UK payments move opens up space to challengers
Proposed changes by the Payment Systems Regulator (PSR) will shake up the monopoly on payments, and will give challenger banks a welcome shot to grab market share.
The PSR has stated that the dominance of one payment system for transactions in the UK – VocaLink – was preventing the growth of competition.
The regulator published 'Interim Report: Market review into the ownership and competitiveness of infrastructure provision', recommending that the current structure be changed as it is stifling innovation.
VocaLink underpins the movement of funds through the Bacs, Faster Payments and Links systems. The use of VocaLink dominates the transactions landscape in the UK, accounting for more than 90% of salary payments and 70% of amenities bills paid in the country.
PSR suggests there should be a clearer process in place to reduce the stronghold of VocaLink and allow other companies to take a share of transactions.
Hannah Nixon, PSR
Hannah Nixon, managing director at PSR, says: “There needs to be a fundamental change in the industry to encourage new entrants to compete on service, price and innovation in an open and transparent way.”
The system’s dominance can be explained through its ownership. VocaLink is controlled by a consortium of banks with Barclays, HSBC, Lloyds, RBS and Santander controlling 85%. PSR suggested the banks sell off part of their stake.
Nixon says: “The common ownership of the leading payments systems and the UK’s payment infrastructure provider, VocaLink, by a small number of banks is having a negative impact on innovation and competition in the industry.
"As a result, the PSR is proposing that these banks sell part of their stakes in VocaLink in order to open the market and allow for more effective competition and innovation.”
The aim is to allow fintechs and challenger banks to come forward with their own systems, encouraging competition and innovation.
“The goal of this review is to make sure that the payments infrastructure – the pipes and wires that payment systems rely on to transfer funds – is more competitive," says Nixon. "With better competition and access, it will make it easier for new entrants to the market, for example challenger banks, giving consumers and banking customers more payment options.”
She adds it would expect to see a range of providers coming forward to compete for contracts. This, in turn, would give the challenger banks greater access to the central payments infrastructure.
The change is not only beneficial to emerging companies, but also established brands. MasterCard is looking to expand its debit card business in the UK. The big five banks all issue Visa debit cards, and MasterCard is looking to take some of the market share.
The company has looked towards the challenger banks, with Metro offering MasterCard products. Virgin Money is also lined up to start using them soon, and smaller entrants such as Atom and Fidor are also planning to use Debit MasterCard.
“Competition for infrastructure services can provide a number of benefits," says Nixon. "It can lead to lower prices, higher service quality and it also promotes efficiency and innovation. We believe the whole industry is set to benefit from this review and ultimately consumers as well.”
Incumbents argue they are already taking their own steps to promote innovation. Faster Payments has initiated a programme to promote competition in the space, which it states “fully aligns with the PSR’s call for broader access”. The New Access Model has been established to actively encourage new fintech participants to develop systems, and challenger banks to access the Faster Payments network.
In a statement, Nick Caplan, independent chair of Faster Payments, says: “Our work to create a new way for challengers to access Faster Payments is set to deliver tangible, fundamental change very soon – three challenger banks have committed to join in 2016, with further payment service providers in advanced discussions to join through the New Access Model in due course.”
VocaLink has also said it is committed to supporting the development of a competitive payments landscape.
In a statement, the company says: “We are improving access to payments through our PayPort suite of products; our current account switching service helped over one million customers in 2015, creating greater competition in retail banking; and our faster payments network enabled the creation of exciting new services such as Paym, a mobile payment solution.”
It also emphasized its own position as a fintech success story, having won competitive bids in Sweden, Singapore and the US.
The PSR is taking industry feedback until April 21, before releasing its final recommendations.
Nixon says: “Ultimately, this is about giving customers more payments options and a better service. Our proposals will increase competition and create more opportunities for challengers, fintechs and other organizations looking to enter the market.
“This will create the conditions for greater innovation – which is in the interests of those that use the infrastructure services directly, and the UK economy as a whole.”