Authors: Duncan McEwen Briony Krikorian-Slade

Transcription

1 ================================================================ Financial Conduct Authority: Payment Systems Regulator Call for Inputs Response from The UK Cards Association 15 April 2014 ================================================================ Authors: Duncan McEwen Briony Krikorian-Slade

2 The UK Cards Association (UK Cards) is the leading trade association for the cards industry in the UK. Its members account for the vast majority of debit and credit cards in the UK, issuing in excess of 55 million credit cards and 86 million debit cards, and cover the whole of the payment card acquiring market. UK Cards promotes co-operation between industry participants in order to progress non-competitive matters and seeks to inform and engage with stakeholders to advance the industry for the ultimate benefit of its members consumer and retail customers. Executive Summary The UK s card market is dynamic and mature and the biggest in the EU. UK consumers represent 31% of the overall card market and 73% of the credit card market, with over 25 card providers issuing cards and around 10 companies acquiring services on behalf of merchants. The UK market is also world-leading in collaborating in the interests of the consumer and merchants with national initiatives such as chip & PIN and the rollout of contactless cards on various transit networks being admired and emulated globally. This collaboration happens between the different players issuing and acquiring banks, card schemes and merchants working through noncompetitive forums such as the UK Cards Association. As a proactive trade association, we seek to work closely with regulators across the card payments arena to ensure they have the data and information they need to make proportionate and evidence-based decisions. UK banks and card companies are subject to regulation from a number of UK and European regulators including the Financial Conduct Authority, Prudential Regulation Authority, Bank of England, the Treasury, and now the Competition Markets Authority and the Payments Systems Regulator (PSR) - which can result in a fragmented approach. We therefore welcome the opportunity to inform the regulatory approach and design of the PSR. We believe that within the UK/EU regulatory framework the PSR can help payment providers, merchants and consumers by providing a focused and impartial view in how the payment system network should operate across the UK. Our main request is that, in taking any action, the regulator considers how components operate as a whole, rather than looking at different parts in silo, and recognises that changes will have consequences across the wider payment system. We would also look for any resulting regulation to support and be flexible enough to allow for the fast-moving innovation in this area. We would urge the regulator to conduct in-depth and quantifiable analysis of the payments landscape in terms of competition, innovation and consumer outcomes - as it shapes its policy approach over time. A UK regulator will also need to consider the ability for the UK market to compete internationally and have the resources to be able to invest in and enhance its competitive features and future infrastructure. 1

3 We have grouped our responses to the list of questions based on common themes to provide a more general view of the market. Competition - Q(s) 1 4 (1) Do you have any views on which payment systems should be considered for designation? If this includes parties other than the UK payment systems listed above, please explain why. (2) Where do you believe competition is effective or ineffective within UK payment systems? (3) At which level(s) is there potential for competition to drive benefits for service-users, in terms of costs, quality or innovation? (4) What are the main factors impeding more effective competition at each level? We believe that competition in the UK cards market is healthy, and both fosters and is bolstered by a high level of innovation to the benefit of consumers. This is chiefly because the cards industry relies on leveraging a joint product serving the differing needs of two complementary groups - consumers and merchants and competition and relevant incentivisation are required to ensure both groups continue to partake in this two-sided market. Consumer choice At a basic level, a good level of competition is demonstrated by the variety of products and availability of choice provided to consumers. UK Cards has 25 members issuing debit, credit and charge cards and are aware of a number of other card issuers who operate in the UK. The level of churn in the market - the percentage of people changing their card issuer - is 20% per year, a high level compared to a number of other utility-style markets such as electricity (17%), gas (15%) and mobile (11%). Not only are there several different providers of cards to choose from, there are different types of card and card-like products on offer. These demonstrate how the industry has evolved in line with the changing spending habits and purchasing value of its customers. Products include: o Debit o Credit o Charge o Commercial o Pre-paid o Store o Affinity Moreover, it is clear that consumer preferences can be followed with relative ease in this market. Since their large-scale introduction in the UK in 1988 (through Switch), debit cards have outgrown credit card usage and allowed for the migration of payment from cash. Card payments now represent 74% of all UK retail sales. 2

4 Finally, there is also a wide array of environments where use of card payments is now commonplace. This includes traditional card-present transactions (otherwise known as Face2Face) and a variety of card-not-present mediums including Mail Order & Telephone Order (MOTO), online and mobile. Market players and competition Competition can also be seen in the different layers of the card payment system. At the widest level, competition exists between the overarching network systems which are built on different business models and provide different network offerings: o Different network models - 3-party (Diners Club, American Express) versus 4- party (Visa and MasterCard) o Within the 4-party models, there are alternate business models - memberowned (Visa Europe) and publically listed corporations (MasterCard Inc) o A growing number of alternative international card networks seeking and/or wishing to continue to expand their presence in the UK (JCB, Discover, Diners Club and China UnionPay) Competition is also a natural result of the various relationships required between the different players of any given retail transaction. For example, between: o Terminal vendor and Terminal Service Manager (TSM) provider o Merchant and acquirer o Acquirer and network scheme o Network scheme and issuer o Third party provider (like an account information service or payment initiation service) and issuer The dynamic nature of the market is also reflected in the differentiation in price structures that have evolved by different payment schemes. These are often successfully used to incentivise and encourage the adoption of levels of higher security by retailers. These pricing structures take different forms: o Scheme established o Domestic rates as set through bilateral agreements o Cross-border payment arrangements o Card-present and card-not-present transactions Within this dynamic market, barriers to entry are low, as found by the Independent Commission on Banking in 2010: over a ten year period ( ), new entrants failed to make any significant impression in any retail banking market apart from credit cards. In particular, the card-not-present model has provided a platform for new entrants into the payments market (e.g. PayPal) and generated a plethora of online retailers (e.g. Amazon), who have been able to monetise their retail offerings because of the widespread use of card payments and the statutory and productspecific protections offered to consumers. The competitive nature of the card payments industry is only likely to increase as the technological landscape changes: o Traditional card payments are being displaced by newly emerging technologies at the point-of-sale; 3

5 o Alternative and closed-loop proprietary payment systems are being offered by the retail community either through consortium-led initiatives (e.g. MCX in the US) and/or independent retail outlets (e.g. Starbucks). Collaboration Q (5) (5) What functions do you think need to be performed collaboratively in the industry? How best can this be achieved? Collaboration is a core component of a two-sided market, with schemes, issuers, acquirers and merchants all having to collaborate to meet changing consumer needs. Indeed, supporting collaborative projects is one of the core aims of trade bodies like UK Cards in a highly dynamic and fast moving payments ecosystem. We can act as a non-competitive facilitator for issues such as contactless limits and standards development, and can coordinate messaging without having to be concerned with branding. This is particularly true as the lines between different markets, such as payments and telecommunications, become less distinct and the number of players in this arena correspondingly expands to include the mobile network operators, overthe-top providers (e.g. Google, Facebook) and a host of technology start-ups. Moreover, collaborative work increasingly has to take into account the need for a consistent consumer experience globally whether the payment is taking place in person or virtually. Some examples of where UK Cards has been able to foster collaborative projects include: o Chip & PIN (see appendix [1] for an overview of the programme). o Current account switching programme (CASS) with the Payments Council, addressing debit card issues and requiring involvement of the card schemes. o Collaboration with Transport for London to rollout contactless payment cards on the London transit network. This has required common messaging to consumers, and agreed processes for avoiding fraud and managing refunds. However, where members have opted to take a competitive stance in delivering innovative products (3-D Secure, Contactless), it is arguable that the industry would have benefitted through earlier co-operation. Conceivably, on certain non-competitive issues (consistent messaging, agreed value transaction limits etc.) an independent regulatory body such as the PSR could call for a more collaborative stance to be taken for the benefit of all. A good example might be in leading a cross-industry initiative around the future deployment of a particular payment technology (e.g. Near Field Communication [NFC] payments). UK Cards would welcome working with the regulator to identify the pinch-points that exist in the collaborative space, where regulatory involvement could help overcome certain commercial hurdles, while helping guard against disproportionate regulatory interventions. The following diagram demonstrates where these pinch-points might exist, illustrated by the perforated red lines, and where regulatory involvement could be effective. 4

6 The potential for regulatory involvement Underlying economic conditions The creation of these underlying conditions requires some form of regulatory input and is where the PSR s primary focus should reside. Dynamic Market Forces Invention Innovation should be industry-led and market-driven; usually dependant on the existence of a free-market economy. Card Payment Innovation Scoping Business Case & Plan Project Development Testing & Validation Ownership Q(s) 6 7 Product Launch (6) Do you think the current ownership structure creates problems? If so, please explain your concerns with the current structure. (7) How might the regulator address any issues with the current ownership structure? Please explain how any remedy, including any alternate model, might address any or all of the issues you have identified and also highlight any potential concerns associated with such alternate ownership. The card payments market is comprised of differing styles of ownership. For example, international four-party schemes can be member-owned or publically listed. In the UK, the four-party schemes were historically structured to encourage banks and building societies to join as members or licensees. These schemes are built around a practical separation of ownership, from the ownership of the scheme itself, to how the processing elements (i.e. the clearing and settlement of payment card transactions) are operated in practice. Alternative international card networks operate on the basis of different structures e.g. global three-party proprietary closed loop card networks which may partner at arm s length with a small number of carefully selected licensees, to complement the proprietary and acquiring business. Such licensees have no role in the governance or ownership of the network. The international four-party card schemes often referred to as the rails of the industry - are broadly interoperable. An example is the use of EMV as a crossscheme, interoperable standard for face-to-face payments. This is key to create the conditions and protocols to facilitate the widespread and internationally accepted use of card payments at a technical level of application. 5

7 The operation and commercial objectives of card payments generally differ to those of the arrangements of the UK interbank schemes (Faster Payments Services [FPS], LINK, BACS, CHAPS). The UK interbank schemes are mainly aimed at being the transfer mechanisms to support different payment types. For example, FPS supports the new PayM application which allows direct mobile to mobile payment. These UK interbank schemes are therefore not generally in direct competition with each other, but support a competitive environment. Governance Q(s) 8 9 (8) Do you have any concerns about the current governance of UK payment systems? (9) What do you believe is the appropriate governance structure for UK payment systems? The role of the international four-party card schemes depends on the efficiencies created by the economies-of-scale and volume of transactions generated by having an interoperable global network. These are not solely UK payment systems. With regard to purely UK payment systems, a more informed opinion will be given by the respective UK interbank schemes and the Payments Council. A potential area of focus for the UK regulator could be leading discussions arising as a result of European legislation and providing agreement on interpretation such as relates to the multilateral interchange fee (MIF). The PSR would be well placed to protect and act on behalf of the UK card payments industry to determine what an appropriate scope and commercially acceptable MIF rate might prove to be, given the complexities of the UK cards market compared to equivalent markets. [See our answer to questions on Innovation below.] Access to payment systems Q(s) (10) How do you access UK payment systems? Please provide details (e.g. direct or indirect, the conditions, fees and requirements for access etc) for each payment system you have access to and any concerns you may have with your current arrangements. If you do not currently have access to UK payments systems, please provide details on how you participate within the UK payment industry, and detail any concerns or constraints you may have in this regard. (11) For the access you described above (in question 10), are the access terms and conditions (including fees) fair and reasonable? If not, please provide details. (12) Does the access arrangement you currently have limit your ability to compete or impact on the service-users experience in any way? (13) If you access payment systems indirectly through a sponsoring agreement with a direct member bank, do you have sufficient choice in sponsoring banks? Would you prefer to access payment systems directly? What do you see as the benefits and risks of doing so? 6

8 (14) Do you act as a sponsoring bank, providing indirect access to any payment system participant in the UK (please provide details for each payment system you provide access to)? If yes; To whom do you provide indirect access? What are the major risks and costs associated with providing such indirect access? On what basis do you choose whether to provide indirect access? Are there any barriers to becoming a sponsoring bank? (15) What changes to access rules and conditions would you like to see? Are there any alternative routes to gain access to payment systems that you believe should be developed (e.g. a second tier membership to payment system operators)? (16) Do you have any other comments regarding access? Our view is that the membership rules and prudential requirements that the international four-party schemes impose are sufficiently structured to allow for open, fair and direct access for any eligible payment service provider (PSP) to join. These four-party card schemes take a graduated approach to membership to encourage as many members as possible with differing styles, separate tiers and class-ofmembership being offered to any PSP. Visa and MasterCard, for example, indicate that their payment networks are comprised of over 3000 European PSPs and approximately 15,000 global financial institutions. There is no evidence that these are not being made accessible to PSPs of every conceivable description. A good example of the dynamism of the schemes is shown in MasterCard s commercial structure as a publically listed corporation. The interests of its shareholders leads to a commercially driven agenda, aimed at generating the volume of transactions needed to increase the profitability and its share price as a commercial entity. Encouraging new participants into its network supports this strategy. Three-party proprietary closed loop schemes, like that underpinning American Express, are exempt from open access requirements under Article 28 of the Payment Services Directive and corresponding UK Regulations. Infrastructure Q(s) (17) What improvements or changes do you believe are required in the provision and use of infrastructure in the UK? We would also be interested in your views on the cost of such changes, for you or for the industry as a whole. What considerations, if any, need to be considered regarding the impact of any changes or improvements on the resilience and reliability of payments systems? (18) What changes, if any, are needed regarding messaging standards in the UK? For example, would the adoption of ISO20022 standards alleviate any concerns or 7

9 improve any constraints you experience? What timeframe and considerations would need to be taken into account in adopting new standards? For question 17, see also our answer to answer to Innovation questions Messaging infrastructure is vital to financial institutions which need to exchange massive amounts of information with their customers, and between themselves. In the UK, ISO8583 standard provides the basis for the card industry s own messaging infrastructure. This accommodates the diversity and full range of card product types (credit, debit, store, prepaid), but also provides the underpinning platform by which future payment innovation can occur (e.g. tokenisation). Standard 70 meanwhile provides a basis for messaging from the merchant to acquirer. There is currently an initiative by the European Central Bank and European Commission to support the implementation of a single standard - ISO to help achieve its aim of a unified Single Euro Payment Area. However, we believe the desire to create a single European standard is too simplistic given the complexities of the card payment ecosystem, and the needs of retailers and of other stakeholders. There is no guarantee that bank-to-bank messaging would encompass the multiple and differing variants being developed, as has proven to be the case for the existing ISO8583 standard. A payment-specific UK regulator could help to represent the UK market s concerns on security standards at a European level, for example through the European Central Bank s subcommittee, SecuRE Pay. (19) What solutions can be developed to increase competition in the provision of infrastructure and/or managed services to support the technical and operational functions of agency banks participating in UK payment systems? How can this be achieved, and what will the impact and benefits of this be to your business? A more informed opinion would be better given by the views of the respective UK interbank schemes and the Payments Council. Innovation Q(s) (20) Are incentives to innovate clear under current arrangements? Please also include any concerns you may have regarding fee arrangements and the impact of changing fee structures (such as changes to interchange fees). (21) Do any factors limit your ability or incentives, either collectively or unilaterally, to innovate within UK payment systems? (22) What changes, if any, are needed to facilitate a greater pace of innovation in UK banking and payments? Please refer to your previous answers where relevant. (23) What do you believe are the benefits and limitations of collectively driven innovation vs. unilateral innovation? As discussed above under the Collaboration question 5, we believe that innovation is being driven forward by the card payments market at some pace. The range of 8

10 schemes and PSPs in the card payments, and more generally retail POS market, drive innovation as they compete to offer a range of products that satisfy consumer demand while delivering commercial profitability. This is increasingly true as an unprecedented number of new players and forms of payment come into the market. As mentioned above, there is a role for supportive regulation but the challenge will be in enabling the currently diverse and fast-moving market activity to continue. Ultimately, it should be consumers who continue to decide what works well for them and demonstrate this with their purchasing decisions. In the main, we believe that innovation should be left to the dynamic forces of the market with the primary role of any regulator focussed on ensuring that the underlying economic conditions are present for innovation and competition to thrive. One area in which the regulator could help to provide the underlying conditions for innovation is in setting interchange fees, as mentioned under the Governance questions 8-9 above. Interchange fees have played a vital role in the development and expansion of four-party schemes in the payment sector and are an invaluable funding mechanism for innovation by these schemes. However, there has been increasing regulatory scrutiny on the level of interchange as card payments have become the preferred payment mechanism for retail payments. The European Commission has now introduced proposed caps for the level of cross-border and domestic interchange rates. The European Commission s proposals could prove hugely disruptive and damaging to the card payment industry because: o It will dampen its appetite and ability to invest in future innovation; o The proposed interchange rates are arbitrary and not based on a comprehensive economic analysis; o The proposed rates are based on a one-size-fits-all approach and do not reflect the very significant differences between Member States markets. We believe that there is a substantial role for the PSR to play in determining the scope and optimal level of interchange regulation in the UK market, balancing the needs of the participants and the need to fund innovation. This should be based on a robust study of the impact of these rates in the UK market. Miscellaneous The future role of regulation Q(s) (24) Do you have any other comments or concerns you would like to highlight? (25) What, if any, are the significant benefits you see regulation bringing? (26) What, if any, are the risks arising from regulation of payment systems? (27) How do you think regulation might affect your business and your participation in UK payment systems? 9

11 We believe the PSR can have a strong role, given its apolitical position, in influencing the regulatory proposals being delivered out of Europe principally from the European Commission and European Central Bank. The PSR can help ensure the underlying conditions of competition and innovation are being safeguarded in the UK, guaranteeing the success and longevity of the card industry here. Our primary concern is that the creation of the PSR should not create a set of domestic regulatory requirements that would fragment and undermine the global interoperability of how card payments work. This is particularly important in a regulatory environment that is becoming more complex on the UK level - with the FCA, BoE, HMT, PRA and CMA all having a perspective on how banks and card companies operate. Payment regulation on this scale is untested and will be exposed to the scale and pace of technological convergence. The onus will be on ensuring that any regulation is outcome-focused and sufficiently flexible to accommodate innovation. We hope to work with the PSR to develop a regulator that is evidence-based and analytical, and that produces regulation that is proportionate and relevant in design. This includes a thorough examination of the competition and innovation within the industry, balanced with the need for interoperability. We look to play a leading, pivotal and co-ordinating role in delivering this on behalf of the industry. 10