between industry and regulator may dampen any industry enthusiasm to invest in underlying systems and infrastructure – thus potentially slowing the pace of innovation.

Another initial impression is that the consultation paper fails to properly acknowledge the depth and breadth of intensifying competition. In the world of 2014, new payment providers are emerging every day and the new areas of competition, particularly in the online world, is fierce. The PSR should be grappling with and promoting competition between payment schemes and systems, rather than regulating individual payment systems like utilities, if it wishes to promote innovation and deliver a world class system for the UK.

Brad Pragnell

Brad Pragnell

Dr Pragnell was the Executive Manager of Policy at APCA from 2008 to March 2016.

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When it comes to consumer payments, the future is obviously mobile. But the "how" of mobile payments turns out to be rather complicated. I recently had the opportunity to participate in the Annual Conference of the Payments Association of South Africa. Systemic comparison is one key benefit of such an experience. Here we have two resource-driven economies of roughly similar size, similarly large physical distances but markedly different population demographics. The retail payments systems are diverging, rather than converging. This highlights the obvious point that payment systems are shaped by people's habits, not by economics. Consider, for example, some simple comparisons between bank account ownership and mobile phone ownership. According to the World Bank, Australia is one of the most heavily banked populations on earth, with a 99% banking rate in 2012 - that is, 99 out of 100 Australians over the age of 15 had a bank account in 2012. South Africa, by contrast, has a 54% banking rate, and therefore a large community that is still cash-based. Now let's look at mobile phones: the "phoned" rate in Australia is a healthy 106%; in South Africa, 135%. Yes, every person in South Africa has a mobile phone subscription, and every third person has two. If you suspect the interaction of these two comparison pairs leads to different payment evolutions, you would be right.

Context is everything

I recently had the rare and valuable chance to take a deep dive into someone else's payments pool. Such comparisons are always refreshing, not to mention instructive. The Canadian Government has appointed a Task Force to review the Canadian payments system, and the Task Force has embarked on a series of intensive workshops with senior people from across payments – financial institutions, schemes, corporate and government users, merchants, consumer groups and others. They kindly invited me to participate in a 3-day workshop that ranged widely over the future payments landscape as they are seeing it in Canada. This was, I have to say, an impressive effort.
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