Published on 28 October 2019

“It is a great pleasure to make this address to you as the Managing Director designate of the UK’s Payment Systems Regulator.

I would like simply to outline the nine focus areas for the first year of my tenure in this role.

With your kind permission I will dispense with any flannel about the background and any claims to great strides made over the last five years, because you are all professionals. So far we got next-to-nowhere. In fact, the main movement was sideways and has created one extremely powerful supplier in the supply chain, with the current direction threatening to strengthen that supplier even further, and to enable its closest rival to gain more market power.

Several steps are needed to preclude that, and I will come on to them. We will start with the steps needed to put an end to the worst failings of the suppliers of UK payments – enabling Authorised Push Payment Fraud, and then failing to decisively combat it.

So, as the first of the nine priority areas, there will be an exercise carried out, starting as from the live date of the Contingent Reimbursement Model code and ending a year thereafter, to measure whether victims of Authorised Push Payment Fraud experienced the same outcome under the Code as they would have done if all if the following conditions had been fulfilled:

• The beneficiary name field in the payment screen through which they ordered the payment had allowed for up to 50 characters and not just 18;
• The payer’s bank, having demanded the payee name as mandatory information for the payment order to be accepted, had chosen a payment channel for clearing and settlement that transported all 50 characters intact to the beneficiary bank;
• The beneficiary bank had checked the name in the payment against the name associated with the account identified by the Account Number and Sort Code.

We understand that banks may have financial reasons for not constructing a payment system to capture, carry and check the beneficiary name, but that should not prejudice the interests of end-users as it has done in the past. Should banks be able to prove that the Code protects end-users to the same extent in both amount and timing as if the banks did do all of this, then no further action will be needed. If there is a shortfall of protection, the banks will fill it with money, and continue to fill it, until the live date of New Payments Architecture, or NPA, as per our third point below. It will be up to them. If they regard it as cheaper to pay out compensation for lost amounts and for delay interest than to resolve the problem at source in the meantime, so be it. They can explain that away to their shareholders.

You will note that we used the term “end-users”, embracing payers of any type, and not just those who fall definitionally within the coverage of the Code.

Second, we will ensure postponement of the implementation of Confirmation of Payee pending the outcome of the exercise described above, since we are not satisfied that Confirmation of Payee – only offered at the setting-up or altering of a payment template – is the correct resolution of the Authorised Push Payment Fraud problem. We also want to ensure that a payer’s partial usage or non-usage of this service is not used by banks as a reason to refuse to pay out under the Code.

Third, we want to ensure, regarding NPA, that the resolution of Authorised Push Payment Fraud is fully baked into it, such that the Contingent Reimbursement Model code and Confirmation of Payee (if this ever needs to go live) are superseded by it. NPA must deliver the basics as per our point 1 above. If the payer’s bank accepts a payment order on that basis and then pays someone else, the payment the bank made was unauthorised and the bank must make the payer’s account good, as is required by the 2017 Payment Services Regulations. Their recourse is to the beneficiary bank, if this bank failed to make the correct checks, but in all cases the end-user must be made whole.

There is no point in undergoing the disruption and effort of NPA and of the adoption of ISO20022 XML if these things are not achieved.

Fourth, we want to see “push payments” divorced from “pull payments” in NPA. What now count as book transfers, Faster Payments and BACS credits are push payments and can continue as such and be handled by NPA as currently proposed but with the name-check fully baked in. However, characterising “pull payments” such as cheques and direct debits as “overlay services” on NPA – which will clear and settle as “push payments” – is an unproven concept. At risk are the important protections that “pull payments” offer:

• The uncontested right of reclaim for 42 days for the debtor under direct debit;
• The risk is on the bank if they allow a cheque to be credited to an account named differently from what the payer has entered on the payee line in a cheque: under an Authorised Pull Payment Fraud – i.e. an attempted cheque conversion – the risk is the bank’s, not the payer’s.

So with “pull payments”, NPA needs to go back to the drawing board, ensuring that card payments – including contactless and ATM – are part of its scope. This will help when it comes to ensuring compliance with the Interchange Fee Regulation once our point 7 below has been remedied: one of NPA Debit’s functions must be to ensure that the merchant receives their sale amount diminished only by the fees stated in the Interchange Fee Regulation. There will not be one NPA for all retail payments, but an NPA Credit for “push payments” and an NPA Debit for “pull payments”. This will ensure that there is competition for volumes between different payment services and between the NPAs, and that no single supplier can get a lock on UK payments by being a station on a major number UK payment journeys. It goes without saying that the supplier for one NPA will be disbarred from bidding for the other one. We will ensure an exercise takes place prior to the award of either NPA to plot the stations on a representative sample of payment journeys and ensure that no suppliers are stations on so many of them as to have a lock on the market. It could be the case that a supplier, in order to supply one of the NPAs, would have to withdraw from one or more other stations.

This brings us neatly on to our fifth point of focus, namely to reduce the term of the renewal of the contract for Vocalink to provide the switching and settlement services for LINK. The supposedly transparent, but actually confidential, bid process that resulted in the re-award to Vocalink through to the early 2030s should not have proceeded while the “Access to Cash Review” was in process. Whatever functional specification bidders proposed to deliver against had been compiled before the “Access to Cash Review” had been completed and so it cannot have been tested to ensure that the recommendations of the review would be accommodated. The contract term for the renewal must therefore be reduced to 4 years, after which the switching and settlement services for LINK will form part of NPA Debit.

Sixth, it is not in the interests of UK society as a whole that too much power be concentrated into one or two sets of hands. The PSR was set up to reduce the concentration of market power, and yet we have Vocalink now owned by a regulated payment scheme that has no separation of scheme and infrastructure. As a result we will bring to an end the dispensations whereby Mastercard and Visa have no separation of scheme from infrastructure. Within two years they must be operating on the same model as the other regulated payment systems.

Seventh, we are concerned at the trend for end-users to have promoted to them payment products where, should the end-user make a purchase from a merchant, the merchant receives only in the high-90s% of the sale value. Of course, if cash and cheques have to be banked there is going to be a charge to be paid by the merchant, and merchants can expect to pay for services rendered by their acquirer. But this is not the same as merchants experiencing deductions over which they have no control or transparency. Supposed trends – which are as much bank-induced as consumer-driven – such as from Cash to Debit Card, and to Contactless, increase the proportion of transactions involving deductions-from-face-value suffered by merchants, and deliver revenues that are opaque in themselves, and which are divided opaquely between card issuers, card brands, acquirers and whatever other intermediaries act as rentiers along the payment journey. For this reason we aim to ensure that the spirit and letter of the Interchange Fee Regulation are adhered to: a merchant when paid by debit card will receive 99.8% of the sale value, and 99.7% in the case of a credit card. “Interchange” will be considered widely as meaning the entire deduction-from-face, and not in the narrow sense as just one of the many fee components that can be imposed on merchants. These deductions will be managed within NPA Debit as from its live date.

Eighth, we are unconvinced that the difficulties in access to cash are caused by changes in end-user habits to the degree claimed by the major card issuers i.e. the major banks. These major banks have thinned out their physical branch networks, and with them their ATM estates, at significant benefit to themselves in terms of cost reduction, but at meaningful detriment to the end-users they claim to serve. These banks remain the principal card issuers, and so their own policies have put them into the position of a net payer of the interchange fee into LINK for ATM withdrawals, compared to the more balanced position they had before. De-banking created, on the face of it, an opportunity for non-banks to acquire and run ATM estates, but these replacement suppliers live or die by the LINK interchange fee. Then the same banks that had reduced their ATM estates and benefitted from major cost reductions decided that they did not want to pay their own version of “cashback”: the LINK ATM interchange fee at a level that allowed the replacement suppliers to live, and which the major card issuers should be regarding as the quid pro quo for their cost reduction programmes. The predecessor PSR regime wrongly bowed to this pressure and agreed that the LINK ATM interchange could be reduced but more slowly, and that there would be miscellaneous “work” and “studies” carried out. The main result that we now see, in the form of UK Finance’s “Community Access to Cash” proposal, is that more retailers will be asked to offer cashback, further alleviating the major banks of risk and expense and enabling higher revenues if the “cashback” transaction is handled as a normal Point-of-Sale transaction. The retailers involved will not be the major out-of-town chains, but smaller retailers in the periphery of larger towns and cities, or in remote areas. If these retailers are able to insure this business, it will be at high premia for reasons we all know but dare not say. It is manifestly unfair to expect such retailers to take this degree of risk and indulge in banking business: banks should do that. But it isn’t even that good: the card issuer pays the LINK interchange fee under an ATM withdrawal, but the merchant pays all the deductions under a customary Point-of-Sale transaction model, and a proportion of these go to the card issuer. The “Community Access to Cash” proposal on the face of it inflates the transaction amount by the “cashback” and directs the payment through a business model in which a substantial deduction – far more than 0.2% for debit card and 0.3% for credit card –  is shared around the card issuer, the card brand and other suppliers. That was a long story. Here is the short one: the LINK interchange will go up, not down, and to 30p per transaction, 5p higher than it was before LINK proposed to reduce it. This will achieve two effects. Firstly, to replace the earnings that independent ATM estates should have had in the case that the reduction had been blocked by the PSR, as it should have been. Secondly, it will provide a breathing space within which there can be free access to cash and balances at every ATM, while plans are drawn up to incorporate LINK into NPA Debit.

Ninth and finally, the PSR was set up to foster new competitors. The Faster Payments New Access model and the efforts of other regulated payment systems to enable new entrants have delivered a result that is at the very lowest end of expectations. NPA may or may not change that, and is anyway several years away. Article 105 of the 2017 Payment Services Regulations requires that all credit institutions make available bank accounts and payment services to Payment Service Providers – a broad term encompassing all the types of new competitor. This access must be on a proportionate, objective and non-discriminatory basis. This is not happening and we will take immediate steps to ensure it does happen.

So I hope I have not detained you too long. The PSR was established to alter the balance of power in the UK payments business from major suppliers to end-users. Unfortunately so far its impact was rather to move market power to a different level of supplier in the supply chain. That will now change.

Thank you for your attention.”