Consultation outcome

Designation of payment systems for regulation by the Payment Systems Regulator

Updated 18 March 2015

This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government

1. Introduction

The Financial Services (Banking Reform) Act 2013 (“the 2013 Act”) received Royal Assent on 18 December 2013. It created a new competition-focused, economic regulator for retail payment systems in the UK: the Payment Systems Regulator (PSR). In April 2014, the PSR came formally into being as it was incorporated as a subsidiary of the Financial Conduct Authority (FCA). It will be fully operational from April 2015. The 2013 Act provides that the Payment Systems Regulator will be able to oversee all domestic payment systems which are brought into its scope by being designated by HM Treasury.

1.1 Background

In March 2013 the government published a consultation document, Opening up UK payments, setting out its proposals to bring payment systems under formal economic regulation. This followed a report published in July 2011 by the Treasury Select Committee, expressing serious concerns about the governance of payment systems, and recommending that the Payments Council be brought into regulation.

The government has considerable concerns about UK payment systems. The combination of strong network effects, and the ownership of many of the key payment systems by overlapping groups of the big incumbent banks, are seen as potentially giving rise to problems in three areas:

1. Competition: the structure of the industry may give the incumbent big banks the opportunity to erect barriers to entry, so that challengers and smaller players find it more difficult to access payment systems on fair and transparent terms. These issues may occur both at the level of direct and indirect access to the payment systems.
2. Innovation: the network nature of payment systems (ie all major banks need to be connected for the system as a whole to be effective) means that innovations in the shared space do not give a competitive advantage to banks individually. The banks also have the ability to slow the pace of development of new innovations if, for example, they are not as well-placed to take advantage of them. There is therefore a concern that new innovations might not be developed where they are in the wider social interest, but not in the narrower interests of individual banks.
3. Service-user responsiveness: the network nature of payment systems means that, if a payment system fails to respond to service-user needs, this does not necessarily give a competitive disadvantage to any individual bank. This may lead to payment systems not being responsive to service-user needs and wishes.

This consultation document explains the criteria for the designation of payment systems, and sets out those payment systems which the Treasury believes meet these criteria and it therefore proposes to designate, thereby bringing them into the scope of regulation. The Treasury is now seeking views from interested parties in relation to these proposals.

2. The legislative framework: the Financial Services (Banking Reform) Act 2013

2.1 Overview

The 2013 Act defines a “payment system” and enables the Treasury to designate payment systems and thereby bring them into the scope of regulation by the PSR. The Treasury may designate a payment system only if deficiencies in the design of the system, or disruption in its operation, would have serious consequences, and the legislation provides four criteria to which the Treasury must have regard. However, the legislation does not prevent the Treasury from taking additional matters into consideration. In considering whether to designate a payment system, the Treasury may rely on information provided by the PSR, the FCA, the Prudential Regulation Authority and the Bank of England.

Once a payment system is designated, this brings the system’s participants (operators, infrastructure providers and payment service providers that provide payment services using the system) within the scope of the PSR’s powers.

This designation framework allows the Treasury to focus the PSR’s attention where it is required, without the need to designate less relevant payment systems at the outset. It then provides the flexibility to bring emerging payment systems and participants into scope, as and when they meet the threshold for designation. Likewise, a system that declines in importance may no longer need to be regulated and this framework allows the Treasury to de-designate a system when appropriate.

In process terms, this framework has similarities with the regime for bringing inter-bank payment systems under Bank of England oversight for stability purposes, as set out in Part 5 of the Banking Act 2009. However, the designation of payment systems for regulation by the Payment Systems Regulator is separate and distinct from this regime.

2.2 Meaning of “payment system”

The 2013 Act defines a payment system as:

a system which is operated by one or more persons in the course of business for the purpose of enabling persons to make transfers of funds, and includes a system which is designed to facilitate the transfer of funds using another payment system.

This definition provides that third-party systems, which overlay or “piggyback” on core payment system rails are treated as payment systems in their own right and therefore may be designated for regulation.

The 2013 Act then specifies that the following are not be considered as payment systems, and therefore cannot be brought into the scope of regulation:

• arrangements for the physical movement of cash
• a system which does not provide for funds to be transferred by payers, or to recipients, in the UK
• a securities settlement system operated by a person approved under regulations under section 785 of the Companies Act 2006
• a system operated by a recognised clearing house
• a system whose primary purposes is not enabling persons to transfer funds

Designation criteria

The 2013 Act provides that the Treasury may designate a payment system only if it is satisfied that:

any deficiencies in the design of the system, or any disruption of its operation, would be likely to have serious consequences for those who use, or are likely to use, the services provided by the system.

Therefore, the Treasury must be satisfied that the importance of the system is such that there is potential for serious consequences for service-users. For example, such consequences could be caused by failures in any aspect of the operation, development or provision of the system.

The legislation provides that a payment system may be designated if such consequences would be likely to occur if there were deficiencies or disruption, as a result of the system’s importance; designation does not of itself mean there are specific failures identified in the system and does not automatically trigger any action by the PSR against the payment system. It allows the Treasury to designate systems in advance of any need arising for the PSR to take regulatory action in relation to them.

The 2013 Act then requires that, in considering whether to designate a payment system, the Treasury have regard to the four criteria below. Rather than a mechanical test, these four criteria provide for a multi-dimensional assessment of importance. For example, it is quite possible that a payment system has comparatively low transaction volumes or values, but that it is an important system for specific service-users. Therefore, no one criterion of itself necessarily qualifies a system for regulation.

(a) The number and value of the transactions that the system presently processes or is likely to process in the future

The Treasury must consider the overall volume and value of transactions. There is no absolute threshold that automatically triggers a payment system for designation. As with each of the criteria, this is one of several factors that the Treasury will take into consideration in building a picture of the overall importance of the system.

(b) The nature of the transactions that the system presently processes or is likely to process in the future

The Treasury must consider the type of service it provides to service-users. For example, the Treasury may consider what it is used for, who its service-users are, and any other characteristics of the transactions processed by it. Where relevant, the Treasury will note the proportion of payments that are retail versus wholesale.

(c) Whether those transactions or their equivalent could be handled by other payment systems

The Treasury must establish whether the types of transaction provided by the system could be provided by another payment system instead. In considering the degree of choice available to service-users, the Treasury will consider the availability of substitutes, how accessible and practical these are to use, and how this applies both for service-users and for financial institutions acting as payment service providers.

The existence of close substitutes can be a useful indicator of choice and competition, and helps assess where the balance of power in the market lies between firms and customers. However, this is not an automatic proxy for market power on its own. For example, there could be healthy competition and customer power even if a firm faces only one or two rivals. Or, the status of a new payment system as a substitute for another, well-established system could indicate that it is now significant enough to designate.

(d) The relationship between the system and other payment systems

The Treasury must assess the significance of a payment system stemming from its relationship to other payment systems. The Treasury will consider whether the payment system in question supports or depends upon another system.

2.3 Future changes in designation

The legislation gives the Treasury powers to amend or revoke designation orders. Before amending or revoking a designation order, the Treasury must consult the PSR, and, if the payment system is a recognised inter-bank system, the Bank of England. The Treasury must notify the operator of the payment system and consider any representations made. The Treasury must consider any request by the operator of a regulated payment system for the amendment or revocation of its designation order.

As set out above, it is possible that payment systems not designated by the Treasury at this stage will in time meet the criteria for designation. Likewise, payment systems currently designated may decline in importance and require de-designation. Therefore, the Treasury intends to carry out horizon-scanning on an annual basis with the PSR and Bank, to consider whether there are any systems that now satisfy the criteria for designation, or any currently designated systems no longer satisfy these criteria.

This is consistent with the horizon-scanning role maintained with respect to the recognition of inter-bank payment systems under the Banking Act 2009. The Bank of England and Treasury meet on an annual basis to consider whether there are systems that may satisfy the criteria for recognition, or any recognised systems that no longer satisfy these criteria.

3. Payment systems proposed to be designated

Having considered the criteria in the 2013 Act, the Treasury proposes to designate the following systems initially:

• Bacs
• CHAPS
• Faster Payments
• LINK
• Cheque and Credit
• Northern Ireland Clearing
• Visa
• MasterCard

Once a payment system is designated, the PSR will have a range of powers over its participants (operators, infrastructure providers and payment service providers that provide payment services using the system). The 2013 Act expressly excludes the Bank of England from the scope of regulation.

This chapter sets out the matters taken into account by the Treasury when selecting the proposed systems, against the four statutory criteria. The Treasury has made an assessment, using the four statutory criteria, of whether any deficiencies in the design of the system, or any disruption of its operation, would be likely to have serious consequences for service-users of that system. As explained in Chapter 3, this does not necessarily mean that any detriment is occurring or has occurred; rather, it reflects how important that system is to its users.

The Treasury has notified the operators of these systems and will consider any representations made.

3.1 Bacs

(a) The number and value of the transactions that the system presently processes or is likely to process in the future

In 2013, Bacs processed 5.7 billion payments, with a value of £4.2 trillion. This represented an increase of 1% and 3% respectively, compared to 2012. Of this, 3.5 billion Bacs items were Direct Debits (worth £1 trillion), 2 billion items were Direct Credits and 18 million items were Standing Orders.

(b) The nature of the transactions that the system presently processes or is likely to process in the future

Bacs provides three types of payment: Direct Debits, Direct Credits and Standing Orders. Bacs is the only provider of Direct Debits, a “pull” mechanism used for regular, fixed payments. Direct Debits are commonly used for paying utility bills, phone bills, insurance, mortgages and subscriptions. Most salary payments, welfare payments and pensions and payments to suppliers are made using Bacs Direct Credits. While most Standing Orders are now handled by Faster Payments, Bacs continues to process a minority of these transactions. Standing Orders are regular, fixed payments set up by the payer, typically used to pay for bills and subscriptions.

Service-users of Bacs include consumers, small, medium and large sized businesses, government, local authorities and banks. Bacs is a deferred multilateral net settlement system, with a three day clearing cycle, settling across accounts at the Bank of England.

(c) Whether those transactions or their equivalent could be handled by other payment systems

As an alternative to Bacs, consumers could make some payments by card, for example, instead of paying bills via Direct Debit or Standing Order. Third-party systems that overlay the inter-bank or card networks to offer online transactions might also be suitable in certain cases. As an alternative to Bacs Direct Credits, businesses and Government could issue cheques for salaries, welfare and pension payments, but this would be slow and costly. Inter-bank transfers could be made using Faster Payments; however, this would not always be suitable as there is an upper limit on transaction values. There would be technical obstacles – including a risk of hitting system capacity – to re-routing large volumes of payments. Rather than a three day cycle, a Faster Payments transaction would be near real-time with intra-day settlement. Depending on access arrangements, smaller banks and building societies may not be able to offer Faster Payment transactions to their customers. In some cases cash could be used, but this would be impractical for high values and for non-face to face transactions.

(d) The relationship between the system and other payment systems

Bacs has links with Cheque and Credit and with the card networks: currently, unpaid cheques and unapplied credits usually result in a new Bacs payment being created, though these can be sent through the Cheque and Credit infrastructure instead. Bacs is also used to fund merchant accounts when card transactions take place.

Bacs currently supports a number of overlay payment solutions, such as GoCardless for managing direct debits online, and iZettle.

3.2 CHAPS

(a) The number and value of the transactions that the system presently processes or is likely to process in the future

In 2013, CHAPS total transaction volumes grew by 3% to 35 million, with a value of £70 trillion. Of this, retail and commercial transactions comprised 28 million items, worth a total of £15 trillion. It is therefore the largest payment system in the UK by value of transactions.

(b) The nature of the transactions that the system presently processes or is likely to process in the future

CHAPS is the only UK payment system providing instant high-value transfers with real time settlement in central bank money. This means the payment is irrevocable as soon as it is entered into the system and banks can only make payments in CHAPS if they have sufficient liquidity beforehand. CHAPS is primarily used for transactions where the payer and payee need the payment to settle as quickly and safely as possible, for example large money market transactions or house purchases.

In 2013, retail and commercial transactions comprised 79 per cent of total CHAPS volumes and 22 per cent of total CHAPS values. Retail service-users are most commonly individuals making house purchases and other high-value, one-off payments, where instantaneous transfer is required. There is typically an up-front charge to service-users for making a CHAPS payment, usually between £25 and £30.

The Faster Payments system currently has a threshold of £100,000, and individual financial institutions may set their own limits below this. However, if the Faster Payments limit were to be raised, some future retail transactions currently processed by CHAPS may migrate to the Faster Payments system.

Whether those transactions or their equivalent could be handled by other payment systems

For high-value payments under £100,000, Faster Payments may be used instead of CHAPS, as it processes payments in near real-time, and there is usually no charge to end-users. However, although many electronic payments sent through Faster Payments will arrive at the recipient’s bank account within minutes or on the same day, this is not guaranteed. There is no practical alternative for CHAPS payments above this threshold (aside from the inconvenience of breaking down a payment into multiple transactions of smaller amounts). Bacs Direct Credits are another possible alternative, but the customer proposition is different here, as it has a three day cycle.

(d) The relationship between the system and other payment systems

Like Bacs, CHAPS can be used to fund merchant accounts for card payments.

3.3 Faster Payments

(a) The number and value of the transactions that the system presently processes or is likely to process in the future

In 2013, Faster Payments processed 968 million transactions, with a total value of £700 billion. This represented an increase of 19 per cent and 25 per cent respectively, compared to 2012. Currently 49 million current account holders have access to Faster Payments. As membership expands, transactions by Faster Payments would be expected to rise. In addition, if the Faster Payments upper value limit is raised it would be reasonable to expect that some payments currently processed by CHAPS could be made using Faster Payments instead. The number of Faster Payments transactions processed for e-commerce and m-commerce can also be expected to rise in connection with the expansion of the internet economy and mobile payment applications.

(b) The nature of the transactions that the system presently processes or is likely to process in the future

Faster Payments supports the following credit (“push”) payments: single immediate payments, forward dated payments, standing order payments, DCA corporate bulk payments, return payments and scheme return payments. Faster Payments offers real-time transactions, with deferred net settlement. It has an upper limit of £100,000. Faster Payments is now used for many telephone and internet banking transfers. Standing Orders are now usually made by Faster Payments. For example, 18 million such payments were made using Bacs in 2013, while 313 million were via Faster Payments.

The Faster Payments system also provides the underlying rails for many new “overlay” payment services, facilitating e-commerce and m-commerce payments. For example, it processes payments for Paym, a mobile database that allows individuals to make payments using a mobile number.

The nature of the transactions for service-users can vary according to their bank’s and the receiving bank’s customer proposition, and the banks’ connectivity to Faster Payments. For example, the service is not necessarily available to customers on a 24/7 basis, and individual financial institutions may set their own upper limits on transaction values, below the £100,000 threshold.

Faster Payments operates by deferred net settlement, with net batches across accounts at the Bank of England, three times a day.

(c) Whether those transactions or their equivalent could be handled by other payment systems

Currently, if a receiving bank cannot accept a payment over Faster Payments, a bank can send the payment using Bacs or CHAPs. There are, however, significant technical obstacles to re-routing large volumes of payments. As an alternative to direct transfers and regular payments, individuals and businesses might be able to pay by cheque, credit or debit cards (and any third-party systems that overlay the inter-bank or card networks to offer online transactions) or cash. However, cash would not be suitable for high-value or remote transactions, and it might not be possible to make the payment quickly enough using cheques or cards. Peer-to-peer transfers could still theoretically be made using Paym because it can operate via LINK rails as well as Faster Payments.

(d) The relationship between the system and other payment systems

Faster Payments provides the underlying rails for a significant number of new and emerging “overlay” payment systems, such as Paym. It is expected to play in integral role in supporting future innovation in this sector. Faster Payments will also replace Bacs, to accelerate the funding of merchant card payments. This is expected to be implemented by December 2014.

3.4 LINK

The LINK system allows for inter-bank transfers and is used when a customer withdraws cash from an ATM that is not operated by their own bank. As set out in the legislation, arrangements for physical movement of cash are not a payment system, therefore arrangements for the actual withdrawal of cash from own-bank ATMs will not be subject to the PSR’s powers.

(a) The number and value of the transactions that the system presently processes or is likely to process in the future

In 2013, there were 3 billion LINK transactions, of a total value of £128 billion. Almost every ATM in the UK is connected to the LINK network. The LINK system, along with Faster Payments, provides the underlying facility for Paym mobile payments. Therefore, the expanded role for the payment system can be expected to support growth in the number of transactions.

(b) The nature of the transactions that the system presently processes or is likely to process in the future

The LINK network is currently used principally for cash withdrawals from ATMs (except where transactions are “native” i.e. made by customers at the ATM of their own bank or building society). The LINK system – allowing for inter-bank transfers – also facilitates mobile payments by Paym. Users are typically individuals withdrawing cash and individuals sending money to individuals and organisations.

LINK operates by deferred net settlement, with a two day clearing cycle. Settlement takes place across accounts held at Bank of England.

(c) Whether those transactions or their equivalent could be handled by other payment systems

There are a number of alternatives to LINK in its capacity for peer-to-peer mobile payments by Paym, including use of the Faster Payments rails that support the same application, and other comparable applications. For example, PayPal’s mobile offering allows users to transfer money to individuals and organisations.

(d) The relationship between the system and other payment systems

LINK directly facilitates mobile payments by Paym.

3.5 Cheque and Credit

(a) The number and value of the transactions that the system presently processes or is likely to process in the future

4.30 In 2013, 566 million items were cleared through the system, with a total value of £558 billion. This represented a reduction of 12% and 11% respectively, compared to 2012.

(b) The nature of the transactions that the system presently processes or is likely to process in the future

Cheque and Credit clears cheques, paper credits (e.g. bank giro credits), euro debits, US dollar cheques and other paper instruments through its system. While cheques continue to account for a substantial number of overall payments in the UK, the importance of the payment system derives not solely from the total volume and value of transactions, but also its significance in certain sectors of society and for certain types of transaction. This comes from the unique nature of cheques (and the other instruments cleared through the system) as paper-based payments.

Cheques and other paper instruments are used by individuals to pay bills (such as utility and credit card bills), to make payments to schools and for children’s activities, to pay small businesses (such as sole traders), to pay tax to HM Revenue & Customs, and for outgoing payments by small and micro-businesses. For example, in 2013, 25 per cent of payments by small and micro-businesses were made by cheque. Cheques are also favoured by many elderly people, and remain a preferred method for birthday gifts and donations to charity.

Settlement takes place across accounts at the Bank of England, on a deferred net settlement basis. Clearing times for service-users currently comply with a 2-4-6^{[footnote 1]} industry standard.

(c) Whether those transactions or their equivalent could be handled by other payment systems

This is the only system for inter-bank clearing of paper cheques and credits for England, Wales and Scotland, therefore there is no direct substitute. Individuals and businesses may be able to pay by other means, such as Bacs or Faster Payment. However, in contrast with using a cheque, users would need to be provided with the payee’s account details. Some users, who find cheques familiar and reliable, may not be comfortable with internet or mobile banking.

Other options include CHAPS (which incurs an up-front fee), debit card, credit card, prepaid card, cash or mobile wallet systems, including third-party systems that overlay the inter-bank or card networks to offer online transactions. Again, these may require knowledge of the payee’s details, use of technology, or in the case of cash, having to access an ATM. Innovation in merchant acquiring solutions is making it easier and cheaper for small and micro-businesses to accept cards, but many sole traders and other small business owners still prefer to receive cheques.

(d) The relationship between the system and other payment systems

Cheque and Credit depends on Bacs for the unpaid process (unpaid cheques usually result in a new Bacs payment being created, though these can be sent through the Cheque and Credit infrastructure instead).

3.6 Northern Ireland Clearing

(a) The number and value of the transactions that the system presently processes or is likely to process in the future

The Northern Ireland system currently processes almost 15 million cheques a year, which is around 2% of the total UK cheque volumes. 350,000 credits are processed each year.

(b) The nature of the transactions that the system presently processes or is likely to process in the future

The Northern Ireland system for the clearing of cheques and other paper instruments is overseen by the Belfast Bankers’ Clearing Company Ltd, while its four shareholding banks handle the processing and settlement of items. While cheques continue to account for a substantial number of overall payments in Northern Ireland, the importance of the payment system is not derived solely from the total volume and value of transactions but also its significance in certain sectors of society and for certain types of transaction. This comes from the unique nature of cheques (and the other instruments cleared through the system) as paper-based payments.

Cheques and other paper instruments are used by individuals to pay bills (such as utility and credit card bills), to pay small businesses (such as sole traders), to pay tax to HM Revenue & Customs; to make payments to schools and for children’s activities, and for outgoing payments by small and micro-businesses. Cheques are also favoured by the elderly, and remain a preferred method for birthday gifts and donations to charity.

Northern Ireland banks settle on a deferred net bilateral basis, using CHAPS payments. Clearing times for service-users currently comply with a 2-4-6^{[footnote 1]} industry standard.

(c) Whether those transactions or their equivalent could be handled by other payment systems

This is the only system for processing paper cheques and credits in Northern Ireland, therefore there is no direct substitute. Individuals and businesses may be able to pay by other means, such as Bacs or Faster Payments – but, unlike with a cheque, they would need to know payee’s account details. Some users, who find cheques familiar and reliable, may not be comfortable with internet or mobile banking.

Other options include CHAPS (which incurs an up-front fee), debit card, credit card, prepaid card, cash or mobile wallet systems, including third-party systems that overlay the inter-bank or card networks to offer online transactions. Again, these may require knowledge of the payee’s details, use of technology, or in the case of cash, having to access an ATM. Innovation in merchant acquiring solutions is making it easier and cheaper for small and micro-businesses to accept cards, but many sole traders and other small business owners still prefer receive cheques.

(d) The relationship between the system and other payment systems

Belfast Bankers and Cheque and Credit have geographically complementary activities, with the former being active in Northern Ireland, while the latter is active in the rest of the UK.

3.7 Visa

(a) The number and value of the transactions that the system presently processes or is likely to process in the future

In 2013, there were 749 million Visa credit card and charge card^{[footnote 2]} transactions, and 11 billion Visa debit card transactions. This accounted for 29 per cent of all credit and charge card transactions, and represented a share of 97 per cent of all debit card transactions. The total value of Visa credit and charge card transactions amounted to £51 billion – 31 per cent of the value of all credit and charge card transactions. The value of all Visa debit card transactions in 2013 was £570 billion – representing 98 per cent of the value of all debit card transactions in the UK.

Around 91 per cent of the UK adult population has a debit card, and debit cards accounted for about 51 per cent of the value of UK retail sales in 2013. The use of the Visa payment system is likely to be supported by the growth of the internet economy (where payment is often by card), in particular, with the development of e-commerce and m-commerce payment innovations that utilise the debit and credit card switches. Innovation in merchant acquiring solutions, making it easier for small and micro-businesses to accept cards, can also be expected to contribute to higher levels of payments using Visa.

(b) The nature of the transactions that the system presently processes or is likely to process in the future

Debit and credit cards are used for a wide range of retail payments, including in physical shops, online (including via “overlay” systems, payment gateways and third-party payment providers), mobile and mail order payments. The customer proposition for card payments has diversified in recent years. In-store, physical point of sale options include a choice of chip and PIN or contactless payment, if the card issued has Near Field Communication technology. For remote, online payments, Visa provides its own mobile wallet application (V.me), allowing users to make purchases online using just a password (instead of having to re-enter card details with each transaction).

Visa works on a deferred multilateral net settlement basis, with a daily clearing cycle and with the Bank of England acting as their settlement agent in the UK (settlement is undertaken across accounts held at the Bank of England).

(c) Whether those transactions or their equivalent could be handled by other payment systems

Non-Visa debit cards and credit cards are a close substitute. However, there may be limited end-user choice given Visa’s position in the provision of debit cards, which may make it harder for customers to find a non-Visa debit card. Cheques and cash can be used by individuals; but retailers may not accept cheques, and cash cannot easily be used for high-values and payment online.

Other e-commerce and m-commerce alternatives are also available, which can run on MasterCard or potentially other card network rails. There are also solutions such as Ukash, allowing users to exchange cash for a voucher redeemable at participating merchant websites. Payment by PayPal online can be made using a pre-paid balance or direct transfer of funds from one account to another, users do not have to link their PayPal account to a credit or debit card.

(d) The relationship between the system and other payment systems

Visa payments can rely on Bacs and CHAPS to fund merchant accounts, and with the implementation of accelerated merchant funding by December 2014, these payments will be made using Faster Payments. The Visa system directly supports “overlay” applications, for example, where customers fund their PayPal account using their Visa card.

3.8 MasterCard

(a) The number and value of the transactions that the system presently processes or is likely to process in the future

There were 1.6 billion credit and charge card transactions by MasterCard in 2013, and 315 million debit card payments by MasterCard. MasterCard’s share of the number of credit and charge card transactions was 63 per cent, and three per cent of the total volume of debit card transactions. Credit and charge card transactions by MasterCard totalled £97 billion, representing 60 per cent of total credit and charge card values, and its debit card transactions were nearly £14 billion – a share of two per cent of overall debit card transaction values.

The use of the payment system is likely to be supported by the growth of the internet economy (where payment is often by card), in particular, with the development of e-commerce and m-commerce payment innovations that utilise the debit and credit card switches. Innovation in merchant acquiring solutions, making it easier for small and micro-businesses to accept cards, can also be expected to generally contribute to higher levels of payments using MasterCard.

(b) The nature of the transactions that the system presently processes or is likely to process in the future

Debit and credit cards are used for a wide range of retail payments, including in physical shops, online (including via “overlay” systems, payment gateways and third-party payment providers), mobile and mail order payments. There were around 30 million credit card holders in 2013 – accounting for 60 per cent of the UK adult population. The customer proposition for card payments has diversified in recent years. In-store, physical point of sale options include a choice of chip and PIN or contactless payment (if the card issued has Near Field Communication technology). For remote, online payments, MasterCard provides its own mobile wallet application (MasterPass), allowing users to make purchases online using just a password (instead of having to re-enter card details with each transaction).

MasterCard works on a deferred multilateral net settlement basis at a commercial bank.

(c) Whether those transactions or their equivalent could be handled by other payment systems

Non-MasterCard credit cards and debit cards are a close substitute. However, there may be limited end-user choice given MasterCard’s position in the provision of credit cards, which may make it harder for customers to find a non-MasterCard credit card. Cheques and cash can be used by individuals to pay for goods and services; but retailers may not accept cheques, and cash cannot easily be used for high-values and payment online. For internet payments, users may be able to use other credit and debit cards, prepaid wallets, funding directly from bank account, for example using third-party payment providers or “overlay” systems such as PayPal.

(d) The relationship between the system and other payment systems

MasterCard can rely on Bacs and CHAPS to fund merchant accounts, and with the implementation of accelerated merchant funding by December 2014, these payments will also be made using Faster Payments. The MasterCard switch directly supports “overlay” applications, for example, online transactions by MasterCard card via PayPal.

4. Other payment systems

Chapter 4 set out the payment systems that the Treasury proposes to designate at this stage and the matters taken into account, against the four criteria that need to be considered for designation. The Treasury is aware of arguments for bringing a number of other payment systems into regulation. The Treasury does not currently consider that there is sufficient evidence to justify designating these systems at this point. This chapter sets out the matters taken into account when considering against the four statutory criteria, whether any deficiencies in the design of the system, or any disruption of its operation, would be likely to have serious consequences for service-users of these systems.

At this stage, the Treasury does not believe that there is significant evidence that these systems meet the criteria for designation, though further evidence on this issue is welcomed. Furthermore, if, in the initial round of designations, the Treasury decides not to designate the payment systems listed in this chapter, it will be able to reassess the situation at its next horizon-scanning meeting, and then at subsequent meetings.

4.1 American Express

(a) The number and value of the transactions that the system presently processes or is likely to process in the future

Having considered the number and value of transactions processed by American Express, the Treasury does not consider that these are currently significant enough to support inclusion of this payment system in the scope of regulation by the PSR. American Express is considered the main alternative to Visa and MasterCard.

(b) The nature of the transactions that the system presently processes or is likely to process in the future

American Express credit cards are used for a wide range of retail payments, including in shops, online, mobile and mail order payments. American Express is often used for higher-end purchases and higher-value transactions. It is characterised by a large proportion of premium cards, offering rewards for card-users, while being more expensive for merchants to accept. Settlement takes place via a commercial bank.

(c) Whether those transactions or their equivalent could be handled by other payment systems

Non-American Express credit cards and debit cards are a close substitute, and American Express cardholders are likely to have a Visa or MasterCard card as an alternative. Cheques and cash can be used by individuals to pay for goods and services; but retailers may not accept cheques, and cash cannot easily be used for high-values and payment online. For internet payments, users may be able to use other credit and debit cards, prepaid wallets, funding directly from bank account, for example using third-party payment providers or “overlay” systems such as PayPal.

(d) The relationship between the system and other payment systems

American Express can rely on Bacs and CHAPS to fund merchant accounts, and with the implementation of accelerated merchant funding by December 2014, these payments will also be made using Faster Payments.

American Express does not have a general membership of banks and building societies and multilateral agreements, its principal model is based on direct recruitment of cardholders and merchants, rather than by banks. However, it does have a licensing relationship with banks in the UK, and therefore operates both a three-party and four-party system: American Express acts as its own merchant acquirer in all cases, but in some cases it licences others as issuers of its cards.. Diners Club

(a) The number and value of the transactions that the system presently processes or is likely to process in the future

Having considered the number and value of transactions processed by Diners Club, the Treasury does not consider that these are currently significant enough to support inclusion of this payment system in the scope of regulation by the PSR.

(b) The nature of the transactions that the system presently processes or is likely to process in the future

Credit cards are used for a wide range of retail payments, including in shops, online, mobile and mail order payments. Diners Club primarily targets its consumer cards at more affluent consumers, as well as providing corporate cards. Settlement takes place via a commercial bank.

(c) Whether those transactions or their equivalent could be handled by other payment systems

Card-holders will usually have a Visa, MasterCard or American Express card as an alternative, but there may be strong user preferences for paying by Diners Club. Less close substitutes include cheque, cash, online transfers, pre-paid wallets.

(d) The relationship between the system and other payment systems

Diners Club can rely on Bacs and CHAPS to fund merchant accounts, and with the implementation of accelerated merchant funding by December 2014, these payments will also be made using Faster Payments.

4.2 PayPal

(a) The number and value of the transactions that the system presently processes or is likely to process in the future

Having considered the number and value of transactions processed by PayPal, the Treasury does not consider that these are currently significant enough to support inclusion of this payment system in the scope of regulation by the PSR.

PayPal’s share of overall transactions can be expected to increase in years to come with the growth of e-commerce and m-commerce in the UK, and as it seeks to establish itself in the physical point of sale environment.

(b) The nature of the transactions that the system presently processes or is likely to process in the future

PayPal allows customers to pay for goods and services with participating online merchants, using just a password, saving customers from re-entering card details for each transaction. PayPal can be used for online transactions on the computer, on mobile websites and in bricks-and-mortar stores. In store, for example, users can pay without a waiter or “check in” and pay “with their face”. PayPal also offers merchant physical point of sale products, including a card reader that connects to their mobile phone. PayPal also allows users to make peer-to-peer transfers. Customers have a choice of paying by PayPal using a prepaid wallet, using a debit or credit card, or directly from their bank account.

(c) Whether those transactions or their equivalent could be handled by other payment systems

For remote online payments, alternatives include using payment gateways to make direct payment by credit or debit card. However, some websites (notably eBay) strongly encourage payment by PayPal over other options. Alternative services such as Ukash allow customers to pay online – at participating merchants – using a voucher exchanged for cash. Peer-to-peer transfers are offered by alternative systems such as Paym. There are a number of bank and non-bank merchant acquiring solutions (for example, Barclaycard Anywhere, iZettle) offering mobile phone-based terminals for card acceptance for small businesses.

(d) The relationship between the system and other payment systems

The card and inter-bank systems provide the underlying rails for PayPal transactions.

4.3 Other

There are also a number of other payment systems that are currently too small or are not operational in the UK – for example, Paym, Zapp, M-Pesa or Google Wallet. If these are launched in the UK and/or became important enough, then they could potentially be included in the scope of regulation by the PSR.

5. Annex A: Confidentiality

Information provided in response to this consultation, including personal information, may be published or disclosed in accordance with the Freedom of Information Act 2000 (FOIA).

If you want the information that you provide to be treated as confidential, please be aware that, under the FOIA, there is a statutory Code of Practice with which public authorities must comply and which deals, among other things, with obligations of confidentiality. In view of this it would be helpful if you could explain to us why you regard the information you have provided as confidential. If we receive a request for disclosure of the information we will take full account of your explanation, but we cannot give an assurance that confidentiality can be maintained in all circumstances. An automatic confidentiality disclaimer generated by your IT system will not, of itself, be regarded as binding.

1. The 2-4-6 standard means that a customer paying a cheque into their account starts to earn interest on the money no later than two days after depositing the cheque; no later than the fourth day, the customer is able to withdraw the money from the deposited cheque, but the cheque can still be dishonoured (“bounce”); only on the sixth day can the customer be certain that the money is theirs and that it will not be reclaimed from their account without their consent, unless they are a knowing party to fraud. ↩ ↩²

2. Charge cards are similar to credit cards, except the outstanding balance has to be settled in full on a periodic basis, while credit cards allow for borrowing over a longer period of time. ↩