[Dave Birch] In March, the Chancellor of the Exchequer (for foreign readers: this is our Finance Minister) gave a major speech on banking reform which included some remarks about the UK’s payments infrastructure (which, as Banking Technology magazine put it, were “at odds with reality”) and went on to say that “there are no incentives on the big banks to deliver new and better services for users” and gave the example of “saving the cheque” as one of these new and better services. He also announced a further consultation process on a “competition-focused regulatory regime”. I’ve written before that I genuinely don’t understand how government “consultation” works. For example: Her Majesty’s Treasury put out a consultation document on the proposed new regime for regulating UK payments last year. As I wrote at the time,

I think it is fair to observe that the roots of this consultation lay in the so-called “cheque debacle” of 2011.

[From It would be great to have a payments strategy]

When the Chancellor of the Exchequer talked specifically about the payments system, I presumed he meant that he would be acting on that consultation process when he said that

“The system isn’t working for customers, so we will change it. I can announce today that the Government will bring forward detailed proposals to open up the payment systems.

[From Faster transfers on the way in banking reform plan – Telegraph]

Now, I’ve argued before that we need a proper National Payments Plan (NPP) with real goals in it. And I’ve also argued that more competition should be seen as the default mechanism for achieving those real goals. The heart of the reform should be to separate payments from banking and allow invention and innovation room to grow.

What regulators ought to be doing is allowing more competition in the payments sector, not trying to work out what interchange fees should be (since neither they, nor anyone else, knows what the correct answer should be).

[From Which payments should be surcharged and, more importantly, why]

Now the Treasury have published their proposals for the consultation process that the Chancellor referred to. They say, in essence, that the government’s favoured option was to create a Payment Strategy Board (PSB) with wider stakeholder representation. They also say that the majority of the responses supported the same outcome. As, broadly, did I.

If the government wants a PSB that will include a variety of stakeholders and develop a genuine long-term strategy for payments then I’m in favour of it

[From It would be great to have a payments strategy]

So what happened? With that clear mandate, you would imagine that the Treasury would be ordering the new paint and scouring lists of the great and good for an appropriate PSB chair, cursing their poor timing now that Christine Farnish has been snaffled by the Peer-to-Peer Finance Association (P2PFA). But in fact..

Our understanding is that the Treasury feels that the responses (56 in total) gave the wrong answer. Which considering the construct of the consultation (it was extremely clear what answer the Treasury was seeking) would seem a rather clear conclusion – few people are both interested enough to respond and believe that there is a need for fundamental change. Yet the Treasury has taken this as further indications that the system is broken, and announced yesterday during the Budget (an annual statement of the Governments’ policies and priorities for the coming year) that a consultation on a PayCom will go ahead shortly.

[From Celent Banking Blog » Thoughts on the Move to Regulate UK Payments]

So given it was what the government said they wanted, want the respondents said they wanted and, most importantly, what I said that I wanted… the government has decided to choose an alternative path and it now says it will create a new payment regulator (known by one and all as PayCom) that will probably be part of the new Financial Conduct Authority (FCA). This, as Heather McKenzie points out in the March issue of Banking Technology (“Clear Thinking”, page 9) is 12 years after the Cruickshank report suggested just such a regulator and a new governance structure for payments. I remain unclear about the principles that this regulator will be following though.

You cannot set a strategy that minimises everyone’s private costs so you will have to make trade offs and I would like to know what the principles using to inform the trade off decisions will be. Those principles are what should then guide the strategy.

[From It would be great to have a payments strategy]

I don’t really understand what the Chancellor’s goals are, except for keeping cheques, and I don’t think I’m the only one. The Independent Commission on Banking did not find that access to the payment system was a barrier to entry and nor did it recommend a regulator, so these ideas must originate from inside the Treasury somewhere.

PayCom cannot ever succeed unless it is clear what it is trying to achieve, why it seeks to achieve those goals, and what the measures of success are.

[From Celent Banking Blog » Thoughts on the Move to Regulate UK Payments]

I agree whole-heartedly with our friends at Celent on this one. Look, the Chancellors decision to go down this route clearly re-frames payments as a utility. I am not against this at all, and have written repeatedly that this will mean different regulatory structures.

This seems to me to imply that the payments utility should be regulated for what the telco guys would label Grade of Service (GoS) and Quality of Service (QoS) and anyone able to meet those requirements should be able to provide the cables, switches and sockets. The crucial economic functions of savings, loans, risk management and information provision should be provided by banks and, further away from the utility, the investment functions should be provided by investment banks (the casinos).

[From On the grid]

Will PayCom work? It’s impossible to say, since I don’t know what it is supposed to do. Reduce the total social cost of payments? Reduce private costs to a defined sets of stakeholders? Other than getting cheques cleared in three days instead of four, I’m really none the wiser as to what the new payment regulator’s goals will be.

These are personal opinions and should not be misunderstood as representing the opinions of 
Consult Hyperion or any of its clients or suppliers

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