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The UK’s new Payment Systems Regulator is now open for business. I imagine that their highest priority work stream will be around access to payment systems, because this is what “challenger” banks need in order to create the more competitive environment that the UK Treasury wants.

The payment systems regulator (PSR) has published their report on a new regularly framework for payment systems in the UK and, as I’m sure many other people did, I spent the weekend reading through it so that our clients can feed it into their product and service roadmaps where appropriate. It’s important to understand the pressures that the new framework will bring to bear and have some realistic ideas about where it will have an impact in the short, medium and long-term. We’ve all understood the big picture for some time. A couple of years ago, I wrote that

The Chancellor’s decision to go down this route clearly re-frames payments as a utility.

[From Consultation on a new payments regulator for the UK]

What most interests me at the moment, however, because of the projects that we happened to be involved in at the moment, is the high level strategic direction of travel. In the report, the regulator outlines three key areas of concern: governance, innovation and access.

  • The first of these, governance, has long been a concern and it was clear from the government’s earlier consultations that there was a (perfectly legitimate) requirement to involve more stakeholders in the decisions that need to be made and more transparency around the decisions. I don’t think anyone would disagree with this and the proposed actions (such as publishing the minutes of meetings) seem reasonable. Note as an aside that the reconstitution of the Payments Council as a trade association for the industry is a direct result of the desire to split governance from “implementation”.
  • Following the original Treasury consultation (the one where the Treasury essentially ignored all of the actual consultation input, or as our friends at Celent put it at the time “Our understanding is that the Treasury feels that the responses (56 in gave the wrong answer“) it was clear that the issue of the pace of innovation in payment systems was going to be added to the proposed regulators casebook. I have commented a couple of times that is not entirely clear to me how this is to be achieved but that’s not the point of this post.
  • The third area of concern, and this is the one where all of the trouble will come, is the ability of new players to get access to the core payment systems. In most of the fora where I hear such talk, access is the nexus between stable, boring and legacy infrastructure and the challenges, up and comers and next big things.

It is this last point about access that is key to achieving the Treasury’s goals for more competition in the banking sector and it is exactly what one of the more interesting (in my opinion) challengers was complaining about in the press this very weekend.

The lender, Fidor Bank, had planned to launch in the UK by the end of March, but has been held up with the country’s difficult payments infrastructure. The big four – Barclays, HSBC, Lloyds and RBS – act as sponsor banks with direct access to payments systems. None has accepted Fidor as a customer.

[From UK launch of digital bank Fidor hamstrung by payments providers – Telegraph]

With respect to this point about the need for “sponsor banks”, who can access the payment system and under what circumstances, the PSR says that they propose an “Access Rule” .

This would require these Operators to have “objective, risk-based and publicly- disclosed Access Requirements, which permit fair and open access”. We proposed requiring these Operators to be compliant with our proposed Access Rule by 30 June 2015. LINK, MasterCard and Visa are already subject to an obligation to provide objective, proportionate and non-discriminatory access under Regulation 97 of the PSRs 2009.

The devil, as it always is with these things, will be in the details. People who want direct access to the payment networks are somewhat suspicious that while the operators will comply with the requirement to publish objective, risk-based and publicly disclosed access requirements, they will insist on non-proportionate countermeasures. The regulator has clearly said (in section 4.14) that their access rule will ensure that operators access requirements are proportionate to the actual risk that will be incurred by adding the new participant. I hope that they are militant in enforcing this because the actual risks, or should I say the marginal increase in actual risks, associated with the addition of direct access by low-value payment systems seems to me to be fairly small.

One specific “access” where I imagine industry participants were vocal is the case of access to the UK’s Faster Payment Service, FPS, to provide immediate settlement. Faster Payments (the scheme that operates FPS) had already put out a White Paper on their vision for the access model of the future in which they say that their goal is absolutely to provide such access to enable a level playing field for the Payment Service Providers (PSPs) that want to offer such immediate settlement services to their customers through FPS.

To show how this might achieved, they set out an architecture to offer open and fair access on “reasonable commercial terms” to the PSPs through accredited technology vendors. You can see why they want to go down this accreditation route and it makes a lot of sense because none of the participants would want to risk technology problems disrupting the operation of what is, in essence, a piece of critical national infrastructure.

What is also interesting to me about this proposed model is that for organisations that are not eligible for a Bank of England Reserve Account for settlement purposes they propose to provide an alternative to finding a sponsor bank. Organisations (such as for example Google or Tesco or Apple) might want to participate in the scheme and can easily afford to set aside the cash for what is known as “pre-funding” collateral but they might not be able to, or not want to obtain either a banking licence or a Reserve Account. What’s more, sponsor banks may not want to handle the accounts of such organisations for a variety of reasons (one of them being AML regulations) and the organisations might not want to have sponsor banks either.

Right now one of the main complaints (from, e.g., Fidor) about sponsor access is the opacity of the commercial relationships with sponsor banks, which is one of the things that the PSR intends to address. The regulator has also set out some changes on indirect access to make the sponsor banks open up their services by publishing service descriptions, eligibility criteria and costs. So for organisations who want to use sponsor banks, the menu and pricing of the sponsor banks would allow them to quickly choose the right partner and get down to business.

At high level, then, the alternative to using a sponsor bank to gain access to FPS will be to gain access through one of the accredited vendor but with liquidity guaranteed by a sponsor (in return for a fee, obviously). The settlement must be guaranteed in this way otherwise you would have to wait for it to actually occur rather make the funds available immediately. This should be cheaper, quicker and simpler than going through the sponsor.

Faster Payments see a competitive market emerging through the accredited technology venders operating aggregation services to the PSP’s (which I think is probably right) but also say that over the time they intend to work with the Bank of England to identify new models and these could potentially open more participation to non-banks (such as retailers for example). Although they don’t say what these new settlement models will be, it is certainly possible to imagine models that will allow PSPs to offer new products and services to their customers. I’m sure this is one of the areas that the PSR will be looking at in their innovation work stream.

One other point. The White Paper also talks about how the new access model will connect with non-UK markets and I can certainly see that integration into other European immediate settlement services and perhaps even in the longer term interconnection with immediate settlement services in other countries (e.g., Australia) and perhaps one day even the United States will deliver a payments infrastructure that is a world away from the 1960s legacy models that still constrain innovation today.

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