Payments shake-up in the UK: the baby and the bathwater

David Bannister, Ovum – Faster Payments Service isn’t perfect

Since the introduction of the Faster Payments Service (FPS) the best part of a decade ago the UK has been rather proud of its payments system – industry body Payments UK uses the phrase “world class payments” in its development plans, and successive politicians have trumpeted the country’s prowess in this field, much as their predecessors trumpeted supersonic flight and the hovercraft.

But not everyone is convinced that things are as practically perfect in every way as they could be: for starters, banks are involved, which is a de facto negative, post-crisis.

There is some justification for this: there are around 2,500 payment service providers (PSPs) in the UK, all of which have to access the Bacs, FPS, and LINK ATM network through the 18 major banks and building societies that also own VocaLink. VocaLink’s existing contracts with the Bacs, FPS, and LINK schemes will expire in 2020, following a renewal in 2014.

The PSR acknowledges that this structure has benefits, particularly in terms of stability and resilience, but thinks that it also means that the current owners of VocaLink have an incentive to protect it from competitive pressures. The recommendation from the PSR is that the owners should sell some or all of their holdings.

Beyond this, however, the question of competition in central payments infrastructure leads the PSR to the conclusion that a common international messaging standard should be adopted by Bacs, FPS, and LINK, which currently use their own messaging formats, with FPS and LINK using their own variants of the ISO 8583 card standard. This will provide interoperability, making it easier for alternative infrastructure providers to enter the market.

Not surprisingly, the ISO 20022 messaging standard is the obvious choice; every immediate payments system implemented since the UK’s FPS system has been based on the ISO 20022 messaging standard, including VocaLink’s implementation in Singapore and the current development in the US. The Payments Strategy Forum, a consultative body established by the PSR, is currently examining this subject.

More intriguingly, the PSR raises the possibility that the adoption of international standards would remove an inhibiting factor in the adoption of a payment system model using multiple centralised infrastructure providers, as opposed to the current centralised single provider model. The fact that this is one of a number of alternative models that the PSR looked at, but is the one singled out in the report, might give a clue as to the direction the PSR is leaning in.

11 potential alternative providers are mentioned in the report. CGI, Equens, MasterCard, NETS, STET and Visa Europe all already operate infrastructures, while ACI, FIS, EBA Clearing and SIA are name-checked, and another nine names have been redacted. Several of these told the PSR that they would be interested in competing for the infrastructure services that are currently only provided by VocaLink.

VocaLink, of course, has been heading in the opposite direction, providing payment infrastructures in Sweden and Singapore, and is in the progress of providing a new payment infrastructure in the US. It also provides competitive layered services on top of FPS, such as Zapp, and provides an information service based on the data flowing through its systems.

For PSPs, this raises the possibility of having to change infrastructure providers, either because VocaLink is replaced at the centre, or because a choice of central providers emerges, as the comments relating to adopting international standards suggest that the PSR views this as a potentially desirable outcome. For Bacs and FPS, there is the risk that a migration could result in a break in service provision, or that the new service will not match the existing one, particularly for the larger banks with high volumes.

There is also a cost question. Some of the large PSPs said that it would cost them between £5 million and £15 million to make the change. However, others said it would require testing the new connection (and one PSP thinks that it is simply a question of changing the IP address of its existing gateway).

Most of the changes will fall somewhere between those extremes of scaremongering and complacency, but for all it will be important to watch developments as the PSR moves toward its final recommendations in the summer of 2016.

The period between then and the end of VocaLink’s contracts in 2020 will determine the future of the UK’s payments industry: decisions taken now will have repercussions for a decade or more.

By David Bannister, principal consultant, financial services technology, Ovum