The review focussed on infrastructure related to interbank payments systems for Bacs, Faster Payments and LINK (the “Schemes”) and aimed to explore whether there is effective competition in the provision of the infrastructure relating to those systems, which the PSR considers is key to ensuring that payments systems in the UK are delivered efficiently and cost-effectively. The PSR also considers that competition for infrastructure services would encourage innovation, which would benefit payment service providers (“PSPs”) and their customers and spur on innovation and competition across the payments field more widely.
The infrastructure under review constitutes the hardware, software and telecommunications networks, along with the operating environments that are used to manage and operate payments systems that clear and settle payments and funds transfers for PSPs. The main infrastructure provider for the Schemes is VocaLink, which is owned and the PSR alleges is controlled by a relatively small number of the estimated 2,500 PSPs authorised to offer payment services in the UK. The PSR notes that this arrangement has resulted in systems that are robust and resilient, but concerns have also arisen that such an arrangement may limit competition and innovation.
Some steps have been taken already following the Cruickshank Report in 2000, the OFT report into payments systems in 2003 and the Treasury’s 2012 strategy consultation, including the creation of the PSR itself and the coming into force of governance requirements in PSR General Direction 5. However, the PSR’s interim findings are that there is still no effective competition for the provision of payments infrastructure. The PSR’s key provisional findings in this respect are:
The operators of the Schemes (who procure infrastructure services on behalf of the PSPs) do not look for alternative providers to VocaLink or hold periodic competitive procurement exercises. This is because the operators are not-for-profit associations who have no incentive to drive costs savings and their costs are met by the PSPs. Meanwhile, the direct PSPs (i.e. those PSPs who contract directly with the Scheme operator for use of the systems provided through the Scheme) do not derive competitive advantage over other PSPs from competition in this area, as this would require changes to their internal systems which they perceive could be costly and risky.
- The common ownership and alleged control by PSPs of the operators and the infrastructure provider reinforces the inertia in seeking alternative providers, as those PSPs who are shareholders in VocaLink see this as a way of enforcing security and resilience, whereas introducing competition for infrastructure services could introduce risk. They also have an interest in protecting their investment in VocaLink.
- Most operators and direct PSPs are satisfied with the value for money and quality of the service they receive from VocaLink, but are not regularly informed of or exposed to alternative propositions that could facilitate innovation.
- These issues, the perceived competitive advantage of VocaLink over other potential providers, and the messaging standards used by the Schemes (which are different to those used internationally) are all considered to be barriers to entry that deter potential competitors from entering the market.
- The PSR has provisionally found that there is effective competition in the provision of gateway services which enable connection to the payments systems and that PSPs do not all use the same provider.
In response, the PSR has also proposed a number of potential remedies in order to address these matters:
- Competitive procurement exercises should be undertaken before current infrastructure services contracts in respect of the Schemes come up for renewal or in time for when the next break clause becomes available.
- There should be enhanced interoperability for the Schemes, including a common international message standard – this is to be examined by the Payments Strategy Forum.
- The possible divestment by PSPs of some or all of their interest in VocaLink.
- There could be measures that separate common ownership of the functions of LINK from VocaLink, while industry-led governance changes could be implemented to separate the body responsible for both setting the rules of that payment system and awarding contracts from the infrastructure provider who delivers the services. The PSR notes that such measures are already planned and are in the process of being implemented.
If the PSR’s potential remedies are implemented the industry can expect to see an increase in procurement and contracting activity and, potentially, re-engineering of technical solutions to ensure arrangements meet the PSR’s requirements. Further consideration as to the impact of such a decision, and how to implement it, is clearly required.
The PSR has invited responses to its initial findings, and on how effective and proportionate the potential remedies are, by 21 April 2016 and will publish its final report later in 2016.