Earlier this year, the UK Payments Systems Regulator (PSR) recommended that the consortium of banks that operates payments processor VocaLink should sell their shares to allow greater competition and innovation in UK payments. It pointed out that the company was processing 90% of UK salary payments and all transactions through the BACs, Faster Payments and Link systems. The bank consortium – dominated by Barclays, HSBC, Lloyds, RBS and Santander, which hold 85% – simultaneously operates as owners and customers, so the regulator was concerned that this left little impetus for innovation.
MasterCard has now stepped forward to take over the bank ownership outright and will make VocaLink a subsidiary of the company. MasterCard is to acquire 92.4%, in a deal worth £700 million. Most of the banks will maintain a minority holding for the next three to five years before the cards provider takes full control.
The decision is strategic for both parties.
|Mark Barnett, |
Mark Barnett, president of MasterCard UK, says: “The rationale for the acquisition is two-fold. VocaLink is the best accounts clearing house (ACH) in the world, with proven ability to scale outside its own country. MasterCard operates in 210 countries, and can accelerate the spread of ACH and Faster Payments platforms.There is also the part on innovation with value-added services from VocaLink, such as Zapp. Zapp is a digital debit product for e-commerce and m-commerce. Combined with MasterCard it can also work in the physical world. The convergence of the two companies can bring tremendous synergy in this way.”
Although a sell-off is what the PSR had suggested, Tom Hay, head of payments at Icon Solutions, who previously worked on the development of the VocaLink architecture, says the details of the acquisition might be different to what the regulator had been expecting. “The regulator wanted to remove VocaLink’s bank ownership,” he says. “However, it being bought out by one of the biggest card processors in the world might not be what they had in mind.”
The PSR says it is an encouraging sign that there has been a move away from dominant bank ownership, but notes that the merger regulator will have to assess the acquisition before it is finalized.
The PSR states: “Our main consideration is that the infrastructure delivers good outcomes for the people and businesses that use it. That discussions are taking place about ownership, and changes being made, is an encouraging sign that people are starting to question the status quo and ask whether it offers effective competition.”
Hay says the move has conflicting benefits: “It is a two-edged sword, as the banks had reason for restricting the competition and their access to the market. MasterCard does not have this conflict of interest, as the more companies on board and transactions completed, the better for their profits. In that sense they may encourage more players to come on board.”
The implementation of new regulations might have a far greater impact on the opening up of payments. The arrival of the second Payment Services Directive (PSD2) will allow more companies to move into payments. Regulation will allow payment-account access to third-party providers. Hay notes that it is a smart move of MasterCard to establish itself in this business area before the new market gets off the ground.
Few companies are large enough to take over the banks' share and continue to run the business effectively. Successful competition with VocaLink on any scale in the current market would require a huge amount of work and investment by any new entrant.
Hays says: “MasterCard already has a real-time network which can be used for carrying the transactions, connectivity and relationships with banks across Europe. The only other organization that comes close to offering such a pan-European reach is EBA Clearing.”
Despite the acquisition, the plans of VocaLink will remain the same. The payments processor will continue to do the processing for the Swedish platform. National operators run the platform in Singapore, Thailand and the US, where VocaLink provides a secondary level of support.
Yates is keen to stress that the payments service is looking to keep its platforms up to date: “We are pro-competition, and want to operate in a competitive environment. We’re ready with the next generation in the UK, implementing ISO 200022.”
He adds that collaboration between two companies that offer very different services will create a better network for customers: “There is little overlap between the operations of MasterCard and VocaLink. What we are seeing is a convergence of these two types of payments which can only lead to greater efficiency.”
But it is MasterCard that looks to profit the most from the acquisition. Hay believes the main benefits for MasterCard do not come from the current set-up, but from the development of the value-add proposition that takes advantage of its own infrastructure.
He says: “The real driver for the acquisition is not the relatively modest additional revenue stream that MasterCard can derive from UK clearing services. The strategic target is the real-time payment technology that VocaLink is selling globally – including The Clearing House in the US – and the Zapp overlay that enables e-commerce and m-commerce via real-time payments. These are assets that MasterCard can use across Europe and globally.”
The acquisition would give MasterCard access to direct-debit business in the UK, which it has so far struggled to get a foothold in given the dominance of Visa.
There might be concerns around the fees that MasterCard might choose to impose as the sole provider. Hay says: “MasterCard has been under pressure in the fees they can charge on card transactions through multilateral interchange fees (MIFs). There is no equivalent mechanism in place on non-card payments, and it gives MasterCard a second string to their bow.”
The PSR highlighted that any changes need to be made in the best interests of the consumer. Hay believes that to protect against this, the banks might have already locked in future fee levels. Further, he notes that the arrival of new players after the implementation of PSD2 will provide more competition. He says: “In the longer term VocaLink is not the only provider of clearing services, and periodically the contracts will come up to tender. If an organization decides it is not happy with the service it can invite other clearing services to tender.