UK payments system 'overhaul' to spur banking competition and innovation

The government has announced a major change to the UK payments system regulation in a bid to increase competition and innovation in the banking sector.


The government has announced a major change to the UK payments system regulation in a bid to increase competition and innovation in the banking sector.

Under the new proposals, regulation of the UK payments systems, will be placed under the control of an independent body reporting to the financial sector watchdog the Financial Conduct Authority (FCA). 

The principle aim of the change is to create more competition between banks, and open up the market for new entrants.  Currently the payments, which supported 7.5 billion non-cash transactions last year through services such as Bacs and Faster Payments, is controlled by the UK Payments Council, a body backed by the major incumbent UK banks and infrastructure provider Vocalink.

The creation of a new regulator seeks to address concerns raised in the past that smaller banking players have faced barriers upon entering the market due to costs for using central payments infrastructure.  For example new entrants are forced to pay a fee each time a transaction was made using the Faster Payments system, introduced to reduce the time taken to process transactions down from three days to one.

The new regulator will be launched in early 2015.

Financial Secretary to the Treasury, Sajid Javid said that the changes will create a level playing field and spur innovation in the banking sector.

"The government is determined to open up competition in the banking sector so that it serves the needs of the British economy, businesses and customers.

"An open and transparent payments system is crucial to give new players freedom to challenge the big banks without unfair barriers.

"The reforms we are announcing today will encourage innovation, ensuring that real benefits are passed onto each and every user of financial services."

Banking technology innovation

Although there are already examples of innovative services in the market, such as Barclays' Pingit app and an industry wide mobile payments initiative being launched by the Payments Council in 2014, there is concern that the use of such services - which rely on the Faster Payments infrastructure - are not open to new entrants due to the cost involved.  

The Treasury claims that by bringing the service under the control of the FCA, there is potential for "real improvements" to how people use the payments system.  For example, the new regulator would be able to replicate the ability to pay to friends accounts via text message, an approach which has gained ground in other countries such as Sweden.

The Treasury also cited technology used in the Netherlands to allow payments to be made online without needing to enter card or account details.

 The new regulator will also be able to prevent unpopular decisions made by the Payments Council, such as scrapping cheque payments, a move which was seen at the time to serve the banks more than the customers.

Account portability

As part of the plans, the government will also ask the regulator to look at the "costs and benefits" of introducing account portability, which would make it easier to switch account, creating individual account codes that could be linked to a proxy number such as a mobile phone number.

Following an investigation by the Independent Banking Commission this had been deemed too expensive for banks, with costs potentially running into the billions of pounds to set up entirely new IT infrastructure. A seven day account switching system, costing the industry around £750 million was launched instead in September.  

Calls for 'minimal' regulatory intervention

Payments Council chief executive Adrian Kamellard welcomed the change to the payments system operation, but highlighted that innovations could be made with 'minimal' intervention on the regulators part.

"We believe we have proved that innovation and beneficial change can be achieved through collaboration and with minimal regulation," Kamellard said.

"You need look no further than our new account switching service which involved banks big and small, and payments schemes working together, our Faster Payments Service which other countries are now emulating, or before this the rollout of global chip and PIN technology in which the UK led the world."

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