Increasing competition in the payment systems industry

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1 Page 1 This article was first published n Lexis PSL Cmpetitin and Lexis Library n 15 April Click fr a free trial f Lexis PSL and Lexis Library. Increasing cmpetitin in the payment systems industry 15/04/2015 Cmpetitin analysis: Hw will the Payment System Regulatr (PSR) carry ut its bjective t prmte cmpetitin in the payment systems industry nw it is fully peratinal? Marta Garcia, partner, and Jseph Del-Grec, assciate at Stephensn Harwd, examine the PSR's planned apprach t prmting cmpetitin in the industry and the actins it can take. What is the PSR and wh will it regulate? Incrprated in April 2014 and a subsidiary f the Financial Cnduct Authrity (FCA), the PSR is an independent ecnmic regulatr with its wn bjectives and gvernance. It is armed with strng cncurrent cmpetitin and regulatry pwers with a fcus n ensuring the market fr payment systems and payment services is wrking well fr service users. It has three bjectives: t prmte cmpetitin and innvatin, and t ensure payment systems are fcused n the interests f service users. Its visin is 't have payment systems in the UK that are accessible, reliable, secure and value fr mney'. The PSR regulates 'designated' payment systems as stipulated by HM Treasury--ie thse cnsidered t be the 'largest and mst imprtant payment systems which, if they were t fail r t be disrupted, wuld cause serius cnsequences fr their users'. These include: six interbank systems--bacs, Cheque & Credit Clearing, CHAPS, Faster Payments, LINK and Nrthern Ireland Cheque Clearing, and tw card payment systems--mastercard and Visa Eurpe Fr each designated payment system, all the participants will fall under the PSR's remit--that is t say, the payment system peratr, the payment services prviders (PSP) using that system and the infrastructure prviders t the payment system. HM Treasury will assess n an annual basis whether any payments systems shuld be added r remved frm the list f designated payment systems. What are the main ways in which the PSR intends t prmte cmpetitin in the payment systems industry? A key stated aim f the PSR is the prmtin f cmpetitin in the market fr payment systems and t increase access t payment services and remve any barriers t new entrants and market stakehlders. The PSR expects that mre cmpetitin will increase the quality f existing services and the prvisin f new services, which will benefit thse individuals and businesses that use payment systems and services. The PSR has identified a number f key ways in which is intends t prmte cmpetitin in the payment systems industry in its Annual Plan fr 2015/16, which is accmpanied by a Plicy Wrk Prgramme that sets ut sme mre detail n the planned wrks. Briefly (as a number f these measures are discussed belw):

2 Page 2 Regulatry directins fr access The PSR will require prviders f direct access (ie direct agreement between the PSP and peratr f the payment system) and indirect access (ie where a PSP accesses the system thrugh a PSP with direct access--the PSP with direct access is knwn as the spnsr bank) t publish certain infrmatin (eg access requirements) fr the benefit f direct and indirect PSPs. These are intended t ensure that requirements fr access t payment systems d nt unnecessarily r disprprtinately act as a barrier t entry fr PSPs. Cde f cnduct The PSR will engage with spnsr banks t develp a cde f cnduct which will set ut a range f respnsibilities that spnsr banks cmmit t when prviding indirect access t PSPs and will prvide a minimum cntractual framewrk the spnsr banks will be expected t meet. The aim is t give PSPs mre cnfidence and certainty when chsing indirect access, and t invest and develp the services they ffer t individuals and businesses. This shuld allw them t cmpete mre effectively with ther PSPs. Market reviews The PSR has pened tw market reviews int the supply f indirect access t payment systems and the wnership and cmpetitiveness f infrastructure prvisin t supprt payment systems t see if the markets are wrking prperly. The PSR has published terms f reference fr these market reviews. Card payment systems prgramme f wrk The PSR will cnsider cncerns abut gvernance arrangements fr card system peratrs including: the level f transparency surrunding the structure f fees and ther terms and cnditins the effectiveness f service-user representatin, and the level f transparency f decisin-making in card payment systems The PSR will als investigate whether there are any cncerns abut access t card payment systems. This wrk will enable the PSR t cnsider whether r nt t intervene at sme future date, given its decisin nt t impse directins n card peratrs relating t representatin f service users' interests and transparency thrugh publicatin f bard minutes (see belw). Best practices Thrugh the UK Regulatrs Netwrk, the UK Cmpetitin Netwrk, the Eurpean Cmpetitin Netwrk and the Internatinal Cmpetitin Netwrk, the PSR will share its experiences and develp best practices n regulatry and cmpetitin matters. Payments Strategy Frum The PSR is in discussins t set up a Payments Strategy Frum. The aim f this will be t develp a lng-term visin fr hw payment systems shuld develp and identify pririty areas fr the industry t wrk tgether where apprpriate t deliver this visin. Thrugh these measures the PSR hpes t encurage, rather than frce, cmpetitin (say by the impsitin f any penalties) while striking a balance with the need fr cperatin with the industry. It is questinable, hwever, whether in fact incumbents will necessarily make changes t facilitate innvatin and cmpetitin. Nnetheless, t date it appears that banks have s far respnded psitively and it is hped that they will act in the cnsumers' best interests. What cmpetitin pwers des the PSR have and what actin is it able t take where it sees anti-cmpetitive behaviur? As f 1 April 2015, the PSR has cncurrent cmpetitin pwers: under the Cmpetitin Act 1998 (CA 1998) t enfrce the prhibitins n anti-cmpetitive behaviur and abuse f a dminant psitin, and under the Enterprise Act 2002 (EnA 2002) t carry ut market studies and make market investigatin references t the Cmpetitin and Markets Authrity (CMA)

3 Page 3 These cmpetitin pwers will be exercised cncurrently with the CMA and extend t participants in any payment system (ie, they are nt limited t participants f the designated payment systems that the PSR regulates under the Financial Services (Banking Refrm) Act 2013 (FS(BR)A 2013)). The cncurrent cmpetitin pwers are als in additin t the PSR's regulatry pwers under FS(BR)A Anti-cmpetitive agreements (and/r abusive cnduct) by participants in payment systems may breach regulatry bligatins under bth FS(BR)A 2013 and CA As a result, the PSR may take enfrcement actin under FS(BR)A 2013 (eg give directins, require an peratr with direct access t grant access, t change the fees related t an agreement, t require the dispsal f an interest in the peratr f a regulated payment system, etc) as well as CA 1998 (eg rder the infringing cnduct be stpped, fine infringing cmpanies up t 10% f their wrldwide turnver), in parallel r sequentially. The PSR will als have the pwer t seek cmpetitin disqualificatin rders. Hwever, befre exercising certain f its FS(BR)A 2013 pwers, the PSR has a duty t cnsider whether it wuld be mre apprpriate t exercise its cncurrent cmpetitin pwers under CA The PSR will lk at a variety f factrs, such as the ptential harm t cmpetitin raised by the cnduct in questin, resurce and timing implicatins f the actins available t it and the ptential utcmes and deterrent effect f thse actins. What market studies reviews is the PSR cnducting and what actin can it take if a market is nt functining prperly? The PSR has nt yet launched any market studies under its EnA 2002 pwers. Hwever, as explained abve, it has pened tw market reviews under its FS(BR)A 2013 pwers in relatin t: the wnership and cmpetitiveness f infrastructure prvisin in the payments systems market with a view t ensuring that such infrastructure is able t supprt new develpments and innvatin at all levels, including bth the system and service levels--it will als examine ptential infrastructure mdels and wnership structures that culd be develped in the future, and the supply f indirect access t payment systems t gain a better understanding f the ecnmics f indirect access and t cnsider ways f imprving the balance between the risks and rewards f ffering indirect access If the PSR cncludes (fllwing a market review r study) that a market culd be made t wrk better, then it has a range f pwers t intrduce apprpriate remedies (eg directins and requirements, publishing general guidance, prpsing enhanced industry actin, etc). Alternatively, the PSR can make a market investigatin reference t the CMA fr detailed investigatin (this pwer applies whether r nt the PSR has cnducted a market study). The PSR has als indicated that ver the next year it will cllabrate with the FCA n its credit card market study and with the CMA n its retail banking market investigatin. In terms f pipeline prjects, the PSR has als mentined that it has in mind t lk at ATM interchange fees, implementatin f the cheque imaging prject and cnsumer redress in the future. T what extent will the PSR's prpsed rules in relatin t transparency and access requirements help t increase penness and help new entrants? A number f cncerns have been raised that the gvernance f payment systems, the criteria fr gaining access, the decisin-making and payment prcesses are paque, time-cnsuming and knwn nly t select few banks that wn the payment systems. As a result, this is hampering the ability f new prviders t enter the payment systems and services markets and cmpete. The PSR has at its dispsal the fllwing principal quick fixes which are expected t increase transparency, imprve direct and indirect access as well as help new entrants enter the marketplace: Ownership, cntrl and gvernance f payments

4 Page 4 The PSR has issued a general directin t the interbank peratrs (ie nt Visa and MasterCard) t ensure all service users' interests are represented in the decisin-making prcess f the regulated payment systems. This will enable service users t assess whether interbank peratrs are apprpriately cnsidering their interests when taking decisins and understand the reasns why decisins have been taken. This is intended t address cncerns abut the gvernance f payment systems, including that the interests f indirect participants are nt taken int accunt in interbank payment system decisin-making r in the card systems that merchants and acquirers' interests are nt adequately cnsidered. Interbank peratrs must cmply with this directin by 30 September 2015 and reprt cmpliance annually. The first reprt is due n 31 Octber The PSR has als made a general directin requiring the interbank peratrs, frm 30 April 2015, t publish bard minutes and vtes as well as identify and address cnflicts f interest (see LNB News 16/03/ ). Direct access The PSR has issued a general directin (knwn as its 'Access Rule') that applies t Bacs, Cheque & Credit Clearing, CHAPS and Faster Payments. It requires them t prvide access n an bjective, risk-based, fair and pen basis, and publicly disclse their access requirements. This will mean that in future, banks and innvative PSPs will be able t gain direct access t payment systems n fair terms. The applicatin prcess shuld be quicker, simpler and nt distrt cmpetitin (ie nt act as a barrier t entry and expansin fr new and emerging PSPs). LINK, MasterCard and Visa are already subject t a similar access requirement under the EU Payment Services Directive 2007/64/EC, art 28 (PSD). All payment system peratrs will have t reprt annually shwing hw they are cmplying with their relevant access rule--the first reprt is due by 31 July In additin, they are required t publish their access requirements frm 30 June Indirect access T ensure greater transparency fr thse seeking indirect access t interbank systems, the PSR is requiring the fur primary spnsr banks (ie Barclays, HSBC, Llyds and RBS) t publish 'clear and up-t-date' infrmatin n their access criteria and prcess t enable thse wanting t use these services t cmpare them. This data will be published n their websites and prvided t the PSR and updated regularly. The PSR has given the spnsr banks until 30 June 2015 t cmply. As explained abve, the industry will als develp a new PSR-apprved cde f cnduct t address cncerns abut the security f supply f indirect access prvided by spnsr banks. It anticipates that it will be in place by 30 June These measures shuld imprve transparency and penness, remving sme f the majr bstacles facing new and emerging payment service prviders when seeking direct r indirect access t payment systems. In the event peratrs d nt step up t the market, the PSR has made clear that it will take actin and use pwers t issue directins, impse fines and impse bligatins that will frce individual players t act differently. What influence may the EU have n the PSR's regulatin and prmtin f cmpetitin? Ultimately, the PSR can nly perate in accrdance with EU legislatin. The PSR will wrk with HM Treasury, FCA and the Bank f England t ensure it plays an active and vcal rle in Eurpe s that any new EU requirements that intersect with the PSR's regime take accunt f the PSR's bjectives and ensures the PSR is in cmpliance with EU rules. Fr example, a revised versin f the PSD is currently under negtiatin (PSD2) and is expected t intrduce further measures t develp an effective and cmpetitive Eurpean payments market. The PSR will interpret PSD2 (when finalised) and ensure the apprach it takes is cmpliant with PSD2--undubtedly the apprach it takes will have a significant impact n the UK payments industry. Likewise, n interchange fees, the EU Regulatin n Interchange Fees fr Card-based Payment Transactins (IFR) will be entering int frce shrtly. The PSR will lk t see hw the IFR may apply in the UK and what changes will be required in the UK. The PSR is expected t be appinted as the cmpetent authrity fr mnitring and enfrcing the IFR. Interviewed by Camilla Cardz.

5 The views expressed by ur Legal Analysis interviewees are nt necessarily thse f the prprietr. Page 5