PSR Interim Report: market review into the supply of indirect access to payment systems

In May 2015, the Payment Systems Regulator embarked on a review into the supply of indirect access to payment systems. Following a period of gathering evidence and information from stakeholders, the PSR has in March 2016 published a report setting out its interim findings and proposals.

Purpose of the review

The PSR’s review focuses on indirect access of payment services providers (PSPs) to the main interbank payment systems in the UK, namely, Bacs, CHAPS, Cheque and Credit and Faster Payments Service (FPS), which access allows those PSPs to transfer funds for their customers. The PSR believes that access to payment systems is a key driver for competition and innovation in the provision of payment services, and that this in turn enhances the services made available to customers of PSPs (i.e. consumers, businesses and charities).

In launching the review, the PSR’s aim was to look into whether competition is working well for PSPs, for instance, in terms of choice and their ability to switch from one indirect access provider (IAP) to another. The interim report closely follows the PSR’s report on direct access to payment systems and the governance of the operators of payment systems, published at the end of 2015, which we reported on in our last payment update. These reports demonstrate that access to, and competition within, the payment systems is a key focus for the PSR.

Interim findings: things are looking positive

In its report, the PSR concluded that work to open up access to payment systems is generating increasingly positive results. However, the PSR identified some concerns which can be broadly summarised as follows:

• choice: while the larger PSPs tend to have access to a good range to payment systems, smaller PSPs have more limited choice and, as a result, have less scope to negotiate on price;
• ability to switch: the limited choice available for some PSPs restricts their ability to switch providers if they are not satisfied with the service they are receiving; and
• service quality: concerns raised by large and medium agency PSPs (particularly banks and building societies) about the quality of technical access to FPS, and by small non-agency PSPs regarding notice periods for the termination of indirect access agreements and the relationship management provided by indirect access providers. 

The PSR attributes these concerns to a number of factors, including the fact that the perceived risks of compliance failures under financial crime regulations influences the behaviour of IAPs as well as a lack of competitive pressure on IAPs to improve their offerings, due to historically low numbers of providers entering the market. 

The PSR’s expectation is that ongoing evolution of the industry will address these issues, and highlights some recent and anticipated developments as examples:

• various on-going reviews of financial crime legislation aimed at improving the transparency, clarity and effectiveness of the UK’s anti-money laundering and counter terrorist financing regime;
• the potential entry of four new IAPs to the market and existing providers broadening their offerings;
• various measures introduced by the PSR to enable PSPs to have direct access to the interbank payment systems, which should in turn increase the number of indirect access providers; and
• an interim Code of Conduct for Indirect Access Providers published by Payments UK. The Code sets out standards of best practice for commercial arrangements between IAPs and PSPs. Currently, four IAPs have subscribed to the Code, namely: Barclays, HSBC, Lloyds Banking Group and RBS.

Next steps: wait and see

Rather than take any regulatory action which might hinder the progress it believes is being made, the PSR intends to support current developments. In the event that its concerns regarding choice, switching and quality are not allayed in the next 12 months, the PSR will consider stepping in and taking regulatory action. 

The PSR invited comments on the interim report until 5 May 2016 and aims to issue its final report in summer 2016.