On 25 February 2016, the Payment Systems Regulator (PSR) published its interim report in respect of its market review into the ownership and competitiveness of infrastructure provision1.

We reported in July last year on the terms of reference and the timetable of the market review. See our previous briefing: PSR confirms terms of reference and timetable for its market review into ownership and competitiveness of infrastructure provision.

The market review came about due to concerns about the extent of the vertical relationships and common ownership of the UK’s interbank payment systems. The PSR has statutory objectives to promote effective competition and innovation in the market for payment systems and for the services the systems provide.

The market review focuses on the three interbank payment systems (Bacs, Faster Payment Services (FPS) and LINK) rather than the card payment systems. These systems are operated by Bacs Payment Schemes Ltd, Faster Payments Scheme Ltd and Link Scheme, respectively (the operators). The operators are all not-for-profit membership organisations and do not issue shares. They set the rules and technical standards for their payment system. Their costs are covered by their members’ fees.

The members of the payment systems are the payments services providers (PSPs) that are also direct users of the systems. They are several of the UK's leading banks and building societies and the member PSPs across the three payment systems are very similar. The operators all procure central infrastructure services (the services) from the same provider: VocaLink. VocaLink is owned by 13 shareholders, each of which is a member of one or all of the three payment systems covered by the review.

In its interim report for the market review, the PSR has identified a lack of competitiveness in several keys areas in the provision of the services. Accordingly they have proposed some significant changes to the UK payments infrastructure. Stakeholders have until 16 April 2016 to submit their views on:

  • the interim report generally and its conclusions
  • the need for remedies
  • the form of the remedies.

The PSR still plans to publish its final report in the summer 2016.

What are the PSR's interim findings?

The PSR considers that the provision of the services in Bacs, FPS, and LINK is not a natural monopoly. In other words, it is not most efficient for all the services to be conducted by a single firm, as they are now.

The PSR’s provisional finding is that competition is not effective in the provision of the services. However, the PSR found that competition is effective in the provision of other infrastructure services relevant to the payment systems, namely gateway services and solutions that PSPs use as their entry point to the secure communication channel for central clearing infrastructure. The PSR identified four key reasons for its interim findings, which are discussed below.

Lack of competitive procurement exercises

The PSR notes that the operators and the PSPs do not shop around for the services as they are satisfied with the value for money and service quality they receive. None of the operators have held a competitive procurement exercise (such as a tender) in the last 12 years, despite contracts for core service provision coming up at least once for each payment system in this period. The PSPs do not directly benefit from competition in the provision of the services, because any benefit would not give them an advantage over their rivals. The operators do not benefit from competition either because they simply pass on their costs to their members.

On account of the lack of competitive procurement, other potential providers are not able to enter this market easily. Ultimately this means VocaLink is free from competitive pressure to innovate, reduce costs or improve quality. Innovation in the sector has been largely driven by government intervention rather than competitive forces. To date, the only provider of the services for Bacs, FPS and LINK has been VocaLink (or its predecessor companies).

Current ownership arrangements

Five of the UK’s big banks (direct PSPs) hold over 85% of the shares in VocaLink, as well as being on the boards of Bacs, FPS and LINK (and VocaLink itself). Furthermore the PSR found that these same five PSPs effectively controlled the decision-making of those bodies. Due to the common ownership of the payment systems and VocaLink there is a perception that VocaLink would have a competitive advantage in any competitive tender.

The payment systems have to date been notably stable, secure and resilient. This has been cited as a reason for maintaining the infrastructure and ownership arrangements as they are. However, the PSR's report suggests that these arrangements have led to inertia in the provision of the services. It also claims that the PSP owners of VocaLink have an incentive to protect their investment in it by not subjecting it to competitive pressure.


Several international providers of the services indicated to the PSR that the failure to use an internationally accepted messaging standard deterred them from entering the market and providing competition to VocaLink. The PSR also found that the lack of commonality of operating rules and standards generally inhibits competition, increases the incumbency advantage of the current provider and may reduce the likelihood of a move towards a more competitive model.

LINK services

The governance and contractual arrangements for LINK appear to be a barrier to switches in central infrastructure provider since there is no legal separation between LINK and VocaLink. Furthermore, there is currently a single contract between VocaLink and all 38 PSPs in LINK.

What remedies does the PSR propose?

The PSR has proposed the following remedies in respect of the issues identified:

Competitive procurement exercises

The PSR proposes that competitive procurement exercises are undertaken before current contracts come up for renewal, or at the next break clause in the contracts. The PSR would require:

  • that a strategy is developed for procuring infrastructure, including a review of the services that should be provided in the core contract and taking into account the work of the Payment Strategy Forum on end users' needs
  • a market-testing exercise to establish availability of other options
  • a procurement process that is open and fair (based on industry best practice), with views invited on what the selection criteria should be
  • that any exercise is monitored by an independent person.

Additionally, the PSR is recommending that contractual arrangements should be in place so that it is possible for each payment system to transition from one central infrastructure provider to another. The PSR is also welcoming feedback on whether the operators are best placed to carry out the procurement or not and the timing of the procurement.

Ownership of VocaLink

In the interim report the PSR has proposed that the interests of the shareholder PSPs of VocaLink be divested. The PSR has the power to require parties with an interest in an infrastructure provider to a payment system to divest all or part of that interest.

As part of the consultation, the PSR invites feedback on:

  • the timing of divestment
  • which parties' interests should be divested
  • whether they should be divested wholly or in part
  • if divested in part, how it should be done, e.g. whether there should be a cap on the total shareholding a PSP can have and whether a reduction should be to below a level of material influence.

The PSR also queries whether remedies should include changes to the composition of the payment systems' Boards.

In addition, the PSR has said it will be necessary to ensure that the incumbent provider is not able to create a monopoly position for itself in relation to additional 'overlay' services it provides to PSPs and that this will need to be considered as part of the competitive procurement exercise. Access to data should also not be used to foreclose the market to other innovative players.


The PSR proposes that a common international messaging standard be adopted for FPS, Bacs, and LINK. The decision on which messaging format to use is being considered by the Payment Strategy Forum. The PSR favours a phased transition period to a new standard since switching to a new messaging standard will require investment by PSPs, some of which will be better resourced to do this than others. The PSR has invited feedback on whether other aspects of technical standards or other rules may act as barriers to entry for potential infrastructure providers.


The PSR endorses measures proposed as part of a governance review conducted by LINK to ensure the separation of ownership of the functions of LINK from VocaLink. The PSR considers this work to be as important as the changes in ownership of VocaLink. These measures include establishing LINK as a separate legal entity (which was done in late 2014) with new governance, new core services contracts, and allocating intellectual property rights and liabilities between the parties. There is still work to do to make VocaLink and LINK fully separate entities.

What does this mean for you?

In 2014, the three payment systems mentioned above were responsible for just under ten billion transactions moving nearly £5.5 trillion2. These statistics highlight the importance of these payment systems to the UK economy. If transactions are delayed or otherwise go wrong, this can have serious repercussions. Furthermore, the number of Bacs and FPS transactions in particular is growing all the time, with the popularity of online and app-based banking services and with the increased threshold for FPS transactions causing increasing migration of payments from CHAPs to FPS.

Meanwhile, improving payment services by increasing competition has been an area of focus for government and regulators for some time. The interim report is just the latest in a series of regulatory interventions in the payments industry3. This interim report marks a significant step for the PSR. It has proposed some substantial remedies, which have the potential to radically change the payment systems landscape. Given the stability, security and reliability of the payment systems to date, the PSR will need to ensure these measures do not undermine the integrity of these crucial systems. This is of particular importance given its secondary objective to preserve the stability of, and confidence in the UK's financial system. If the PSR decides to confirm the remedies proposed in its interim report, it remains to be seen whether alternative bidders will come forward leading to the opening up of central infrastructure to competition and whether this will bring the benefits anticipated by the PSR.

The deadline for responses is 16 April 2016. Any firm that may be impacted by these proposals is encouraged to submit a response to the PSR as it is required to take into account all representations made. After all, the PSR has already shown an ability to change tack in the face of strong challenge raised during consultation (see our previous briefing, PSR confirms how it will regulate payments industry) and given the prominence of this review and the history of reviews before it, it has a strong interest in getting its recommendations right.