The payment services market under the eye of the regulator
The UK payment services market has been under the spotlight in recent months with the introduction of a new Payment Systems Regulator created with the intention, amongst other things, of opening up the industry to new and emerging payment service providers.
In this article, we consider the criticisms of the industry and how the PSR is hoping to address these, looking in particular at the issue of technical barriers, including technology, inhibiting direct access to payment systems write Mike Pierides and Sarah Atkinson.
Electronic payments and money transfers by individuals and businesses are made possible through the use of payment systems. In 2014 more than 21 billion payment transactions were made worth around £75 trillion. Payment systems include interbank payment systems, such as Bacs, CHAPS and cheque and credit clearing, as well as card payment systems such as MasterCard and Visa (Payment Systems). Payment Systems are managed by operators who interact with the payment service providers (PSPs), and it is through PSPs that customers are able to use Payment Systems to process transactions.
To provide payment services, PSPs need either direct or indirect access to the Payment Systems. Whilst the UK’s big four banks (Barclays, HSBC, Lloyds and RBS) have direct access to most of the interbank payment systems, indirect PSPs must have a contractual relationship with a direct PSP (often known as a Sponsor Bank in this situation) to connect to the Payment Systems.
The UK payment services market has faced criticism for being slow to innovate (the major payment systems have been gradually developed over the years) and for having barriers to entry for new competitors. It appears that many of the obstacles to entry have arisen as a result of the close links that interbank operators have with banks, which it is believed creates barriers to direct and indirect access.
The UK’s Payment Systems Regulator was created to regulate the payment industry and target these criticisms. The PSR became operational on 1 April 2015 and is a subsidiary of the Financial Conduct Authority; however, it operates independently, with its own managing director, board and objectives. The key objectives of the PSR were set out in its policy statement, being:
- to increase competition;
- to promote innovation; and
- to ensure development and operation of payment systems in the interests of service-users.
A primary focus of the PSR is to open up direct access to Payment Systems. One of the barriers identified by the PSR is a technology barrier and it is with respect to this that a significant development of the market might be seen. To be able to access Payment Systems and thereby process payment transactions, PSPs must be able to communicate with the Payment Systems (Technical Access). Technical Access can be achieved by a PSP either connecting directly to a Payment System’s infrastructure, or indirectly, either by using the infrastructure of a Sponsor Bank (which can lead to claims of delays and prevention of access, as occurred earlier this year with the German bank, Fidor), or a third party service provider.
Concerns have been raised that the requirements and criteria applied by operators for direct Technical Access are too onerous and disproportionate, in particular with respect to smaller PSPs and the risks posed by such PSPs to the relevant Payment System. Furthermore, different requirements and criteria apply depending on the Payment System being used, so making it a particularly complex area. As well as acting as a barrier to direct Technical Access by PSPs, the requirements can also act as a barrier to third party providers who wish to provide Technical Access technology solutions in competition to the services offered by Sponsor Banks.
To address these concerns, the PSR has proposed a risk-based approach to the requirements for Technical Access to ensure that these are proportionate, meaning operators would need to consider the justification for requirements imposed. It is anticipated that this could result in reducing both upfront and ongoing costs for PSPs and third party technology vendors.
The PSR also supports the development of accreditation arrangements for technology vendors, through whom indirect PSPs could gain Technical Access as an alternative to solutions offered by Sponsor Banks. Accreditation processes would ensure that the technical solution offered by a vendor complies with the criteria set out by the operator, allowing PSPs that engage them to be confident that the accredited technology vendor they are working with meets the operator’s requirements.
Faster Payments, which is championing a ‘New Access Model’, intends to have at least three accredited technology vendors by the end of 2015, potentially to include AccessPay, which has signed up to undertake the accreditation programme along with eight other companies. The PSR hopes to increase competition by facilitating entry to the market of alternative Technical Access solutions, which in turn may promote innovation, lower costs and improve the quality of services. The PSR notes in its consultation paper, however, that alongside its push to remove unnecessary Technical Access barriers, any changes made must not “adversely impact upon the integrity and financial stability of the payment systems”. It is also worth noting that despite the drive to open up the UK payments industry, it is nevertheless still a heavily regulated industry with the Payment Systems Regulations 2009 providing the regulatory framework in the UK.
The payments industry is one with huge potential for growth and in 2014 Capgemini predicted in its World Payments Report that mobile payments would rise 60.8% from £29 billion to £47 billion by the end of 2015. Furthermore, the Financial Services Club has identified possible opportunities for “trusted” businesses such as eBay and Amazon, which already hold personal details about customers and handle payments, to move into providing banking (or quasi banking) services.
Greater competition and promotion of innovation are key to improving the service-user experience. The size of the payments industry and its potential for growth combined with the PSR’s efforts to open access to Payment Systems means that we can expect to see more PSPs entering the market and third party technology vendors offering alternative Technical Access solutions to those offered by Sponsor Banks.