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UK’s New Payments Architecture now to be a bungalow

What started out as a Temple of Solomon to revolutionise the UK’s payment systems will now be reduced to a more manageable bungalow-sized development. Multiple layers collapse down to one.

The UK's Payment Systems Regulator (PSR), who started this show rolling in 2015 by creating the Payment Strategy Forum, has just announced that another of its creations – Pay.UK – “should phase the development of the UK’s New Payments Architecture (NPA) by narrowing the scope of the NPA central infrastructure services (CIS) contract”.

Cheque&Credit now seem to have disappeared from the scope, just like CHAPS, LINK, Visa and Mastercard, so that the first roll-out of the NPA central infrastructure will be a 2-bed bungalow to house BACS and Faster Payments, and not the extensive country estate originally envisaged under the PSR’s own design project: the NPA Blueprint was delivered on tablets of stone to Pay.UK at the end of 2017 as an “implementable” plan, supposedly.

Pay.UK – the outcome of a revolutionary PSR-inspired move to re-unify the same payment systems that had been atomized into their own scheme companies in the mid-2000s – has worked diligently since its creation in 2017 to set up itself and its programme management units, advisory boards, governance structure and NPA re-design and tendering processes.

The PSR has also now dictated that “Pay.UK must secure this (CIS) contract through a competitive tender” and not through a “direct award”, code for not just rolling over the current contracts with Mastercard. Mastercard runs the infrastructure for BACS, Faster Payments and LINK now, through its subsidiary Vocalink.

Another of the PSR’s masterstrokes was to dictate that the major UK banks should divest themselves of Vocalink, because of the market dominance of those banks over UK payments. Under the PSR’s intended “layered market model” there should be several separate marketplaces for layers like infrastructure provision, payment scheme management, settlement, and provision of payment services to end-users. No one market actor should have a dominant market share of any one layer, and ideally each layer should contain its own set of market actors, competing with one another for the business of the actors in the layers above and below.

There should be no monoliths, either actual or substantive (meaning 5 or 6 major banks acting as a de facto monolith). This has backfired as well: UK payments now has an actual duolith in the shapes of Mastercard and Visa, who were already strongly positioned in more than one layer before the PSR was created and who have benefitted enormously from the move to online shopping during the pandemic, from the switch from cash to card, and from digitalisation in general.

Both Mastercard and Visa are themselves payment systems regulated by the PSR but were exempted from being compelled to layer their own business models by splitting off their scheme management from the provision of infrastructure. LINK was compelled to do this, but Mastercard and Visa were not.

Where do we go from here? Heaven knows. The PSR has made an enormous hash of the UK’s payment landscape. It started off by directly steering developments through the Payment Strategy Forum and its various Directions and Specific Directions, and now it attempts inexpertly to steer them through the organisations its initial steering created. What a mess! And there is no chance of going back to the status quo ante.

It would be funny if this fiasco did not represent a colossal systemic financial risk falling directly on UK consumers and businesses. There is one comfort for if it does go wrong and there aren't any credit transfers or direct debits to pay for the things money should be able to buy, though, because for everything else there's Mastercard and Visa.

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Comments: (2)

Jeremy Light
Jeremy Light - Fourdotzero - London 03 August, 2021, 11:37Be the first to give this comment the thumbs up 0 likes

The good news is that the Faster Payments system continues to go from strength to strength, in particular the real-time SIPs (single immediate payments) - up from 731m txns in 2015, the year the ill-fated Payment Strategy Forum started, to 2.3 bn SIPs txns in 2020. SIPs txns are up 27% already in the first six months of 2021 over the same period last year.

However, the biggest detriment to the UK is the lack of innovation that the PSR has as an objective. There has been virtually none since 2015, except for open APIs, although volumes are still very low.

As an indication of how UK payments is suffering, in India UPI was launched in 2016 opening up the real-time payments switch (similar to the one powering UK Faster Payments) with open payment initiation API access to third party apps. UPI has been a huge and rapid success, crossing one billion monthly transactions in October 2019 and three billion in July 2021.

The UK payments industry urgently needs to focus on unleashing innovation like this instead of spinning wheels endlessly on procurement and process.

Bob Lyddon
Bob Lyddon - Lyddon Consulting Services - Thames Ditton 03 August, 2021, 20:49Be the first to give this comment the thumbs up 0 likes

The PSR has bitten off on the same layered market model as SEPA, with all the separation of layers, ISO20022 XML and so on, without seeing through the impact of the annual upgrades of the SEPA schemes and the way in which the fields in ISO20022 XML are either reserved or susceptible to later filling wth mandatory contents.

The space for innovation is limited in both extent and time, because it means using fields in ISO20022 XML that are not already reserved, and running the risk that they become mandatorily reserved later on by an authority that has a reservation ticket for every field (like the EPC).

The idea that a private initiative could result in new fields altogether in ISO20022 is implausible, because the intent of the new fields would become public years before the new product was launched and the proposer loses their advantage: their innovative idea has become public property and they could easily see their idea being included in proposed upgrades to the SEPA rulebooks so that every bank has it.

The multilateral approval process at the ISO level and then the annual approval process for the SEPA schemes ensures no innovation both within the SEPA schemes and around them, if, by innovation, we mean services unique to one supplier with which the supplier competes to attract new customers.

This sits in opposition to the Euro Bankers Association "innovation" model where they have their members acts as a test bed for services that will soon become available to all in their 'Core&Basic' flavour, rather than being 'Value-Added'. This has been the fate of Request to Pay, ensuring that EBA members - the 70 biggest banks in Europe and all direct competitors of one another - all get a working but mediocre product to cram down on their customers.

This public/private development and 'innovation' model has been a failure, resulting in stagnation, but it has one thing in its favour as we found at IBOS (a collaboration aimed solely at delivering a value-added and pro-competitive service): it enables hundreds of people in organisations like SWIFT, Pay.UK, EBA, EPC etc. etc. to draw their pay and rations on the promise of their enabling Bank X to be able to transact Service Y with Banks 1-6,500, and not just with 27 partner banks in IBOS.

This El Dorado of reachability sits, however, in strict juxtaposition to time-to-market, service functionality, competition and innovation.

At some point it will be realised that this model (Co-opetition) beloved of regulators and legislators is a guaranteed failure unless it is genuinely pro-competitive in the sense a competition lawyer would understand it. But Co-opetition has been the name of the game since 2000 and its adherents are many and well-placed in the industry, and in regulatory and legislative bodies.

It would take quite a few banks to turn round and say to them that they are really not helping and they should sit in their allotted box and stop coming up with value propositions that fail to add value once they are delivered many years later.