Banks call for Bacs face-lift

Proposed Bacs shake-up could propel UK payment industry to the forefront of e-business, writes Nick Langley.

Proposed Bacs shake-up could propel UK payment industry to the forefront of e-business, writes Nick Langley.

The mooted shake-up of Bacs, the automated bank clearing system, could herald a new era for technology and IT staff in the UK payments industry.
If the Bacs board does decide to open up its elite members club and allow non-banks to become shareholders, IT suppliers and consultancies will be in a prime position to develop new services, propelling the UK payment industry to the forefront of e-business.

This would break up the cosy club at Bacs, whereby banks are both customers, shareholders and owners of Bacs. A more cash-rich Bacs could then begin to work closely with technology suppliers and develop new services for public and private sector clients outside the banking industry.

There is a strong case for a more dynamic clearing system in the UK. The high street bank members have come under fire from analysts and the government for not investing in innovative technology and payment systems, particularly for Web-based technology.

To its critics, Bacs is something of a technology dinosaur. This image was further cemented earlier this year when Computer Weekly revealed that the Bacs network was vulnerable to hacking. This was because the Bacs board and its member banks had failed to implement a public key infrastructure security system, despite seven years of discussions and plans.

But how would the split option work?

The discussions over structural reform - by Bacs directors and banks - have been rumbling on for a couple of years within Bacs, according to people close to the organisation. Nothing has yet been finalised but one option being considered would be for Apacs, the payment clearing association, to take over responsibility for the direct debit scheme from Bacs.

Around half of the UK population use the Bacs direct debit scheme while around 40,000 businesses use the bank clearing house for payments, including salary payrolls.

Bacs would remain a limited company and its IT staff would continue to be responsible for the day-to-day operations and processing of transactions.

The more far-reaching change under this plan would be to allow non-banks to invest in Bacs and become shareholders. The advantages are obvious: external investment and the potential for Bacs to expand its customer base, away from its bank members. In other words, a new, dynamic Bacs. "It's about getting new blood in, for instance IBM or BT," said one industry source. "The Bacs operating company could offer competitive commercial services for individual banks or individual companies. They are not allowed to do this now."

"If, for example, the Department of Social Security [a Bacs customer] wants to handle payments a different way, they [Bacs] could do this directly."

For go-getting IT staff within banks and suppliers this presents an opportunity to help create the next generation of payment system for the UK market, and possibly overseas.

But despite the strong case for a new look Bacs, it is still far from certain whether the banks and clearing house heads will blaze ahead with reform. After all, Bacs has still to move to a new IP-based network, a major undertaking for most organisations.

Industry insiders also point to a potential tension between Bacs and its bank members if Bacs opens itself up to new shareholders.

Why should the banks foot the bill for Bacs' new IP network, and expected new security system, if Bacs has the potential to offer rival payment services to their customers?

The proposals could easily be blocked by the banks, fearing a threat to their dominant position in payment services. But with banks facing the threat of mobile payment services by telecom providers, and the urgent need for effective Internet payment services, now is no time for complacency.

Bacs fundamentals

Bacs Limited is one of the world's largest automated clearing houses.

Established in 1968, Bacs is owned by the major banks and building societies. Bacs' business encompasses the Electronic Funds Transfer (EFT) processing of Direct Debit, Direct Credit, Standing Order, information advises and the management of inter-bank network services. Over 40,000 companies are currently registered users of the Bacs service, including all of the FTSE 100.

Bacs processes over 3 billion financial transactions annually with more than 49 million on a peak day. On an average day more than 10 million Direct Debits and Direct Credits are processed.

Direct access to the Bacs service is available via the telecommunications service Bacstel, a private online service. Bacs claims this service is secure but the proprietary infrastructure does not encrypt most financial transactions that pass over it. Instead, a one-off password is generated for every transmission.

Bacs is currently reviewing security for Bacstel, including the possibility of introducing a Public Key Infrastructure security system. It is also due to move to an IP network in a bid to end the laborious batch processing of transactions.

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