The slow drip of the ‘faster’ payments system


Regulatory agencies often come to see their functions through the eyes of those they regulate. The label for this process is regulatory capture.

We have just passed the first anniversary of the introduction of a “faster payments system” by British banks. The system is still only partly operational. Progress in introducing everyday financial transactions to the electronic age remains glacial.

When financial institutions talk about the chilling effect of regulation on innovation, the innovation they have in mind relates to complex new financial instruments, not more convenient forms of banking. The difference is that faster payments benefit customers of banks but not banks themselves. The experience of public policy towards payment systems is not encouraging for those who look forward to better regulation of financial services.

An aeon ago, a fresh-faced Gordon Brown, then chancellor of the exchequer, commissioned a report from Don Cruickshank on competition in the UK banking industry. Mr Cruickshank reported in 2000 and was particularly concerned about the lack of competition and innovation in payments. Making payments was slow and expensive, and the banks had used their control over the system to discourage competition.

Mr Cruickshank suggested that the money transmission system was similar to the gas, electricity or telecommunications networks. All were natural monopolies that formed an essential part of the national infrastructure. In these other utilities a regulator monitors investment, prices and service quality, ensures fair access for new providers and has the power to take control of the network if the continued supply of services is in doubt. Mr Cruickshank proposed a new agency, Paycom, which would fulfil these functions in financial services. The government accepted his cogent argument.

In 2001, however, following consultation, the chief secretary to the Treasury announced that no new agency would be established. The powers that Mr Cruickshank had proposed would be given to the Office of Fair Trading. Legislation would be introduced for this purpose.

No such legislation was brought forward. Two years later, Mr Brown said that instead the Office of Fair Trading would establish a Payments Task Force. Representatives of banks, retailers and consumer groups would monitor the development of competition in the industry.

In 2005, Ed Balls, then economic secretary to the Treasury, announced that the Payments Task Force would be superseded by a new Payments Council. The Payments Council is a membership organisation funded by established banks. Eleven of its 15 directors are their appointed representatives.

The chief executive of the Payments Council is Paul Smee. Mr Smee brings to the role the extensive knowledge of the industry he acquires in the course of his main job as chief executive of Apacs, the trade association for banks’ payment services. He does not have to walk far to attend meetings: the Payments Council shares the offices of Apacs.

The story does not get better. The European Union recently passed a directive requiring member states to establish an independent payments regulator. Britain’s designated regulator is the Financial Services Authority, which has issued a paper describing how it will exercise this responsibility. The main practical effect is that if you are not a bank, you will now have to get a licence to provide payment services. It is not the remit, or the intention, of the FSA to do anything about costs, access, innovation or service quality.

A regulatory agency is inevitably reliant for information and expertise on the industry it regulates. Major industries devote considerable resources, and infinite patience, to lobbying. If regulators are resistant, the lobbyists may use their political connections to exert pressure on them. By contrast, consumer groups are small and poorly funded, academics are isolated and the attention span of journalists is short.

Regulatory agencies often come to see their functions through the eyes of those they regulate. The label for this process is regulatory capture. Some industries succumb to it more quickly and easily than others. Still, the saga of the Payments Council must set some sort of record.

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