The modern financial services industry is a casino attached to a utility. The utility is the payment system, which enables individuals and companies to manage their daily affairs… Modest levels of speculative activity may improve the operation of the utility[From Essays: ‘Making banks boring again’ by John Kay | Prospect Magazine January 2009 issue 154]
Now that the UK has a coalition government committed to revising banking regulation something will happen, although it looks as if part of the compromise between the Conservatives and the Liberal Democrats will be kicking the idea of a UK Glass-Steagall into the long grass for the time being.
George Osborne is to chair a new cabinet committee on banking, expected to thrash out the conflicting policies of the Tory and Liberal Democrat coalition partners on issues such as selling off the nationalised lenders.
The chancellor will have ultimate responsibility for policy on regulating and supervising the banks, while Vince Cable, the business secretary, will lead on bank lending to business and consumer credit, government insiders said.[From FT.com / UK / Politics & policy – Osborne to chair banking committee]
Nevertheless, there will be changes to banking regulation, whether from Westminster or from Brussels. It occurs to me that just as there is growing regulatory pressure for some form of “narrow banking”, perhaps there ought to be pressure for “narrower” banking that does not include payments. The business of banking could focus more on its core of lending and borrowing while payments would become more of a low-margin, high-volume commodity service. There is no reason to expect that banks will be the best placed providers of the infrastructure for this (most of it is outsourced already and organisations such as Equens, Vocalink, First Data and PayPal seem to do a reasonable job).
The Payment Services Directive (PSD) has already introduced the regulatory category of the “Payment Institution”, or PI, as just as we discussed last year, and interesting range of organisations have already stepped up to obtain PI licences (eg, PayPal). Now, I am the first to note that PSD has its problems, but it does contain the seeds of change.
The conclusion of the research is that European member states are implementing the Payment Services Directive (PSD) in a completely inconsistent manner which threatens to derail the progress of the Single Euro Payments Area (SEPA). Certain member states were particularly cited as at issue more than others, with Germany and Italy seen to be actively blocking progress whilst France and Spain are viewed as delaying the process[From European Payments: A Land Of Confusion]
Tb be fair thought, the Logica report does note that there are seeds of change planted.
participants do expect new payments institutions to gain market share, particularly money transfer service providers, and that these changes have motivated many banks to look for more innovative services for their clients, particularly around corporate information services, e-payments, m-payments and e-invoicing.[From European Payments: A Land Of Confusion]
Why am I pushing this perspective? Well, in the Philippines, where the G-Cash and Smart mobile money transfer (MMT) services are well-established, I understand that around a sixth of the MMT customers have given up their bank accounts, thus demonstrating (to my mind) that a reasonable fraction of the population want “payment accounts”, not bank accounts. The banks don’t seem to care that much, because these customers are expensive to maintain and they don’t buy profitable products anyway. So everyone is better off. Separating banks into the banking bit and the payments bit makes a lot of sense, and makes for a more practical approach to solving the problem of financial inclusion.
Why should we the government push us down this route? Because competition, not regulation, is the way to get a better payments system. Not competition in banking, necessarily, but competition in payments. This means separating the regulation of payment systems from the regulation of “narrow banking” and the regulation of investment banking. I did scour the manifestos of the main political parties in the UK to see who might be committed to this kind of reform but couldn’t find any reference to it. Perhaps a fruitful way forward would be to continue down the road opened up by the Commission via SEPA and the PSD and regulate the payments business (I suppose you might call it “narrower banking”) quite separately from the narrow banking (deposit-taking and credit-issuing) institutions and investment businesses (“gambling”).
In fact, I would go further and suggest that this approach might be brought into bank strategies ahead of any such push. A couple of times during discussions taking places as part of the Innovation in Payments programme, there were comments that it might be good for even banks themselves to shift their payments businesses into subsidiaries with PI (and ELMI) licences instead of operating those businesses within banks, both because they might have lower costs in the more lightly regulated environment.
Note that along with the new Payment Services Directive (PSD), which hopes to stimulate competition in the payments market but creating the new regulatory category of Payment Institution (PI), the European Commission is also revising the Electronic Money Directive.
I mention the ELMI licence because the old E-Money Directive has failed to help establish a market for virtual currency and will be replaced with a set of less onerous regulations. The replacement E-Money Directive will must be transposed into national law by the EU’s 27 member states by the end of April 2011.[From EU Directive makes it easier to print e-money • The Register]
It isn’t just about compliance costs, but also because it might stimulate innovation to have the payments R&D quite separate from the bank stuff, so that the subsidiary with the PI and ELMI licence can look an exploiting opportunities beyond support the banking business (after all, they will need volume to thrive). The more I think about, the more I think this make sense.
These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]