Shared UK payments infrastructure faces uphill struggle
Financial services observers have expressed support for intentions behind the UK Payments Council’s new roadmap – but serious concerns remain about the viability of the proposals, which are backed by the UK government as part of a drive to improve services for consumers.
On Monday, the Council published a document in which it set out six possibilities for the future of UK payments, all of which broadly aim to support the objective of a shared payments infrastructure. The UK government has been a keen proponent of such a scheme, on the grounds that it might help to reduce costs and provide the stimulus for better service and greater competition in UK retail banking.
Some observers, such as Alex Kwiatkowski, research manager at IDC Financial Insights, suggested that the roadmap is a step in the right direction, and while difficult to implement, reflects laudable intentions to reform the UK payments infrastructure and make it operate more effectively.
“Payments reforms are like an oil tanker,” he said. “These are major transformation projects that can’t be hurried through – but things do need to change, and the Payments Council is right to dream. The present system is not as efficient as it could be, due to a multiplicity of clearing and payments engines. Getting it on the agenda is a good thing – payments is too often overlooked.”
However, others were more critical, raising serious questions about the practical considerations necessary to make some of the more radical suggestions contained in the document a possibility. The roadmap suggests the creation of a central clearing hub, consisting of two or three payment clearing engines, one for high-value payments, one for instant payments and one for batch processing of direct debits or payroll transfers; it also proposes to create a centralised banking utility, which would cover current accounts, collaborative clearing and data and service management.
“The problem is that while a shared infrastructure sounds like a great idea if we were starting from scratch with a smaller market, that is not the reality,” said Gareth Lodge, senior analyst, banking at research firm Celent. “The banks have just spent hundreds of millions of dollars upgrading payment systems and supporting VocaLink over the last five years. To scrap up to $1 billion worth of spending across the industry is not logical.”
Lodge added that even were it possible to make the proposed changes, the likely costs would far outweigh any practical benefits. The introduction of the Faster Payments service in the UK provides a precedent – the system cost an estimated £60 million, yet it brought only around £1 million in return a year, according to Lodge. In addition, he also criticised the proposals to create an agency utility for agency banks, saying that it may actually hurt rather than help smaller players, who may have obtained a good deal below cost from a larger bank and would now be mandated to use a utility, potentially at higher cost.
“This is a hard task – it’s like trying to rebuild the underground,” he said. “Everyone can see that new lines and longer trains would be a good idea – but who wants to go in and build that? Even more importantly, it would cost so much, would you ever get a return? The banks are likely to stand against it, because they’ve already invested so much and would lose out completely if the regulator was to mandate a central utility.”
The UK already has the CHAPS Clearing Company, an organisation responsible for the operation of same-day high-value payments. It also has Bacs, a scheme for processing payroll information. But the Payment Council’s second suggestion – to create a payments utility that would provide a hosted platform similar to a database for all current accounts in the UK – also came in for fire.
“Banks are already struggling to compete, and bringing even more of their systems onto the same platform is likely to further reduce competition and provide even less differentiation and therefore even less reason for customers to switch their current accounts – a situation which is contrary to the basic objectives of the Payments Council,” he said.
Already some senior-level financial industry representatives have questioned whether there might be better ways to encourage competition. At an event hosted by Experian in London last week, one senior business development manager at RBS told Banking Technology that a possible end to the UK’s free banking business model would be the best solution.
“The real problem is there’s virtually no difference between current accounts,” he said. “It would be better to end this ridiculous free banking model in the UK and have customers pay a fee; then at least that would allow for differentiation between retail banking services.”
Meanwhile, Lodge suggested that the proposals reveal a lack of understand in government and among regulators of why new entrants are not coming to the retail banking sector, as well as the difficulty of implementing useful changes for the consumer.
“UK retail banking is a mature market with low profit margins – that’s why new entrants don’t come, not because they can’t access payments,” he said. “The regulator doesn’t want to hear the truth. Commonwealth bank of Australia spent A$1 billion on replacing its core banking systems – and the UK big four banks would have to pay a lot more. Where is the return? It’s ridiculous. I sympathise with the Payments Council – they really are stuck between a rock and a hard place.”
The first full version of the UK Payments Council roadmap will be published in Q1 next year, following a period of consultation with government, business, charity and consumer representative groups.