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Selling VocaLink to MasterCard will Kill Innovation in UK Payments.

The proposed sale of Vocalink to MasterCard, threatens to kill innovation in UK Payments. This is my damning verdict and reason for calling on payments experts to come together to voice their opinions and thoughts, before a final decision is reached.

In the time it takes you to read this blogpost, more than 400,000 Bacs payments and approximately 10,000 Faster Payments transactions will have been made in the UK.

These startling figures demonstrate how vital the Bacs and Faster Payments systems are to the UK economy, and why some payment industry experts are uncomfortable with the announcement that US card giant, MasterCard is to acquire VocaLink –  the central payments services infrastructure provider for the UKs key payment systems.

The Deal

MasterCard has entered into a definitive agreement with VocaLink to purchase 92.4% of the London-based consortium, which is currently owned by 18 banks and building societies.

The announcement comes following concerns raised by the Payments Systems Regulator (PSR), in February 2016, that the collective ownership of VocaLink was having a "negative impact on innovation and competition in the industry".

The economic regulator for UK payment systems suggested that by loosening their grasp on Bacs and Faster Payments and by selling their share of VocaLink, they would help towards ensuring UK payment systems continue to evolve and work for its users.

In addition to operating the Bacs and Faster Payments central infrastructure, VocaLink also controls Link, the UKs largest network of ATM machines, as well as licensing its immediate payments infrastructure in Singapore, Sweden, Thailand and the United States.

Why should you be concerned about MasterCard buying VocaLink?

When you take into account that 90 per cent of salaries, over 70 percent of household utility bills and almost all UK state benefits are paid through the VocaLink managed UK payments infrastructure, it is understandable why some commentators within the UK payments landscape are a little concerned.

There is a degree of scepticism amongst payment industry experts, in particular payment software providers that single ownership of the UK’s payments systems could lead to an adverse impact on the country’s payments market – a direct contradiction to the problems PSR believes will be alleviated from a change in ownership.

Some of the concerns being raised and debated:

Pricing - Implications to connectivity and transactional volume usage fees

In the wake of the landmark £68.5 million (plus interest) Sainsbury’s competition damages case and already facing a possible lawsuit for allegedly imposing illegal card charges onto UK customers, MasterCard does not have an upright reputation when it comes to pricing.

So how will giving a monopolistic position to an organisation currently being sued for price fixing, give us any comfort that we won’t be ripped off with sky high charges?

One of the major issues raised by payment software providers is that they envisage an increase in transactional volume usage fees for end users and a potential increase in direct connectivity costs.  Though prices have increased over the years, the rate of increase has been steady. The fear now is that MasterCard could turn that model on its head, if the pricing structure itself is left unregulated.

Competition – Could we be saying "Farewell, farväl, การอำลา" to Faster Payments?

Given that MasterCard will see its core product threatened by the emerging immediate payments revolution and PSD2, is it a good idea to sell off the Faster Payments central infrastructure to an organisation that has vested interest in stifling competition for one of its core products – thus killing the nascent Real-Time Faster Payments New Access Model proposition?

Surely, by selling Faster Payments as part of this deal, we are throwing away one of the most innovative payment solutions to have come out of the UK Payments Industry in recent times.

On an additional note, how will this affect immediate payments infrastructure in Singapore, Sweden, Thailand and the United States? Are payment industry experts not worried in those countries?

Market power – How can single ownership boost competition and open industry?

Whilst you could argue that the consortium of banks which currently own VocaLink have sat idle for far too long at least we were assured a variety of differing and competing interests at the top table, which in effect ensured that no one view dominated. This has ensured that whilst there has not been innovation, there at least has not been monopolistic practices. Now we’ll have one player with a controlling interest over the entire infrastructure. How is this good for the industry?

ALSO – Given that they backed away from giving one corporation too much sway over a small part of power generation at Hinckley C, what does the UK Government have to say about this deal? How on earth can they agree to sell the entire UK payments infrastructure wholesale to one company?

Philip Hammond’s response to the deal showed a total lack of understanding of the implications of it and instead is more aimed at limiting the damage of Brexit (but don’t get me started on that! ),: “MasterCard’s decision to buy VocaLink shows that Britain remains an attractive destination for international investors. Britain is and continues to be an open and globally facing country in which to do business.” ref: MasterCard bags payment processor Vocalink for £700m via Financial Times

There is little doubt that greater competition is needed to help drive innovation in UK payment infrastructure. However, before the whole UK Payments Infrastructure is sold, there needs to be some reassurances that whoever acquires VocaLink – be it MasterCard or any other payments industry behemoth –will not unduly exploit their inherent position of near single-ownership.

Innovation –  Protection of UK Payments Infrastructure

The PSRs stance that the 18 banks which own VocaLink are somehow holding back innovation makes little sense, especially when you consider that UK Payments Infrastructure is seen as the market leader in innovation.

While the banks individually may have been slow in bringing forth innovation within their own business compounds, VocaLink as a whole have always acted in the best interest of the protection of the UK payments infrastructure – after all, each banks end customer is taking advantage of the payments service.

With MasterCard, there would be no direct correlation or relationship with the end customer. As the sole provider of payment processing infrastructure, they would have nothing to lose and everything to gain if they wanted to make significant changes to a system that is already seen as world leading – Is that something we are willing to accept?

With VocaLink, at least we were seeing good moves to drive innovation and wider engagement, with Faster Payments New Access Model just one of the more recent examples. Could a big shop like MasterCard deliver the same results – or are we handing them a licence to kill innovation in UK Payments?

C'est la vie

Before this multimillion-pound deal is allowed to proceed, the transaction is expected come under close scrutiny from UK & International merger authorities, regulators and a number of jurisdictions from whom anti-trust clearance will be required.

The Treasury should consider other models of ownership – why not simply open up ownership to all PSPs? Why is it being sold at all – Surely the issue of freeing up control of the infrastructure is separate from providing a return for VocaLink’s shareholders?

All I ask from those involved is to take these industry concerns and thoughts into deliberation when making their decision over the coming months. The outcome of this verdict is likely to affect the entire UK economy and every single business that relies on the presence of a stable UK Payments Infrastructure.

Payments industry experts, payment software providers and those responsible for processing business payments and collections are invited to comment and make suggestions on this blog post.

Will selling VocaLink to MasterCard kill innovation?
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Comments: (13)

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 15 August, 2016, 17:502 likes 2 likes

Mine was the lone voice in the comments section of MasterCard agrees £700m VocaLink acquisition. Nice to have some company now! What I find most intriguing is the glaring difference in take rate between MC and VL - 1% versus 0.003% respectively.

David Godfrey
David Godfrey - ACI Worldwide - Watford 16 August, 2016, 07:333 likes 3 likes

I have a different view. As we have separation of scheme ownership from technology and infrastructure provision, and it's the latter which VocaLink provide under contract to FPSL for example in the case of Faster Payments, this move does not see Faster Payments subject to any risk of becoming more expensive or that charging may become less transparent - after all, there is a contract in place governing this, and it's a matter for FPSL as the scheme body to set the fees charged by the scheme. Should Mastercard wish to change all if this, I imagine they have an opportunity to do so when the next tender for the provision of the scheme's technology and infrastructure is issued, and at the same time, other companies may also wish to bid to provide that infrastructure. In fact, now that VocaLink isn't bank owned, you might argue there is a better chance that another company may win that business, and equally that the fact that Mastercard owns VocaLink increases the likelihood that other competitors may wish to compete against them - I can think of at least two very well known organisations that I imagine will be having serious thoughts about doing just that.

 

Nick Collin
Nick Collin - Collin Consulting Ltd - London 17 August, 2016, 11:08Be the first to give this comment the thumbs up 0 likes

Anish - your piece is very well-argued and I agree that this is a highly significant development but my reaction is much more positive - see  MasterCard agrees £700m VocaLink acquisition (I commented too Ketharaman :-)).

I think David hits the nail on the head by pointing out that for any payments scheme there should be a separation between the technology or infrastructure provider and the branded business service.  As I understand it MasterCard would be acting solely as the infrastructure provider in this case - we're not talking about MasterCard-branded Faster Payments are we?  Also, I think we need to look at this as a global rather than just a UK development.  From this perspective MasterCard, as an infrastructure provider, already operates in a highly efficient marketplace characterised by intense competition amongst a handful of big transaction processing firms such as First Data, Equens, Visa of course, TSYS, Elavon, SIA-SSB, PBS, Six and so on, as well as Vocalink and MasterCard itself.  Hardly a monopoly!

Ketharaman - you're right to draw attention to pricing, but firstly, the ad valorum charges of 1%+ are what MasterCard, or more precisely MasterCard banks as the branded business service providers, charge for card payments - I believe Mastercard transaction processing rates are much lower and are transaction based rather than ad valorum.  Secondly, I've always thought that UK banks were missing a trick by underpricing BACS and Faster Payments - in effect giving it away for free!

So going back to David's point, I think it's up to FPSL and the UK banking community to make sure they develop BACS and Faster Payments into innovative and fairly priced payment schemes and if FPSL feels that MasterCard is the best infrastructure provider to meet this goal then so be it.  As David points out, they can always go out to tender again at a later date.

 

A Finextra member
A Finextra member 17 August, 2016, 16:32Be the first to give this comment the thumbs up 0 likes

I agree with the points raised in this article. I think the passing of this acquisition would be bad news for merchants and consumers, who have already felt the impact (i.e. higher prices) of concentration in other markets that MasterCard dominates. I’m concerned with the stance the PSR has taken but there’s still an opportunity for competition authorities to intervene.

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 17 August, 2016, 17:51Be the first to give this comment the thumbs up 0 likes

@NickCollin: Oh, my apologies, I do recollect that you'd commented! Actually, I'd sort of assumed a total MDF / MSC of around 2% but I agree with you that MC's take rate out of that will be closer to 0.5% rather than 1%. But 0.5% is also two orders of magnitude greater than VL's take rate of 0.003%! For the sake of innovation etc., I hope MC finds a way to raise the take rate on VL's offerings instead of shutting them down and moving everything to its native card based offerings which would prove much costlier for merchants. 

David Godfrey
David Godfrey - ACI Worldwide - Watford 17 August, 2016, 17:56Be the first to give this comment the thumbs up 0 likes

@Ketharaman - how could MC "shut down" services that VL are involved in? FPSL run Faster Payments, and there is similarly a scheme body for BACS. VL are simply the technology and infrastructure provider, they have no control over the strategy or running of Faster Payments, or G3/FAST in Singapore, or BACS, etc. MC are in a very different position in terms of their "scheme" and hence the take rates reflect the role played.

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 17 August, 2016, 19:01Be the first to give this comment the thumbs up 0 likes

@DavidGodrey:

My comments here, and on the previous post titled MasterCard agrees £700m VocaLink acquisition are based on the following passage in the previous post: 

"The London-based group operates BACS, the ACH enabling direct credit and direct debit payments between bank accounts, as well as the Faster Payments scheme".

If the ownership of BACS and FPS is as you describe, then the above passage is an exaggerated account of VL's role in BACS and FPS and I'd agree that MC can't shut down VL's offerings.

David Godfrey
David Godfrey - ACI Worldwide - Watford 17 August, 2016, 19:151 like 1 like

@Ketharaman - absolutely, the payment schemes in the UK are divorced from the operator of the technology and infrastructure; this has been an ongoing regulatory theme for several years now.

In the case of Faster Payments, the scheme body is FPSL, who are completely separate and independent of VocaLink or MasterCard. VL have a contract to provide and operate the technology that powers UK Faster Payments, but the management of the scheme is down to FPSL, who will put the operation of the scheme infrastructure out to tender every few years.

I would argue that now that VL is not owned by the banks, it provides for an even more level playing field when it comes to choosing who should be awarded the contract to operate the scheme infrastructure. Now that VL is not owned by the banks, who essentially "own" the scheme company FPSL, there cannot be any suggestion that VL have an unfair advantage.

Equally if you look at BACS, you will see there is a similar arrangement. Had this not been the case, as it was until around 2004, I doubt it would have been anywhere near as easy for the MC acquisition of VL to have proceeded.

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 17 August, 2016, 19:33Be the first to give this comment the thumbs up 0 likes

@DavidGodrey:

TY for the clarification. 

If VL is only the supplier of the FPS and BACS technologies,

  1. the line "the company processed over 11 billion transactions with a value of £6 trillion, generating revenues of £182 million" in the previous post is somewhat misleading, and
  2. the term "take rate" is itself meaningless in the context of VL or, at least, not comparable with the much higher take rate of MC, which actually owns a card scheme, not just the underlying technology. 

Thanks again, far more than a clarification, this has been a revelation!

David Godfrey
David Godfrey - ACI Worldwide - Watford 17 August, 2016, 19:42Be the first to give this comment the thumbs up 0 likes

@Ketheraman - you could argue they do process the transactions - they are not simply the technology supplier but the infrastructure provider, e.g. they keep the lights on, they manage the data centre, run the help desks etc but the bank's and other scheme members relationship is with the scheme body, e.g. FPSL, not VL, e.g. VL cannot dictate who joins the scheme and on what basis they join, nor can anyone other than the scheme body decide how the scheme will evolve in terms of standards and services available.

As you say, in the context of MC operating their scheme, their take rate is much higher due to the wider scope of their offering.

Nick Collin
Nick Collin - Collin Consulting Ltd - London 17 August, 2016, 20:09Be the first to give this comment the thumbs up 0 likes

@Ketharaman:  I think there's still confusion over the so-called "take rate" - a term I've never come across before.

Just to be clear, MasterCard, like Visa and as far as I know like most transaction processing companies, charges its bank customers a transaction processing fee for every transaction processed which is normally a fixed amount per transaction and is typically a few fractions of a cent.  This is what should be compared with the Vocalink fee which from your figures I calculate to be 0.0165p per transaction (£182million/11billion).  I'd be surprised if the transaction processing fee rates were markedly different.

In addition, MasterCard charges its bank customers an assessment fee for the use of its brand - with similar sorts of rates.  But this should be compared with whatever is charged by FPSL, not Vocalink.

As a completely separate issue, MasterCard's bank customers charge their merchant customers a merchant service charge which is typically an ad valorum charge of 1-3%.  I think this is what you're referring to when you talk about "the much higher take rate of MC".  In fact MasterCard gets none of this merchant service charge and none of the interchange charge which contributes to it.

This is a complex and hugely misunderstood area so I'm not surprised you're confused :-).

 

 

This is a 

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 17 August, 2016, 20:50Be the first to give this comment the thumbs up 0 likes

@NickCollin:

I too learned the term "take rate" very recently, but it has been around for a while, judging from this BI article titled "As PayPal's Business Expands, Its Take Rate Is Collapsing" published in Jan. 2015. As stated in this article, take rate is the revenue the company generates as a percentage of total payment volume.

AFAIK, and as per another BI article (http://www.businessinsider.com/interchange-fees-the-billion-dollar-fight-for-control-of-your-wallet-2011-3?IR=T), card networks like MC earn an ad valorem fee on every transaction and it is a part of interchange. The fixed fee transaction fee you're referring to is probably in addition to this.

Bob Lyddon
Bob Lyddon - Lyddon Consulting Services - Thames Ditton 21 August, 2016, 12:261 like 1 like

Dear Anish - from the authorities' perspective I think this deal is meant to go hand-in-hand with the scheme companies going regularly to tender on the provision of infrastructure, such that players like STET and Equens could bid against Vocalink on the provision behind LINK, FPS and BACS, and presumably Vocalink could try to bid for Cheque&Credit and even CHAPS, but then at the same time the PSF's Payments Strategy anticipates that (i) the BACS, FPS and Cheque&Credit scheme companies will merge - so will they merge their schemes in some way and reduce the number of contracts to be tendered for? and (ii) there should be a single Simplified Payments Platform that sounds very much like Distributed Ledger, and the "schemes" would be "overlay services" on top of this SPP, so there would not necessarily be a central infrastructure at all.

On that basis Mastercard may have bought a cash cow, or a sunset business, who knows. 

Anish Kapoor

Anish Kapoor

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AccessPay

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