Competition and choice in the banking sector

Written evidence submitted by VocaLink

Summary

· VocaLink processes automated payments in the UK, including all Direct Debits, Direct Credits and Faster Payments; this accounts for approximately half a billion payments a month. It also operates LINK, the world’s busiest ATM network of over 63,000 cash machines.

· Bacs services (Direct Debits and Direct Credits) have been available for many years, work well and are readily accessible by market participants.

· The UK Faster Payments Service has been available since 2008, delivering real innovation to consumers.

· We do not believe that access to systemically important payment systems represents a barrier to entry in the banking market

· We believe the consumer inconvenience in switching banks has been largely removed by the ToDDaSO service, although there is potential for further innovation in this area

· We believe that there is considerable scope for better delivery and further innovation in mobile payments offerings to consumers

1. VocaLink welcomes the opportunity to contribute a submission to the HM Treasury Committee’s Inquiry into competition and choice in the banking market.

2. VocaLink is a specialist provider of transaction services. We process automated payments in the UK including Bacs Direct Debits and Direct Credits, the method by which 95% of salaries and 98% of state benefits in the UK are paid. It is estimated that over 70% of household bills are paid by Direct Debit, and the total value of payments flowing through the Bacs system in 2009 was £3.8 trillion.

3. We provide the real-time central infrastructure for the UK Faster Payments Service – which enables payments, including state benefits, to be made between accounts within seconds. Our services operate in highly secure data centres on ‘never fail’ technology which ensures total reliability and availability, 24 hours a day.

4. The specific purpose of this submission is to demonstrate that access to payment systems does not, in our opinion, represent a significant barrier to entry in the banking market.

5. The Bacs service has been in existence since 1968, and in 2004 following the Cruickshank Report it was divided into a scheme company (Bacs Payment Schemes Limited) and an infrastructure company (originally called Voca, now VocaLink following the merger between Voca and LINK in 2007). The separation of scheme and infrastructure provides a level of separation between the customers and the owners of the service. This model has been followed for the Faster Payments Service, launched in 2008, and has been widely copied in Europe and elsewhere. The Faster Payments scheme is managed by CHAPSCo and the infrastructure is provided by VocaLink.

6. The Bacs service (Credit Transfers and Direct Debits) has been running for over 40 years and its potential market is approaching saturation, although there are ongoing efforts by Bacs and the industry to encourage even higher levels of adoption of Direct Debits by consumers. The Faster Payments scheme was launched in May 2008 and banks are currently completing the migration of Standing Orders and remote banking transactions to this service away from Bacs. The Faster Payments Service has the potential to attract other types of payment, including lower-value CHAPS transactions and support new payment methods such as mobile payments and on-line payments (as an alternative to cards). There has been wide interest in the concept of Faster Payments from other countries seeking to learn from our experiences.

7. We do not perceive access to the Bacs and Faster Payments services as a barrier to entry or expansion in UK banking. The agency bank model works well for Bacs although it should be noted that after two years operation there are still no agency banks providing access to Faster Payments services directly. This may be due in part to the technical complexity of building or purchasing a gateway and then integrating this to the bank’s back office systems. We have recognised the demand for a managed service offering in this area and have developed a Faster Payments Managed Service to offer an easier channel for agency banks and other potential FPS users.

8. The provision of the ToDDaSO service (Transfer of Direct Debit and Standing Orders) has largely removed the customer inconvenience of cancelling Direct Debits and Standing Orders with one bank and then having to re-establish them at the new bank. This service has worked well for a number of years and has removed the major obstacle to account switching.

9. Further enhancement to ToDDaSO to provide linked electronic transfer of associated funds, the extension of the service to investment accounts such as ISAs and the migration of the service to real-time operation would significantly enhance the benefits to the consumer.

10. The near universal use of mobile phones and the sharp growth in availability of smart phones provides a compelling base for innovation in delivering mobile banking, and in particular mobile payments. The launch and widespread take-up of mobile banking services from major banks in the past two years shows that there is significant consumer demand for further innovation in delivering mobile payments. The key driver for future demand is likely to be the ability to clear funds between accounts within a few seconds1, utilising existing services such as Faster Payments and LINK. We believe that there is a compelling case for industry collaboration to facilitate full account reach and widespread take up of such services. Mobile payments will deliver credible alternatives to cheque and cash usage, and allow consumers greater control of their finances.

September 2010