The division of the UK clearing house into two separate companies
will see its systems people move to the fore. Nick Huber
reports
After decades in the shadows of financial services, the IT staff at
the UK banks' electronic payments service, Bacs, are about to be
catapulted into the spotlight.
Bacs is poised to undergo a radical restructuring which aims to
transform the way payment technology and services are developed.
The proposed shake-up will see the clearing house, which handles
billions of pounds in salary payments, split into two separate
organisations.
One company will be responsible for running the IT infrastructure
of Bacs, processing transactions and developing new technology for
commercial use, Computer Weekly has learned from industry sources
close to Bacs. The other, made up of Bacs' member banks and
possibly overseen by the Association for Payment Clearing Services
(Apacs), will be responsible for running Bacs' direct debit, direct
credit, and payroll services.
Changes to the ownership of Bacs will also see non-banks, for
instance software suppliers, become eligible for membership of this
elite financial club. Bacs said that it had undertaken a review of
its corporate governance and would make an announcement when the
review is complete.
Reaction to the proposed split, which has been agreed in principle,
has been broadly supportive. Industry experts believe that the
restructuring, the most radical in Bacs' history, could provide a
timely shot in the arm for the UK payments industry.
In the past few years UK banks have come under fire from the
Government and analysts for failing to offer businesses real-time
payment services over the Internet and for not applying technology
to reduce the three-day cycle for clearing cheques.
Bacs was embarrassed last year when Computer Weekly revealed that
its clearing network was vulnerable to hacking attacks, although it
denied its network was vulnerable.
One industry source familiar with Bacs said that plans to divide
the clearing house into two made sense. "Bacs is a networking IT
company that processes direct debits, credits and banking
transactions. The proposed division sounds like a logical
progression to me."
The source added, however, that it is not clear how much freedom
the infrastructure company will have to develop new services for
companies other than its banking members.
Currently, Bacs' revenues are determined largely by its member
banks, whose representatives sit on its board. Bacs' profit
margins, which stem from how much it can charge per transaction,
are balanced against its operating costs for staff, IT
infrastructure and overheads.
"It is a crazy situation because the banks are determining how much
Bacs can charge," the source added.
Clearly, with its vast network, Bacs has the potential to make a
big splash in the payments market. The big question is how.
Will Bacs use its network to process new payment services over the
Web, partner with software and telecomms suppliers, or simply
service the needs of bank members?
Its proposed revamp comes at a time of frenzied activity in the
payments market, with banks and telecoms suppliers scrambling to
deliver new services online and through mobile phone technology.
UK banks have already entered into joint ventures with software
suppliers to cut their running costs for delivering certain
services.
For instance, Intelligent Processing Solutions - a payment
processing provider owned by IT services provider Unisys, with
banks HSBC, Lloyds TSB and Barclays holding a minority stake - now
processes about 70% of all UK cheques, after only two years in
operation.
Jonathan Charley, vice-president of global financial services for
Unisys, the IT services provider, said, "You will probably see more
joint ventures with and against Bacs. I think there will be
significant pressure from Bacs' traditional customer base to reduce
the processing costs for transactions."
A new-look Bacs is also likely to face competition from European
clearing houses. Most analysts predict that the European clearing
market is likely to consolidate in the next few years as Web
technology allows clearing houses to offer payment services outside
their national borders.
"Anyone who can offer a high-volume and secure clearing service
will be a threat to Bacs," said one industry source. "You might see
overseas companies entering the UK market, helped by the increasing
speed of the Internet and network infrastructure."
The proposed Bacs restructuring has the potential to breathe new
life into the UK banking and payments industry. The record of the
banks in developing Internet-age payment services has been patchy
at best, while Bacs itself dithered for more than seven years
before overhauling its IT infrastructure.
A separate Bacs infrastructure company has a vast network to offer
and a strong and well-respected brand name. However, its exact
remit and relationship to its member banks still have to be
decided. Competition within the UK payment market will intensify in
the next few years, and industry experts believe that clearing
organisations in mainland Europe will start to target the UK
market.
IT staff at Bacs should prepare themselves for some time in the
spotlight.
What is Bacs?
Formed more than 30 years ago Bacs is at
the heart of the UK payments industry. Most people's salaries,
direct debit and direct credit payments will pass through the Bacs
clearing network, which processes more than 3.5 billion financial
transactions a year. On a peak day, Bacs handles almost 60 million
payments.
It has about 50,000 UK business customers, including all of the
FTSE 100 companies.
Bacs is owned by the major UK clearing banks and building
societies, and operates under the umbrella of the Association for
Payment Clearing Services (Apacs).
Customers send payments to Bacs via their bank and specialist
software. The transactions pass unencrypted through the Bacs
private telecoms link. However, Bacs is in the middle of a £75m
overhaul of its technology infrastructure, in an attempt to
modernise its security systems and help it to handle growing demand
for electronic payments.
A move to an Internet Protocol (IP)-based network is central to the
project, and is due to be completed by 2005. The IP network will be
supported by a public key infrastructure (PKI) security system
developed by Bacs and its members.
Last year, Computer Weekly revealed that the clearing network,
which handles billions of pounds, was vulnerable to hacking attacks
because the board had failed to implement the security
recommendations of its own IT department to introduce a PKI-based
security system.
Bacs denied that the network was vulnerable, and insisted that its
security was first class.
Are two Bacs better than one?
For
- Bacs and its member banks have failed to harness the full
potential of the Internet to deliver speedy payment services
- Major industry technology projects have moved along at a
snail's pace. Plans for Bacs to move to introduce public key
infrastructure security technology for its network were first
outlined more than seven years ago
- Creating a Bacs infrastructure business will give it a clear
focus and more scope to develop a wider range of payment services,
in partnership with outside suppliers.
Against
- The two companies - infrastructure and scheme businesses - may
lack co-ordination and push for different objectives
- Aside from supporting its payroll and direct debit services,
Bacs lacks experience in developing new payment technology and
services to tight time-frames, in an increasingly competitive
market.