On 21 July 2016, the Payment Systems Regulator (PSR) published its final report in its market review into the supply of indirect access to payment systems. This follows a year-long review, interim findings in March 2016 and responses to the interim report.
Background: what was the PSR looking at?
The PSR’s market review focused on how banks, building societies and other payment service providers (PSPs) obtain access to the main interbank payment systems (namely, Bacs, CHAPS, Cheque and Credit, and Faster Payment Service (FPS)) in order to be able to move money between accounts for their customers.
The PSR identified that access can be either direct or indirect (where one PSP relies on another PSP to provide access such that payments are sent and received through a third party PSP). The PSR, in conducting its review, recognised that indirect access is important for smaller PSPs and is a key driver for competition and innovation. The PSR sought to examine whether competition is working well for PSPs.
Final report: what are the PSR’s concerns?
The PSR’s final report broadly confirms its interim findings, confirming that while competition in the supply of indirect access is working relatively well for indirect access providers (IAPs), there are concerns surrounding limited choice, barriers to switching provider and service quality.
The PSR identified a number of specific concerns which it considers hinders competition and innovation:
- choice: while larger indirect PSPs have access to a good range of payment systems, many smaller indirect PSPs have limited or no choice of IAP, which impacts their ability to gain access, negotiate price or switch to an alternative IAP;
- ability to switch: barriers to switching IAP exist, which reduce the competitive constraint on IAPs and impact the ability of indirect PSPs to obtain the best price and quality of access; and
- service quality: large indirect PSPs raised concerns with the quality and availability of technical access to the FPS, while small indirect PSPs were concerned with their notice period for termination and the relationship management provided by IAPs. This impacts PSPs’ ability to compete in related markets, such as retail banking.
As noted in its interim report, the PSR attributes the concerns to three main market characteristics: (i) the perceived risk of compliance failures under financial crime regulation, which influences IAPs’ behaviour; (ii) a history of low entry and expansion by IAPs in the market; and (iii) an increase in demand for real-time payments, such that the technical solutions provided to indirect PSPs may not meet customers’ needs.
Final report: positive outcomes in the market
The PSR identified a number of positive outcomes in competition in the supply of indirect access:
- large indirect PSPs have a number of options in seeking access to payment systems;
- there is a reasonable level of satisfaction as regards the quality of the indirect access received by indirect PSPs;
- feedback to the PSR did not indicate any widespread concern with the price of access; and
- there has been investment and innovation in new and improved service offerings, which should improve choice and quality for indirect PSPs.
The PSR also noted that there have been a number of developments since its interim report was published, which the PSR considers will open up choice for PSPs. Such developments include the following:
- the Bank of England announced that it will extend settlement account access to non-bank PSPs, such that more PSPs will be able to gain direct access;
- four new PSPs are due to become direct PSPs in the FPS by the end of 2016;
- five companies are now accredited to provide direct technical access to the FPS, giving more options for PSPs to have direct access. Raphaels Bank, for example, will become a direct participant of the FPS and will be a new active IAP within the next 9 months, increasing the choice of IAPs;
- the IAP Code of Conduct has been published by Payments UK;
- the Payments Strategy Forum has been working on examining whether and how payment systems can be developed to simplify access;
- financial crime regulation is being reviewed; and
- the Competition and Markets Authority has proposed measures to improve switching as part of its retail banking market investigation.
Next steps: what happens now?
In its report, the PSR considers what quality, choice, switching and price outcomes it would expect to see if the supply of indirect access were working well. The PSR considers that the recent industry developments, combined with its on-going work on access and the market, have the potential to address its identified concerns and lead to these good outcomes. The PSR considers that a number of the recent developments will make an impact in the short term (0-1 year) or medium term (1-3 years).
Rather than taking specific regulatory action, therefore, the PSR states that it will continue to monitor and support the recent industry developments to assess whether they are suitably addressing its concerns, noting that indirect access is a key priority area for the PSR’s work programme.
The PSR intends to incorporate the outcomes of its monitoring activities in its annual review of access and governance of regulated payment systems, which is expected in early 2017.