17th Jul 2016

VocaLink’s sale to Mastercard will kill UK payments innovation

The proposed sale of VocaLink to MasterCard, threatens to kill innovation in UK Payments.

This is the damning verdict of AccessPay CEO, Anish Kapoor – who is calling on payments experts to come together and voice their opinions before a final decision is reached.

In the time it takes you to read this post, more than 400,000 Bacs payments and approximately 10,000 Faster Payments transactions will be made in the UK.

These figures demonstrate just how vital the Bacs and Faster Payments systems are to the UK economy.  Explaining why some payment industry experts are uncomfortable with the announcement that US card giant, MasterCard is to acquire VocaLink – the central payments services infrastructure provider for the UK’s key payment systems.

The deal

MasterCard has entered into a definitive agreement with VocaLink to purchase 92.4% of the London-based consortium, which is currently owned by 18 banks and building societies.

The announcement comes after concerns were raised by the Payments Systems Regulator (PSR) in February 2016. The PSR believed that the collective ownership of VocaLink was having a “negative impact on innovation and competition in the industry” .

The economic regulator for UK payment systems suggested that by loosening their grasp on Bacs and Faster Payments – and selling their share of VocaLink, they would help ensure UK payment systems continue to evolve and work for users.

VocaLink also controls Link; the UK’s largest network of ATM machines. In addition to licensing its immediate payments infrastructure to Singapore, Sweden, Thailand and the United States.

Why should you be concerned about MasterCard buying VocaLink?

When you take into account that 90% of salaries, over 70% of household utility bills and almost all UK state benefits are paid through VocaLink-managed UK payments infrastructure, it’s understandable that some commentators within the UK payments landscape are concerned.

There is a degree of scepticism amongst payment industry experts – particularly payment software providers – that single ownership of the UK’s payments systems could have an adverse impact on the country’s payments market.

A direct contradiction to the PSR’s view that problems will be alleviated with a change in ownership.

Some of the concerns being raised and debated:

Pricing – Implications to connectivity and transactional volume usage fees

In the wake of the landmark £68.5 million (plus interest) Sainsbury’s competition damages case (and already facing a possible lawsuit for allegedly imposing illegal card charges onto UK customers), MasterCard does not have an upright reputation when it comes to pricing.

So how will giving a monopolistic position to an organisation currently being sued for price fixing give us any comfort that we won’t be ripped off with sky high charges?

One of the major issues raised by payment software providers is that they envisage increased transactional volume usage fees for end users, as well as potential increases in direct connectivity costs.

Although prices have increased over the years, the rate of increase has been steady. The fear now is that MasterCard could turn that model on its head, especially if the pricing structure itself is left unregulated.

Competition – Could we be saying “Farewell, farväl, การอำลา” to Faster Payments?

Given that MasterCard will see its core product threatened by the emerging immediate payments revolution and PSD2, is it a good idea to sell off the Faster Payments central infrastructure to an organisation that has vested interest in stifling competition for one of its core products? Thus killing the nascent Real-Time Faster Payments New Access Model proposition?

Surely, by selling Faster Payments as part of this deal, we are throwing away one of the most innovative payment solutions to have come out of the UK Payments Industry in recent times.

Additionally, how will this affect immediate payments infrastructures in Singapore, Sweden, Thailand and the United States? Are payment industry experts in those countries not worried?

Market Power – How can single ownership boost competition and open industry?

Whilst you could argue that the consortium of banks who currently own VocaLink have sat idle for far too long, at least they ensured variety in differing and competing interests at the top table. Which, in effect, ensured that no one view could dominate.

And whilst there hasn’t been much in the way of innovation, this set up at least protected against monopolistic practices.

Now we’ll have one player with a controlling interest over the entire infrastructure. How is this good for the industry?

ALSO, given they backed away from giving one corporation too much sway over a small part of power generation at Hinckley Point C, what does the UK Government have to say about this deal?

How on earth can they agree to sell the entire UK payments infrastructure wholesale to one company?

Philip Hammond’s response to the deal shows a total lack of understanding of the implications and is instead aimed more at limiting the damage of Brexit (but don’t get me started on that!).

There is little doubt that greater competition is needed to help drive innovation in UK payment infrastructure.

But before the whole UK Payments Infrastructure is sold, there needs to be some reassurances that whoever acquires VocaLink – be it MasterCard or any other payments industry behemoth –will not unduly exploit their inherent position of near single-ownership.

*Ref: MasterCard bags payment processor VocaLink for £700m via Financial Times

Innovation – Protection of UK Payments Infrastructure

The PSR’s stance that the 18 banks who own VocaLink are somehow holding back innovation makes little sense. Especially when you consider that UK Payments Infrastructure is seen as the market leader in innovation.

While individually, the banks may have been slow to bring forth innovation within their own business compounds, VocaLink have always acted in the protection & best interest of the UK payments infrastructure. After all, each bank’s end customer is taking advantage of the payments service. With MasterCard, there would be no direct correlation or relationship with the end customer.

As the sole provider of payment processing infrastructure, they would have nothing to lose and everything to gain if they wanted to make significant changes to a system that is already seen as world leading. Is that something we are willing to accept?

With VocaLink, at least we were seeing good moves towards driving innovation and wider engagement, with Faster Payments New Access Model being one of the more recent examples. Could a big shop like MasterCard deliver the same results – or are we handing them a licence to kill innovation in UK Payments?

C’est la vie

Before this multi-million-pound deal is allowed to proceed, the transaction is expected to come under close scrutiny from UK & international merger authorities, regulators and a number of jurisdictions from whom anti-trust clearance will be required.

The Treasury should consider other models of ownership.  Why not simply open up ownership to all PSPs? Why is it being sold at all?

Surely freeing up control of infrastructure is a separate issue to providing a return for VocaLink’s shareholders?

All I ask from those involved is to take these industry concerns and thoughts into deliberation when making their decision over the coming months.

The outcome of this verdict is likely to affect the entire UK economy and every single business that relies on the presence of a stable UK Payments Infrastructure.

We’d love to hear your thoughts…

We want to hear opinions from payments industry experts. Payment software providers and those responsible for processing business payments and collections are invited to comment and make suggestions on this blog post.

Please email: [email protected] to submit your response.