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?
- 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.
- 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.