Selling VocaLink to MasterCard will Kill Innovation in UK Payments.

Mine was the lone voice in the comments section of MasterCard agrees £700m VocaLink acquisition. Nice to have some company now! What I find most intriguing is the glaring difference in take rate between MC and VL - 1% versus 0.003% respectively.

I have a different view. As we have separation of scheme ownership from technology and infrastructure provision, and it's the latter which VocaLink provide under contract to FPSL for example in the case of Faster Payments, this move does not see Faster Payments subject to any risk of becoming more expensive or that charging may become less transparent - after all, there is a contract in place governing this, and it's a matter for FPSL as the scheme body to set the fees charged by the scheme. Should Mastercard wish to change all if this, I imagine they have an opportunity to do so when the next tender for the provision of the scheme's technology and infrastructure is issued, and at the same time, other companies may also wish to bid to provide that infrastructure. In fact, now that VocaLink isn't bank owned, you might argue there is a better chance that another company may win that business, and equally that the fact that Mastercard owns VocaLink increases the likelihood that other competitors may wish to compete against them - I can think of at least two very well known organisations that I imagine will be having serious thoughts about doing just that.

Anish - your piece is very well-argued and I agree that this is a highly significant development but my reaction is much more positive - see  MasterCard agrees £700m VocaLink acquisition (I commented too Ketharaman :-)).

I think David hits the nail on the head by pointing out that for any payments scheme there should be a separation between the technology or infrastructure provider and the branded business service.  As I understand it MasterCard would be acting solely as the infrastructure provider in this case - we're not talking about MasterCard-branded Faster Payments are we?  Also, I think we need to look at this as a global rather than just a UK development.  From this perspective MasterCard, as an infrastructure provider, already operates in a highly efficient marketplace characterised by intense competition amongst a handful of big transaction processing firms such as First Data, Equens, Visa of course, TSYS, Elavon, SIA-SSB, PBS, Six and so on, as well as Vocalink and MasterCard itself.  Hardly a monopoly!

Ketharaman - you're right to draw attention to pricing, but firstly, the ad valorum charges of 1%+ are what MasterCard, or more precisely MasterCard banks as the branded business service providers, charge for card payments - I believe Mastercard transaction processing rates are much lower and are transaction based rather than ad valorum.  Secondly, I've always thought that UK banks were missing a trick by underpricing BACS and Faster Payments - in effect giving it away for free!

So going back to David's point, I think it's up to FPSL and the UK banking community to make sure they develop BACS and Faster Payments into innovative and fairly priced payment schemes and if FPSL feels that MasterCard is the best infrastructure provider to meet this goal then so be it.  As David points out, they can always go out to tender again at a later date.

I agree with the points raised in this article. I think the passing of this acquisition would be bad news for merchants and consumers, who have already felt the impact (i.e. higher prices) of concentration in other markets that MasterCard dominates. I’m concerned with the stance the PSR has taken but there’s still an opportunity for competition authorities to intervene.

@NickCollin: Oh, my apologies, I do recollect that you'd commented! Actually, I'd sort of assumed a total MDF / MSC of around 2% but I agree with you that MC's take rate out of that will be closer to 0.5% rather than 1%. But 0.5% is also two orders of magnitude greater than VL's take rate of 0.003%! For the sake of innovation etc., I hope MC finds a way to raise the take rate on VL's offerings instead of shutting them down and moving everything to its native card based offerings which would prove much costlier for merchants. 

@Ketharaman - how could MC "shut down" services that VL are involved in? FPSL run Faster Payments, and there is similarly a scheme body for BACS. VL are simply the technology and infrastructure provider, they have no control over the strategy or running of Faster Payments, or G3/FAST in Singapore, or BACS, etc. MC are in a very different position in terms of their "scheme" and hence the take rates reflect the role played.

@DavidGodrey:

My comments here, and on the previous post titled MasterCard agrees £700m VocaLink acquisition are based on the following passage in the previous post: 

"The London-based group operates BACS, the ACH enabling direct credit and direct debit payments between bank accounts, as well as the Faster Payments scheme".

If the ownership of BACS and FPS is as you describe, then the above passage is an exaggerated account of VL's role in BACS and FPS and I'd agree that MC can't shut down VL's offerings.

@Ketharaman - absolutely, the payment schemes in the UK are divorced from the operator of the technology and infrastructure; this has been an ongoing regulatory theme for several years now.

In the case of Faster Payments, the scheme body is FPSL, who are completely separate and independent of VocaLink or MasterCard. VL have a contract to provide and operate the technology that powers UK Faster Payments, but the management of the scheme is down to FPSL, who will put the operation of the scheme infrastructure out to tender every few years.

I would argue that now that VL is not owned by the banks, it provides for an even more level playing field when it comes to choosing who should be awarded the contract to operate the scheme infrastructure. Now that VL is not owned by the banks, who essentially "own" the scheme company FPSL, there cannot be any suggestion that VL have an unfair advantage.

Equally if you look at BACS, you will see there is a similar arrangement. Had this not been the case, as it was until around 2004, I doubt it would have been anywhere near as easy for the MC acquisition of VL to have proceeded.

@DavidGodrey:

TY for the clarification. 

If VL is only the supplier of the FPS and BACS technologies,

1. the line "the company processed over 11 billion transactions with a value of £6 trillion, generating revenues of £182 million" in the previous post is somewhat misleading, and
2. the term "take rate" is itself meaningless in the context of VL or, at least, not comparable with the much higher take rate of MC, which actually owns a card scheme, not just the underlying technology. 

Thanks again, far more than a clarification, this has been a revelation!

@Ketheraman - you could argue they do process the transactions - they are not simply the technology supplier but the infrastructure provider, e.g. they keep the lights on, they manage the data centre, run the help desks etc but the bank's and other scheme members relationship is with the scheme body, e.g. FPSL, not VL, e.g. VL cannot dictate who joins the scheme and on what basis they join, nor can anyone other than the scheme body decide how the scheme will evolve in terms of standards and services available.

As you say, in the context of MC operating their scheme, their take rate is much higher due to the wider scope of their offering.

@Ketharaman:  I think there's still confusion over the so-called "take rate" - a term I've never come across before.

Just to be clear, MasterCard, like Visa and as far as I know like most transaction processing companies, charges its bank customers a transaction processing fee for every transaction processed which is normally a fixed amount per transaction and is typically a few fractions of a cent.  This is what should be compared with the Vocalink fee which from your figures I calculate to be 0.0165p per transaction (£182million/11billion).  I'd be surprised if the transaction processing fee rates were markedly different.

In addition, MasterCard charges its bank customers an assessment fee for the use of its brand - with similar sorts of rates.  But this should be compared with whatever is charged by FPSL, not Vocalink.

As a completely separate issue, MasterCard's bank customers charge their merchant customers a merchant service charge which is typically an ad valorum charge of 1-3%.  I think this is what you're referring to when you talk about "the much higher take rate of MC".  In fact MasterCard gets none of this merchant service charge and none of the interchange charge which contributes to it.

This is a complex and hugely misunderstood area so I'm not surprised you're confused :-).

This is a 

@NickCollin:

I too learned the term "take rate" very recently, but it has been around for a while, judging from this BI article titled "As PayPal's Business Expands, Its Take Rate Is Collapsing" published in Jan. 2015. As stated in this article, take rate is the revenue the company generates as a percentage of total payment volume.

AFAIK, and as per another BI article (http://www.businessinsider.com/interchange-fees-the-billion-dollar-fight-for-control-of-your-wallet-2011-3?IR=T), card networks like MC earn an ad valorem fee on every transaction and it is a part of interchange. The fixed fee transaction fee you're referring to is probably in addition to this.

Dear Anish - from the authorities' perspective I think this deal is meant to go hand-in-hand with the scheme companies going regularly to tender on the provision of infrastructure, such that players like STET and Equens could bid against Vocalink on the provision behind LINK, FPS and BACS, and presumably Vocalink could try to bid for Cheque&Credit and even CHAPS, but then at the same time the PSF's Payments Strategy anticipates that (i) the BACS, FPS and Cheque&Credit scheme companies will merge - so will they merge their schemes in some way and reduce the number of contracts to be tendered for? and (ii) there should be a single Simplified Payments Platform that sounds very much like Distributed Ledger, and the "schemes" would be "overlay services" on top of this SPP, so there would not necessarily be a central infrastructure at all.

On that basis Mastercard may have bought a cash cow, or a sunset business, who knows.