Where it’s at – Competition and innovation in Payments
In terms of interesting places to be working in Financial Services at the moment, it has to be Payments. Payment systems are critical to our economy; they let you pay a deposit on a house, withdraw money from a cash machine, pay by direct debit, write a cheque, receive your salary directly into your back account, and transfer money via your smartphone.
Last year, UK Payments systems processed more than 21 billion transactions, worth more than £75 trillion.
With all that in mind, the UK Payments Industry will soon be transformed by legislation with the launch of the new regulator – the PSR (Payment Systems Regulator) – on the 1st April 2015. It is already proving to be a hugely disruptive and hectic period, as incumbents jostle for position, hoping to convince the PSR how great they are for the market and consumers.
Although the PSR will be part of the FCA, it will actually be an economic regulator, and has three statutory objectives:
- “To promote effective competition…”
- “To promote the development of and innovation in payment systems, in particular the infrastructure used to operate payment systems…”
- “To ensure that payment systems…promote the interests of service-users”
The MD (Hannah Nixon) is also new to the Payments Industry – she has joined from Ofgem, the gas and electricity regulator and her background means her appointment should bring a fresh perspective to the challenges ahead.
So, what are some of the current challenges?
Whilst often held up as a world leader with the introduction of services such as Faster Payments, the UK payments markets – and its associated infrastructure – has hardly moved as quickly or innovatively as it could have. The barriers to innovation are not unique to the UK market, and include things such as:
- The lack of a clear industry vision and strategy – a baton formerly held by the UK Payment Council
- The need to incentivise industry collaboration – SEPA is a good example of where this has been an issue
- Governance – the big Banks directly control the majority of the core Payment Schemes (e.g. Bacs, FPS, C&CC), and company who provides infrastructure on their behalf (e.g. VocaLink)
- Network effects in a two-sided market – e.g. where there are two distinct user groups in a transaction (payer and payee) who need to adopt the innovation for it to be successful, this can be a barrier
- A lack of common standards and interoperability – e.g. by limiting scale and making the business case for innovation less clear
How can these barriers be overcome?
Well, clearly not very easily – hence the need for the PSR in the first place. However, there are a couple of key initiatives planned to address them:
- Creation of a ‘Payments Strategy Forum’ led by the PSR with a much wider cross-industry representation than the big Banks – this reflects the unique role the PSR has; that of promoting innovation. To succeed, the forum will need to distinguish between the different types of innovation; that that can be driven commercially by an individual entity, and the innovation that can only happen collaboratively. For the former they need to get out of the way, and for the latter, they need to play a more active role
- Two ‘Market Reviews’; one focussed on ‘ownership and competitiveness of infrastructure provision’, and the other focussed on ‘the supply of indirect access’ to payment systems – in both areas the main ‘sponsor’ banks (e.g. Barclays, HSBC, Lloyds, and RBS) currently have tight control. This will almost certainly have to change, increasing the role that ‘challenger’ banks such as Santander can play in this space
What can we expect to see then?
Whilst it’s still early days for the PSR, the scene is set for significant change; here are a few thoughts on what we can expect to see:
- An increase in the number of PSPs (Payment Service Providers) with direct access to payment systems, allowing more ‘challenger’ banks to become ‘sponsor’ banks – this move may also be supported by fintechs / established technology companies providing competitive, industry-wide gateway solutions into the payment systems
- A change in the governance and ownership of the main operators e.g. Bacs, FPS, and possibly their main infrastructure provider, VocaLink – a small number of the main Sponsor Banks currently control these organisations and as such, the payment systems are oriented towards technical and operational excellence and efficiency; the governance to drive competition is minimal
- An increased – and permanent – overhead for the majority of the incumbent organisations in the UK Payments Industry as they adjust to life with a new regulator – this will include, for example, the need to respond to new regulatory directions compelling them to increase the transparency of their decision-making and to demonstrate how they’re meeting the PSR’s three core objectives
Stay tuned for further updates!