On 25 February 2016, the Payment Systems Regulator (PSR) published its provisional findings in its market review into the ownership and competitiveness of infrastructure provision, proposing in particular that Barclays, HSBC, Lloyds, RBS, and Santander should reduce their ownership stakes in VocaLink.
PSR’s market review
The PSR launched its market review into the ownership and competitiveness of infrastructure provision in March 2015, following responses to its consultation paper on the regulatory framework for payment systems which highlighted concerns with the common ownership of operators and the infrastructure provider.
Payments systems infrastructure comprises “the hardware, software, secure telecommunications network and the operating environments that supports the clearing and/or settlement of a payment“.
The market review examined whether the common ownership structures of certain payment systems (Bacs, Faster Payment Service, LINK) and the central infrastructure for those systems (VocaLink) restricts competition, hampers innovation and enables the small number of banks which own both to influence any developments in favour of their own interests (and not all payment service providers (PSPs) and customers).
During its review, the PSR gathered evidence from more than 70 stakeholders, including PSPs, infrastructure providers, operators, and FinTech companies.
Interim report of the PSR
The evidence gathered during the PSR’s market review has pointed to issues in the market which give rise to competition concerns. The PSR considers that there is scope to improve competition in the provision of infrastructure services through a number of proposals for reform.
- Divestment of shareholding in VocaLink: The PSR has provisionally concluded that the common ownership of VocaLink by a small number of banks is adversely affecting innovation and competition in the market. The PSR proposes that to remedy its concerns Lloyds Banking Group, RBS, HSBC, Barclays and Santander should sell part of their ownership stakes in VocaLink. The PSR considers that reducing the level of their ownership will open the market and enable more effective competition and innovation.
- Competitive procurement process: The PSR has also provisionally concluded that the procurement of payment infrastructure services may prevent potential providers from competing effectively. As such, the PSR proposes introducing a new open, transparent, competitive procurement tendering process for the provision of infrastructure services, which is independently audited and monitored. This procurement requirement will take effect when contracts for infrastructure services next come up for renewal.
- Common messaging standard: The PSR has provisionally concluded that the current unique messaging standard acts as a barrier to entry for new infrastructure providers in the UK and that a common standard would create a level playing field. The PSR has therefore proposed that a common messaging standard is introduced in the market in respect of communications between Bacs, FPS and LINK, and the infrastructure provider.
- Separation of LINK from VocaLink: The PSR provisionally found that LINK and VocaLink are not separate legal entities and that the current governance and contractual arrangements for LINK services (including the fact that the contract for services is between VocaLink and all 38 PSPs in LINK) makes it difficult to switch provider. The PSR has therefore proposed a number of measure to separate common ownership functions of LINK from VocaLink, so that “the body responsible for setting the rules for the payment system and awarding the contract is functionally and legally separate from the infrastructure provider that delivers these services”.
The PSR intends that these proposals will drive competition and innovation, and create opportunities for new entrants to come into the market.
The PSR has invited comments on its provisional findings and interim report by 21 April 2016.