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Payment Systems Regulator issues Call for Input on competition issues arising in the New Payments Architecture

  • United Kingdom
  • Payment systems and digital commerce

13-02-2020

On 28 January, the Payment Systems Regulator (“PSR”) issued a Call for Input on competition issues that could arise in the New Payments Architecture (“NPA”).

The PSR is seeking stakeholder input to better understand the competition risks that might arise from the NPA and consider ways to effectively mitigate those risks.

The PSR will use the feedback it receives from stakeholders to develop its regulatory policy for the NPA. It then expects to set that policy out in a consultation before publishing a final statement before the end of 2020.

The deadline for responses to the CFI is 5pm on 24 March 2020.

Background

The NPA will be the new way of organising the clearing and settlement of the majority of the UK’s domestic interbank payments, ultimately replacing the Bacs and Faster Payments systems.

One of the main features of the proposed design of the NPA is a simple common central infrastructure service (“CIS”). This would provide basic interbank clearing and settlement-related services that would enable one payment service provider (“PSP”) to make a payment to another PSP. This would increase the range of activities that could be competitively offered by multiple service providers who might use access to the NPA CIS as an input for the services they provide. A range of suppliers could offer competitive ‘overlay’ services to PSPs (such as banks) and/or directly to payments account holders.

Pay.UK, the operator of Bacs and Faster Payments, is tasked with the delivery of the NPA which the PSR hopes will enable competition between existing and new payment services, facilitate innovation in the interests of users, and enhance resilience and security in payments.

Pay.UK will run the competitive procurement process to identify one sole provider of the CIS. The CFI will, in particular, help inform the parameters of this procurement process in order to mitigate against the competition risks that could arise from having a sole operator of the CIS.

PSR’s views of potential competition risks

The CFI sets out the PSR’s view of the potential risks to competition that might arise from the behaviour of the CIS provider:

- Competition on the downstream market may be adversely affected  - for example, if the CIS provider also provides overlay services that require access to the CIS then the CIS operator may have an incentive and the ability to favour its own services over those of its competitors for those overlay services;

- Competition with the NPA interbank system could be affected  - for example, if the CIS provider has an economic interest in a different payment system that competes or has the potential to compete with the NPA interbank system, the CIS provider might have the incentive and ability to discriminate against parties requiring access to the NPA CIS; and

- Monopolistic issues might arise – the monopolistic nature of the CIS might result in competition issues if the CIS provider does not effectively control the costs involved with the initial investment and ongoing operation of the services, potentially resulting in higher user costs.

The PSR appears to be particularly concerned about the CIS operator engaging in the following behaviours:

  • exploiting first-mover advantages to raise barriers to entry for others;
  • overcharging for access to the CIS;
  • distorting prospective third-party competitors’ access to the CIS;
  • gaining knowledge through the information it receives as the CIS operator of competitors’ commercial strategies and using that to its own advantage;
  • abusing access to and use of NPA payments data to its own advantage; and 
  • discriminating against services provided in the NPA in favour of services which are potentially substitutes to the NPA ecosystem.

Potential mitigation of competition issues

The CFI sets out a number of ways that these potential risks could be mitigated so as to avoid harm to competition and innovation, including:

  • ensuring appropriate technical design of the NPA;
  • implementing strong governance arrangements (enforced through contractual provisions where appropriate); and
  • removing or reducing the economic interest of the NPA CIS provider in overlay markets or competing payment systems through a form of separation.

The PSR wishes to hear from stakeholders on how effective they think the proposed mitigations would be and whether they think any of them would have particularly high costs or risks. It also wishes to hear suggestions about any alternative mitigations and whether there are any particularly effective existing mitigations in the pre-NPA payments ecosystem.

Commentary

The CFI provides a very useful opportunity for stakeholders in the payment services industry to give their views on the NPA CIS procurement process, potentially enabling them to shape both the process and the regulation of the NPA. Given the broad range of proposed approaches to the procurement process and proposed mitigations in the CFI, there may be a good opportunity for stakeholders to have an influence in these areas.

The CFI should be of particular interest to users of payment systems, PSPs, and any participants in the NPA CIS procurement process. Stakeholders are advised to submit a response to the CFI, which can be accessed here.