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HM Treasury - Opening up UK Payments

Summary of response

ABCUL and our member credit unions support the proposal to create an economic regulator for payment systems and a new, competition-focussed, utility-style regulator for retail payment systems.  Credit unions, as small, deposit-taking, financial co-operatives are keen to expand their role in providing payments services to their members.  Most of the best-developed credit union systems around the world provide transactional banking and payment services as part of their  
core proposition and in seeking to emulate their success, ABCUL and the British credit union sector are working towards replicating this model.

To this end, ABCUL – in collaboration with credit unions and the Co-operative Bank – developed and launched a full current account service (the Credit Union Current Account (CUCA)) in 2006 and in 2011 launched the Credit Union Prepaid Card.  The DWP’s Credit Union Expansion Project which is being delivered under contract by ABCUL and a consortium of credit unions will develop a shared banking platform as a central plank of its strategy to further embed transactional banking and payment services in British credit unions’ business model.

But while a growing number of credit unions are offering these transactional services, and further expansion into this market is central to the sector’s Government-sponsored expansion plans, there is a significant group who currently struggle to access these systems and for those that can’t, all payments have to be made manually via a third party clearing bank which is time-consuming and costly.  The principal reason why credit unions face this challenge is because of the terms upon which credit unions are offered access to the payments systems that underpin these card payment products.  

So both those credit unions which are able to provide these accounts and those that can’t are put at a disadvantage when competing with the large, system-owning clearing banks since every transaction is more costly for a credit union to process than it is for the major providers with whom they are competing.

Given the above, we are heartened by the consultation’s acknowledgement of the conflict of interest that the ownership and usage of payment systems creates with the system owners also being major system users.  We support the proposed approach to addressing this conflict which is resulting in inefficient outcomes for consumers since smaller providers are prevented from competing on a level playing field.  An economic regulator with a strong mandate to safeguard the interests of end-users and to promote competition between providers to this end should – if effectively implemented – provide the conditions for a better functioning payment system which allows fair competition between providers and, therefore, results in improved market efficiency and outcomes for consumers.

We support basing the regulator’s duties in the BIS Better Regulation Principles, particularly in relation to proportionality which will be critical to ensuring that the gains of enhanced competition and fairer access terms are not off set for smaller providers by increased regulatory burdens.  This is particularly true of the fee structure required to fund the regulator’s activity – it will be important that any fees are proportionate to the size and scope of the firm in question and reflect a fair allocation of the relative regulatory time and resource dedicated to each firm.

We support the wide-ranging powers which the consultation proposes should be provided to the new regulator since these will be critical to its success.  We are also supportive of the strong focus that the regulator will have on the end-user’s needs and how competition can be maximised in order to achieve positive outcomes for them.

Finally, and to reiterate, we welcome the consultation’s commitment to providing the new regulator with full powers to resolve the conflict of interest that exists currently around between the ownership and use of the payment systems.  In order to achieve a competitive payment systems market which delivers the best outcomes for consumers, it is critical that all providers are allowed access on fair terms and it is welcome that the new regulator as proposed will have scope to address the full range of factors which might be preventing fair access currently.

The full response is available to download on the right hand side.