Making UK Payments Regulation Work

Government's decision to wind up the Payments Council and vest control in some form of statutory body raises serious issues of governance and commerciality. The underlying assumption that civil servants are better able to determine market preference than bank executives seems an unlikely scenario. State managed Skoda was a constant butt of humour whilst its market based successor is widely acknowledged as a competent and skilful manufacturer hampered only by the ghost of its reputation. So how did we get to this unpromising crossroads?

One major issue is that the payments business requires competing institutions to act in complete cooperation. Any successful scheme must promise consumers and businesses that payments originated with one bank can reach (almost) any other. Scheme participation typically requires significant IT implementation, however, which is not only expensive but also very disruptive. 

Time was when the main commercial banks all had at least one executive who knew the payments business intimately and was senior enough to carry his board through the relevant decisions. Bert Morris was not only Bacs chairman in the 1980s and 90s but also NatWest’s Deputy CEO and a main board director. More recently, however, senior executives have become increasingly focused on capital markets business with little or no appreciation of the payments core. When RBS's systems recently malfunctioned leaving customers unable to make or receive payments for several days, CEO Stephen Hester was not immediately able to explain the cause. 

There has been a similar demise in product management expertise. Not long ago, marketing staff worked diligently to add value to their services as they implemented, for example, international reach and online access. Current marketing effort is more typically focused on the packaging of unrelated services such as travel insurance and vehicle breakdown cover whilst some banks have tacitly admitted their services contain so little value that they pay clients to use their accounts. 

None of this has been helped by the prevalent regime of no commission consumer banking. With little prospect of persuading clients to pay for the core payments service, managers have no real alternative but to remove costs and therefore typically also reduce value added. 

One cost the banks were keen to remove was that required to maintain the cheque clearing service. Whilst usage is in terminal decline, however, the banks fell foul of Government by omitting any meaningful impact analysis. As a result, no intermediate steps were proposed to manage withdrawal and marginal users such as elderly consumers and small charities were able to stop the initiative by claiming unfair discrimination.  

The new regulator, however constituted, therefore inherits a challenging agenda which needs to deal with issues of the past as well as the future. Civil servants and professional NEDs seem no more likely to achieve this under a new constitution than under the old one. The payments infrastructure is of national importance and needs people of appropriate stature and experience to manage it effectively. That means members who are bank main board directors under the chairmanship of an experienced business leader. After all, anyone unfortunate enough to need brain surgery, will look for a skilful and experienced doctor rather than a career administrator. The same principles apply here.