The UK payments infrastructure is in need of reform to increase competition and improve services for customers, according to a market review published by the Payment Systems Regulator (PSR). The report looked at the ownership and competitiveness of the infrastructure that supports three payment systems: Bacs, Faster Payments Service and LINK. It found there is a lack of effective competition among the three systems. The PSR stated: “Payment system operators are currently controlled by a relatively small number of large banks, which also own and control VocaLink – the single infrastructure provider that the operators use to process payments.”

No effective competition

The report's findings show:

• there is no effective competition for the provision of UK payments infrastructure for the three main interbank payment systems (Bacs, FPS and LINK);
• the lack of competitive procurement exercises by the operators is a barrier to entry that prevents potential providers from competing;
• the UK payment systems’ bespoke messaging standards are acting as a barrier to entry for new infrastructure providers into the UK market; and
• because of the joint control that the four largest shareholder payment service providers (PSPs) exercise over both the operators and VocaLink, the current ownership and governance arrangements are likely to reduce the level of competition.

Current system "not adequate"

The PSR's managing director Hannah Nixon said: “As it stands, the current system is not adequate and we need to see a change. There is not one single area of concern, but a series of issues that are entwined and require a holistic approach in order to see them resolved.”

Some of the measures under consideration to address this include:

• adopting a common international messaging standard to encourage new entrants; and
• creating a competitive procurement process that addresses consumer needs.

Sale of stakes in Vocalink

The PSR has suggested that the four largest banks that have common control of the payment system operators and the infrastructure provider should sell all or part of their stakes in VocaLink. However, last week MasterCard announced that it has entered into a definitive agreement to acquire 92.4 percent of VocaLink Holdings Limited for about £700 million (approximately US$920 million).

Vocalink is currently owned by a consortium of 18 banks and building societies including Barclays, The Royal Bank of Scotland, Lloyds Banking Group, HSBC and Santander.

Change must be done in the "right way"

Payments UK chief executive, Maurice Cleaves, commented: “Looking ahead at what can be done to enhance current arrangements in the payments infrastructure, there is common consensus that the adoption of common global standards will help to simplify and open up the market... The key to success will be to ensure logical sequencing so change is done in the right way and in the right order to deliver benefits for customers and new players.”