A tale of two market reviews
Speech by Hannah Nixon, managing director of the PSR, at the Money 20/20 Europe event, Copenhagen, Denmark, on 6 April 2016.
This is the text of the speech as drafted and may differ from the delivered version.
Thank you. It’s a pleasure to be here in Copenhagen.
This is an important event in the payments calendar, but particularly resonant for us at the PSR, as this week marks our first anniversary.
Today, I want to talk about where I think we’ve got to in UK payments in the last twelve months, and about some of the challenges ahead.
But as we are so new, and because this is an international audience, I’m aware that not all of you will know who we are, or what we do. So first I thought I’d give you a bit of background – the Payment Systems Regulator in a nutshell, if you will.
Who we are
We regulate the parts of the UK financial system that allow money to be transferred between people and institutions. Everything from credit card operators MasterCard and Visa Europe, to the Link ATM system, BACS, Faster Payments and CHAPS.
To give you some idea of the scope and scale of this remit, in the time it takes me to deliver this speech about 420,000 transactions will have been made in the UK using the systems we regulate. That’s 42,000 for every minute I’m on stage, or a little over 700 every second.
Payment systems underpin almost every financial transaction we make – using contactless to buy a coffee, the high value transactions between traders in our financial centres, and everything in between. They allow the UK to go about its daily business.
Our job is to protect that daily business by making sure that the payment systems operate in a way that works well for the people and businesses that rely on them.
We want payment systems that are accessible, reliable and secure, and represent good value for money.
What that means in practice is encouraging the industry to be more competitive and innovative, or stepping in if change is not forthcoming.
But payment systems need to be reliable and that’s why we work closely with the Bank of England.
All told, we want competition that gives more businesses a chance to enter the market, so payments aren’t a barrier to entry for new retail banks, and so that customers get more choice.
And we want to encourage technological innovation. Not for innovation’s sake, but to drive improvements for users, helping payment companies find new and ever more convenient ways for people to pay.
In fact, we want the UK industry to become a centre of innovation, to lead the world in the development of payment systems. And I believe the PSR can play a major part in that.
We want people to look at UK payment systems and the PSR, and say ‘we want to do it like that’.
No small ambition then, I’m sure you’ll agree. Especially given that we’re the first dedicated regulator of payments systems in the world; there’s no-one to look to for “how-to” advice.
Instead, all eyes are on us. Watching to see where we’ve made strides; where we’ve come up against obstacles; and, at a very basic level, what makes a good payment systems regulator?
And I welcome the attention. Because no one has a monopoly on ideas, and engagement is the way we learn. And I believe we have a good story to tell – though it’s not necessarily the one you’d expect to hear.
A different kind of regulator
I’ve been with the PSR for a little under two years, but longer in regulation. So I’ve seen the rolling eyes, felt the weight of disapproval at the creation of “yet another regulator”.
Because the prevailing view is that regulators curtail, and the assumption was that’s what we’d be about.
Now to be fair, prudential and conduct regulators need to set strict rules, but I do understand the consternation: regulators are not normally seen as promoters of competition and innovation - at least in the financial services sector.
But in our case, and given our remit, there was an opportunity to do things differently. To ask - “what makes a good payment systems regulator?” - and to put it into practice.
So what was our answer? How are we working to create that centre of innovation I mentioned?
We’ve done lots of work around opening up access and increasing innovation. But let’s look in particular at the two market reviews we’ve carried out over the last year; equally weighty, but with vastly different implications in terms of necessary intervention.
This is, if you’ll allow me the Dickens reference, a Tale of Two Market Reviews.
So, this is the first half of the story.
Part of keeping the UK at the forefront of innovation is to ensure that the structure and ownership of the industry does not get in the way of competition and innovation. With that in mind, we began a review into the ownership of the infrastructure that supports three key UK interbank payment systems:
- BACs, which is used to pay wages, and also runs the UK’s Direct Debit scheme which people use to pay bills
- Faster Payments Scheme, which processes payments in near real time and is used by all telephone and internet banking services in the UK
- and LINK, which operates much of the UK’s ATM network
The issue is this: BACs, FPS and LINK are currently owned by a relatively small number of banks. But those same banks also own the main infrastructure provider these systems rely on – Vocalink.
While we could see that this arrangement has resulted in payment systems that are robust and resilient, we were concerned that it may be limiting competition, which in turn could limit innovation.
Concern that has, we consider, ultimately proved well placed.
In February we announced our interim findings. They confirmed:
- that the way operators procure for infrastructure is not especially competitive
- and that the UK payment systems’ unique messaging standards mean it’s hard for new providers to enter the market
In other words, common ownership and control at operator and infrastructure level are hampering competition and the speed of innovation.
So we intend to take direct action, and have set out a series of measures we believe will tackle this issue. These include:
- A new, more competitive, procurement processes for the provision of infrastructure services, to be independently audited
- The adoption of a common international messaging standard
- And the potential divestment by banks of their interest in Vocalink
These are evidence-based measures. But they are tough measures.
And these measures will increase competition, open the market up to new players and new ideas, and loosen the grip of the incumbents.
When, twelve months ago, I set out what sort of regulator I wanted us to be, I was clear that we would need to show our teeth from time to time.
But this was never going to be the only tool in our kit. Regulation doesn’t always have to be interventionist.
In fact, I strongly believe that the best regulation is the kind the industry is invested in, and wants to drive forward.
Part of being a good regulator is about creating the right culture, the right environment, the right incentives, so that industry rises to the challenge.
That means there are times when a more subtle approach is needed. The second of our two reviews is an example of this in action.
Indirect access market review
Innovation again at the front of our minds, this time we wanted to get to the bottom of stakeholders’ concerns around the supply of indirect access.
This is a crucial market, especially for the smaller players in payments.
But those players had told us that the odds were stacked against them, that charges were too high, and that things were taking too long.
Our findings bore this out. The evidence we gathered showed that there are issues over choice, over service quality, over the ease of switching providers, and that wider financial crime regulations may be causing people to be overcautious about doing business with a third party.
But we won’t be taking direct action. And this is why.
Over the last year, we’ve already put in place measures to promote better choice and improve quality.
- Changes we have made on direct access are helping level the playing field. Direct access to payment systems is now a real option for more parties and will help new banks provide indirect access to others.
- We’ve made getting indirect access easier by increasing the information available and the support on offer.
- And the UK payments industry has created to a code of conduct for sponsor banks
But crucially, we’re not the only ones taking steps to sort this out. On access, the industry has upped its game.
Just last week, in the UK, Faster Payments announced that two FinTechs had gained accreditation to supply access, with four more soon to follow.
And we’re aware of a number of others that are planning to start offering indirect access or expand their current services.
Further, there are at least six reviews of financial crime regulation aimed at improving transparency, clarity and effectiveness.
Put together, what’s already happening should alleviate many of the concerns and help deliver widespread access without the need for PSR intervention.
That’s not to say we’re walking away. This is not job done. We’ll monitor progress carefully and if at a later date we need to step in, then we will.
But this time our approach is to support and encourage.
We don’t want an industry that waits to be told what to do. Nor do we want to see a blind compliance culture. We want an industry that is invested in change; that innovates because it sees the advantage in doing so.
It’s not an easy ask, I realise that. But on the strength of progress so far, and on the growing willingness of industry, it’s one that is achievable.
As I said earlier, we’re the first regulator of our kind in the world and I’m aware that the world is watching us.
And I made clear that I welcome the attention, because I believe we’ve got a good story to tell.
- We’re taking decisive action when and where it’s needed.
- But we’re taking on mind-sets too. Working with those we regulate, helping the market help itself.
I’m proud that in our first year of operation we’ve had the chance to show both approaches – and give a flavour of how we intend to proceed.
And importantly, I believe that by continuing this twin approach we can help create the kind of industry we want to see.
- One that has the interests of consumers at its heart.
- But more than that, one that encourages innovation helping the UK become the world leader in payments systems.