6.11 The OFT notes that, at present, competition in this sector is very limited for the following reasons:
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• there is limited overlap in the activities of the payment systems
• there is limited competition between payment cards and payment systems
• there is limited access for payment businesses that wish to develop new ways of using payment systems, and
• further development to some payment systems would be needed to allow for effective competition.
6.12 These issues are examined below.
Limited overlap in the activities of recognised payment systems
6.13 The recognised payment systems were designed to meet different customer needs and, due to the range of payments that business and consumers need to be able to make, are complementary in nature rather than competitive. There are few transactions where a choice of payment system is available.28
6.14 The OFT is aware that there are inherent similarities in the
infrastructure of the electronic payment systems – in that they all involve interconnections between banks to make and receive payments. This creates the possibility of the rules governing the
payments made in these systems being amended, so that certain types of transaction could be made through more than one payment system. For example, the ability to make same day transfers between bank accounts using either faster payments or the Link infrastructure.
Consequently, banks need to be
members of, or have access to all these systems to process the range of payments that customers wish to make.
6.15 This could generate the scope for choice and competition over how to make certain types of payment. It may also lead to demand, either from banks and/or customers for the use of one payment system in preference to another, dependent on the speed, security and price of the system and its underlying infrastructure.29
28 One exception is direct transfers, although even here, the size limits on faster payments means that the scope
for overlap in practice is limited.
29 As noted above, while bank customers do not typically face direct costs of payments, banks do face these
42 OFT1498 6.16 It is also possible that this choice may lead to changes in the levels of
use of particular payment systems and, the potential for
rationalisation, if some systems have more favourable characteristics than others for a wide range of payment types. This may lead to a more efficient and possibly lower cost outcome for banks as well as customers.
Limited competition between payment cards and recognised payment systems
6.17 The OFT has gathered views from a number of payment businesses that wish to develop value-added payment services for consumers. These would be based on recognised payment systems and designed to provide fast payments easily so as to compete with payment cards. To do this, payment businesses are keen to establish easier and
broader access to the existing payment systems and to build new consumer interfaces with electronic payment systems so that
consumers will be able to make payments more easily in an increasing range of ways, without using payment cards.
6.18 In addition, the OFT is aware of some developments in other
countries, where credit and debit cards are used to a lesser extent and some payment systems are used more extensively in making a range of payments. Therefore, while the OFT does not discount the need to ensure the security of new payment services, these problems do not appear to be insurmountable.
6.19 The OFT also notes that some of the UK payment card networks are able to process their own transactions without reliance on a
recognised payment system. As such, these payment card networks are in effect vertically integrated and self-sufficient payment systems in their own right. In theory therefore, there is scope for payment card networks to compete with other payment systems.
6.20 However, at present there are limited incentives for large banks to generate competition between payment systems and payment card networks. While payment systems may represent a cost to retail banks, the margins earned on credit and debit cards, through the fees and income earned, (as explained in Chapter 7) mean that large banks have little incentive to generate competition between payment
43 OFT1498 payment cards.
6.21 The OFT can see benefits from developing the electronic payment systems to provide an alternative to payment cards. A large part of these benefits could come through innovations that non-bank payment businesses could bring to the market in competition with banking services. In this regard, there is a strong case for treating payment systems similarly to essential facilities and allowing wide-ranging access to these not only from banks, but other payment businesses. If this were combined with developments to some of the functionality of the existing payment systems, for example a pull-based system for faster payments (similar to the direct debit system that operates using BACS), new entrants may be able to develop ways for consumers to have access to this for instant online and mobile payments. This could be one way in which to introduce competition between payment cards and payment systems.
OFT recommendations
6.22 The OFT recommends that, in addition to its proposed regulatory objectives set out in its consultation, HMT should ensure that the regulator of payment systems has sufficient powers to allow for the development of competition as set out below:
• First, to relax rules that determine the scope of payments that can be processed by recognised electronic payment systems to give at least some of these systems broader scope to process a wider variety of payments, so that more than one system is capable of processing certain payment types.
− This would create the scope for choice and competition between payment systems which could drive innovation and efficiency in the underlying payment systems themselves.
− The OFT expects that competition between payment systems may lead, through a process of considering the value of the various attributes of the different payment systems, to the
possibility of rationalisation of payment systems and potentially a reduction in the cost and an increase in the efficiency of this sector which could be passed on to retail banks and their customers.
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• Second, to develop the infrastructure of the existing electronic payment systems to allow for broader access to the systems, giving new providers access to the underlying payment systems.
− For example, this might include either a pull-based payment system30 for faster payments, or a request for push payment system.31
− The OFT notes that these innovations could facilitate the development of new payment businesses, in competition with traditional banks, offering services to customers that make the use of recognised payment systems easier and available in more environments, as well as between these new payment
businesses and payment card networks. With access to payment systems on fair, reasonable and non-discriminatory terms, these new payment businesses would have clear incentives to develop competition in payments that large banks would not have an incentive to develop. In addition, this access may also generate valuable innovations for consumers and businesses.
• Third, generating competition in the ways described above may require changes to underlying payment systems' infrastructure to facilitate changes in the scope of, and access to, existing systems. The OFT therefore recommends that HMT should consider whether the proposed legislation should extend the licensing regime to encompass the providers of infrastructure of the existing
recognised payment systems. If accepted, this would ensure that the regulator has powers to compel changes across the payment systems sector as a whole.
Non-bank access to clearing systems
6.23 The recommendations above could allow for access to payment systems for new payment businesses to build new consumer interfaces and allow greater competition. In addition, broadening
30 A pull-based payment system is one where, upon signing an agreement, customers give businesses permission
to take money from their account without further authorisation and at certain times. Many subscriptions and similar transactions are pull-based systems. For example, Direct Debit, which operates through the Bacs settlement process.
31 A request for push system would involve retailers triggering consumers to make a payment to a retailer through
sending information through a payment system. This may be in the form of a message or invoice, but would ensure the payment could be made to the correct retailer for the correct amount.
45 OFT1498 access to payment systems may have other benefits. For example,
non-bank organisations that process large transactions or large volumes of transactions through the existing payment systems may wish to become direct members of payment systems. For example, large employers may wish to join the Bacs system if they pay staff salaries and other payments through Bacs. The OFT considers that a future regulator should consider the case for allowing non-bank businesses to join payment systems directly.