Why the new Payments Systems Regulator needs to avoid rushing in change

The UK government has announced that the bank dominated
Payments Council is to be replaced by a competition-focused utility style
regulator for payment systems, under the Financial Conduct Authority (FCA),
part of the Bank of England. This new body will assume its powers in late 2014
and will be fully operational by Spring 2015. The focus will be on providing
competition, innovation and responsiveness to consumer demands in the payments
system. It is hoped by the government that the Payments Council will in turn
reform itself into a more traditional trade body.

Talk of reforming the payments system has been going on for
a very long time with the Cruikshank Report into competition in banking  back in 2000 recommending the setting up a
full blown payments regulator, the so-called ‘Payco’. That recommendation was
never acted upon, not only because of the active lobbying by the banking
industry but also because of the size of the investment required to set up the
regulator and the fear of disruption to the payments system in the process.
Little progress has been made since 2000 except the slow introduction of Faster
Payments and the reluctant abandoning of end of cheques, which had been due in

The new Payments Systems Regulator may want to show that
whilst the creation of the body has taken a long time that it is a body with a
mission and at pace. However whoever heads this body should be wary of rushing
in change too quickly.

The UK has one of the best set of payments systems in the
world – in many ways the envy of the rest of the world. After 9/11 it wasn’t
the fact that the Twin Towers had come down or that the US had been attacked on
its own soil and that hundreds had died that nearly brought down the US
economy, but rather the grounding of all the airlines. In the US at that time
(and even today)  because the economy was
highly reliant upon cheques (or checks if you are outside the UK) the fact that
the planes could not fly the cheques raised on one bank to deliver them back to
their originating bank for clearing meant that the US economy almost ground to
a halt.  The flow of money was stopped. Given
similar circumstances in the UK the impact on the UK economy would have been
far less. The UK has a highly resilient, highly reliable payments
infrastructure. Britain should be proud of the long history of a payments
infrastructure that is only invisible to most because it works and customers
take it for granted that when they make a payment it will arrive where it is
meant to in the time that it is meant to. This is despite the fact that the
systems have, primarily, been built by those ’empires of evil’, as portrayed by the politicians, the big four banks
(Barclays, Royal Bank of Scotland, Lloyds Banking Group and HSBC).

However the UK payments infrastructure has been slow to change,
has failed to grasp innovation and has had to be dragged and screaming towards
the twenty first century. The Payments Council dominated by the Big Four banks
has had the unenviable task of leading by consensus and with each of the Big
Four being competitors has rarely got to consensus and where it has it has been
through a suboptimal compromise.

The new regulator has the challenge of addressing the level
of competition in the industry, increasing the innovation and making sure that
the consumer’s voice is heard.

Despite all the reviews and all the parliamentary committees
which have reviewed and reviled the banking industry, a forensic analysis of the
payments industry has not really been carried out. Whilst the small banks and
building societies who process low volumes of transactions and the new
challenger banks may complain they are unfairly charged for access to the
payments system the arguments seem to be based on little data and a lot of

One of the first tasks that the new regulator should
commission is an independent, forensic analysis of the costs to both build and
operate the existing infrastructure. The natural instinct will be to use one of
the Big 4 accountancy firms to do this, however they are so dependent upon fees
from the big banks that it is questionable whether they will be seen to be
independent. The purpose of this analysis of the costs will be to determine what a fair cost to use the infrastructure should be (allowing for investment to build the next generation infrastructure) and compare that against what is being charge today.

The new regulator has an unenviable task because there is a
clear conflict between significantly reducing the cost of using the
infrastructure and encouraging investment and innovation into that infrastructure.
It is analogous to Ed Miliband, the UK leader of the Labour opposition, saying
that he will freeze the cost of utility bills whilst still expecting those
utilities companies to invest in green technologies and maintaining and
upgrading the creaking infrastructure.

This brings into question whether there can be real and
speedy investment and innovation into the payments infrastructure while the big
four banks still collectively own it. Over the last forty or so years they
have demonstrated that getting to consensus has inhibited progress and has
compromised innovation. There has also been a chronic lack of investment in building the next generation infrastructure. Is there any reason to believe that this will change?

The new regulator needs to decide whether the three objectives assigned to the regulator of creating competition, encouraging innovation and responding to consumer demand can be met while the ownership of the payments infrastructure remains with the big four banks.  A solution could be that the big four banks are forced to dispose of the payments infrastructure
to an independent business to which they will become customers just like the
smaller banks, building societies and challenger organisations. The acquiring
organisation will need to demonstrate not only that they have the experience to
run the infrastructure the resilience and reliability of which  is of
national importance but also have a realistic strategy for the payments
industry going forward and how they will fund both innovation and maintenance
of that infrastructure whilst actively engaging with consumers. This is not a
task for those who are looking for a quick in and out with a healthy profit. Only an organisation that is prepared to run the infrastructure independently of the banking sector for the long term will make any sense.

Without taking a measured, fact driven and courageous
approach to changing the payments industry with cross-party support (given the length of time any programme will take to enact) this regulator will be no better
than the Payments Council it is replacing. 

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