Banks look set to lose their grip on payment systems because they add little other than resilience, as the new Payment Systems Regulator (PSR) sets out its plans in its industry consultation.
Part of the new regulators role will be to ignite competition in the sector.
Speaking when the PSR was announced, the Financial Conducts Authority (FCA) CEO Martin Wheatley said the regulator needs to know if the sector is as open as it should be to new entrants to the market and whether consumers are getting the best possible deal.
About 21 billion UK financial transactions were made possible by payment systems in 2013. Because the large payment systems – which ensure people can withdraw money from cash machines, pay bills and be paid wages – are owned by banks, the FCA is concerned “the sector lacks transparency and innovation”.
The FCA said it needs to be easier for challenger banks to access these systems and compete with the bigger players.
More on payment systems
The consultation is open for industry feedback until 12 January 2014. It is focused on encouraging innovation, opening up ownership and providing fairer and more open direct access to payment systems, as well as increasing transparency.
Managing director of the PSR Hannah Nixon said change is needed because existing systems are little more than back-office functions that add little value other than resilience.
“The systems we have today have been developed incrementally over time by the major banks. So while they are relatively resilient, they are often treated as back-office functions. Competition is limited, decision-making is opaque, and this is stifling innovation. This has to change,” she said.
“I want to see an industry that is responsive to, and focused on, the needs of those using payment services. This will be an industry that encourages and enables competition and innovation, and provides value for money while maintaining reliability and security. In short: a UK payments industry that is world-class. I am confident our proposed package of measures will make this possible,” she added.
Economic secretary to the Treasury Andrea Leadsom MP said opening up the banking sector to competition is core to the new regulator’s challenge.
“We want to ensure payment systems foster competition and innovation in the interests of customers," she said. "In particular, we want to ensure where smaller firms want direct access to the payment systems, they can get it on a fair and transparent basis."
Payment Strategy Forum
The PSR said it will take control of the strategy development and setting through a Payments Strategy Forum with representation from industry and service-users.
Celent analyst Gareth Lodge said the banks are resigned to losing the payments systems, but he is uncertain who could and would take over.
Opening up membership of services such as Faster Payments to more providers will certainly drive innovation and level the playing field
Kieran Hines, Ovum
“I think the banks are pretty much resigned to giving up their ownership," he said. "The question is who wants to buy it?”
Lodge added that although it is a consultation, he senses what is said is going to happen and “it’s more a case of how radical the changes might be”.
Ovum analyst Kieran Hines said the devil will be in the detail with the PSR: "The degree to which it mandates rather than presses for change will be key."
He added it is difficult to look at the track record of the Payments Council or the Association for Payment Clearing Services (Apacs) and find enormous room for improvement.
"The roll-out of the Europay, MasterCard and Visa (EMV) standard in the UK was a fine example of the industry coming together to lead a large infrastructure change, while the creation of Faster Payments and the account-switching scheme also demonstrate self-regulation had been broadly effective," he said.
"Less prominent initiatives around fighting payments fraud have also been successful in reducing finance for organised crime.
"Opening up membership of services such as Faster Payments to more providers will certainly drive innovation and level the playing field, as many of the smaller banks can only access this via sponsor banks, which can make it expensive to offer these services to customers. However, there is also the risk this reduces the willingness of banks to invest in this kind of infrastructure in the future."
He said suppliers such as ACI and Fiserv will be watching with great interest for an opportunity to compete directly with Vocalink to offer processing services.