Mastercard’s decision to buy VocaLink is highly unlikely to have the galvanizing effect on competition within UK payments the Payment Systems Regulator hopes to see.
The Payment Systems Regulator is of the opinion that the current owners of VocaLink (the major UK retail banks) needed to sell off their stakes in the UK’s payment infrastructure in order to promote competition, due to there being no effective alternative in the UK to VocaLink’s systems. In the short term, however, things are unlikely to change from a competition perspective, as ultimately the only thing that is changing is the owner of the dominant infrastructure.
There is a (weak) argument for this move promoting competition in UK payments, which runs as follows. Given that the major banks will no longer own VocaLink, it is at least plausible that they would attempt to find the best deal rather than keeping things “in-house.” Additionally, as an outsider Mastercard may be viewed as more likely to open up the VocaLink systems to challengers in order to gain more clients. But the single biggest reason there is no effective competition for VocaLink’s infrastructure is that a comparable alternative is both difficult and expensive to put together.
Even if this move were to bolster competition – if Visa, for example, built a rival system in the UK of similar quality and there were two “Faster Payments” systems competing for business – a net gain for pricing or innovation would be unlikely to follow. Faster Payments is seen globally as a market leader in infrastructure innovation, as shown by VocaLink’s international contracts. It also continues to innovate and widen market access in the UK (admittedly to its own systems) with initiatives such as the New Access Model announced last year. It is questionable (and has been questioned directly here) whether Mastercard would continue to innovate to support UK payments infrastructure in the same manner.
Payments as a business is all about transaction volume. Even though Visa and Mastercard have been accused in the past of setting their fees too high, the income they see from a single transaction is minute – to turn a profit, a system needs to turn over billions of transactions in a year. If there were two rival Faster Payments systems in the UK, each would suffer a hit in terms of profits compared to a single system (due to reduced transaction flow). This could even drive prices up, instead of down.
Furthermore, the theoretical VocaLink rival would need to be totally interoperable with Faster Payments, in order that customers of all UK banks can send money to customers of all other UK banks, regardless of which system those banks are clients of. This begs the question of why a rival is desirable in the first instance – competition is a worthy cause, but a payments infrastructure needs to be universal to be useful.
Mastercard may prove to be a worthy steward of the UK payments infrastructure, but its purchase of VocaLink is unlikely to improve the situation in the UK payments market.
By Sam Murrant, Senior Consumer Payments Analyst