Payments used to be a banking business. Now it is not, and the interests of the banks and the payments industry are no longer wholly coincident. The banks don’t own Visa and MasterCard any more, kids using Venmo neither know nor care whether it is a bank or not and there are plenty of non-bank players out there who want to have (and are going to get) access to the payments infrastructure. It seems to me that regulatory frameworks such as PSD2 cut across institutional boundaries: they are not “bank things” and they need a response from a wider constituency. The general thrust of regulation is to separate payments from banking further — separating the systemically risky from the systemically non-risky — and to drive competition in the provision of payment services. I’m sure we all agree that this is a good thing.
Back in 1999, the Federal Reserve Bank of New York Economic Policy Review said that “Economic theory on the operations of commercial banks cannot, by itself, explain why they provide payment services on such a large scale”. Quite.
I wrote that a decade ago, drawing on work from a decade before. This is hardly a radical or futuristic position. The provision of payment services and the provision of banking services are different ecological niches in the modern economy and they need to be filled by different and better-adapted organisms. This, it seems to me, further implies that there should be different consumer organisations, trade bodies and lobby groups in each of these niches as well. It would be a logical, sound and practical structure for the UK (for example) to have some kind of an Association for Payment Institutions (UKAPI) and some kind of an Association for Credit Institutions (UKACI). Well… that’s not what is happening. Since the start of this month, the UK has had a new trade association for the financial services industry. It’s called “UK Finance”.
Stephen Jones has been appointed as the chief executive of the new banking group, which will merge the British Bankers’ Association, Council of Mortgage Lenders, Payments UK, Asset Based Finance Association, UK Cards Association and Financial Fraud Action UK.
Just as a recap, the old trade associations were:
The British bankers Association which had 200 member banks that operate in 180 jurisdictions worldwide and whose activities span both retail and wholesale banking and capital markets;
The Council of Mortgage Lenders which represented 133 UK mortgage lenders accounting for almost all of the UK’s residential lending;
Payments UK which represented the U.K.’s payment industry;
UK Cards Association which had 32 members who accounted for the vast majority of cards issued in the UK;
The asset-based finance association which represented around 95% of the companies from the UK and Ireland providing factoring invoice discounting and asset-based lending (which will join in a second phase).
So what was the rationale for this daft rearrangement that will inevitably have to be reversed within a few years? Well, as I understand it from talking to a variety of different people in the industry is that first of all there was duplication of effort in the different trade bodies and hence money wasted and secondly that it was thought a unified trade association might have more influence.
As to the first point, I’m sure that this was true, so some kind of merger or rearrangement made sense (but not this one).
As to the second, I have my doubts and while reading through Statutory Instrument 2017 no. 752 (the transcription of the Second Payment Services Directive into UK law), those doubts crystallised. This is because of the new organisations that will come into the space as PSPs of one form or another and will not only be allowed access to bank accounts via open banking APIs. Note that new organisations will further be allowed access to the payments infrastructure. I expect to see an interesting variety of plays in this space. I suggest you take a look at the excellent Emerging Payments Association report from that year which argued that, under the appropriate licence conditions, non-banks should be allowed access to instant payments infrastructure through the use of a new kind of limited pre-funded settlement account at the Bank of England. This is now happening.
The Bank of England is announcing today that a new generation of non-bank payment service providers is now eligible to apply for a settlement account in the Bank’s RTGS system.
The Bank’s decision will open up competition in an area previously the preserve of the main banks. It will give non-bank PSPs direct access to full and final settlement in central bank money through systems including Faster Payments, BACS, CHAPS and the (under construction) digital cheque imaging system. This must, and will, lead to a shake up in the payments sector as the new players (with new business models) come into the space. Just to pick one obvious example: suppose Amazon bring Amazon Reload to the UK, but with direct access to settlement so that you can send money between bank accounts and your Amazon Prime account? That could make Amazon Pay a lot of fun. But why would it be represented through the same trade association as the people who give you mortgages? How are their interests coincident? Further, there are important benefits that come from having more specialised trade associations [see Patel, K. “Trading places”. Financial World. London (2016)]. One of the main functions of these associations is to scrutinise new rules and regulations (the nutty ban on credit card surcharging, to give a current example) and such bodies have a closer connection to and deeper understanding of the markets they represent. Now that there is going to be a New Payment Architecture (NPA) in the UK, there should be a New Payment Trade Association to go with it.
The consolidation of the three main UK retail Payment System Operators: Bacs Payment Schemes Limited (BPSL), Cheque and Credit Clearing Company Limited (C&CCCL) and Faster Payments Scheme Limited (FPSL). A PSO Delivery Group (PSO DG) was established by the Bank of England (BoE) and the Payment Systems Regulator (PSR) to plan the consolidation of the three PSOs into a single entity – the New Payment System Operator (NPSO).
There are a lot of great people at UK Finance but they have been put into a decidedly suboptimal structure, especially at a time when that just-released new national payments strategy in the UK is going to bring together the payment rails under the single body. In my opinion, there is no logic to the jumbling together of payments and other banking activities in a single trade association. I give it a couple of years tops before the non-bank complaints result in a new payments industry trade association. I suggest we call it the Association of Payment and Cashless Services (APACS) and we can invite the by-then former Prime Minister to be the Honorary Chair. She can use her old business cards.