Financial Conduct Authority 25 The North Colonnade Canary Wharf London E14 5HS. Dear sir / madam. Payment systems regulation call for inputs

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1 Financial Conduct Authority 25 The North Colonnade Canary Wharf London E14 5HS Dear sir / madam Payment systems regulation call for inputs We appreciate the opportunity to respond to this consultation. The Association of British Credit Unions Limited (ABCUL) is the main trade association for credit unions in England, Scotland and Wales. Out of the 393 credit unions which choose to be a member of a trade association, 72% choose to be a member of ABCUL. Credit unions are not-for-profit, financial co-operatives owned and controlled by their members. They provide safe savings and affordable loans. Some credit unions offer more sophisticated products such as current accounts, ISAs and mortgages. At 30 September 2013, credit unions in Great Britain were providing financial services to 1,075,951 people, including 122,280 junior savers. The sector held more than 1.1 billion in assets with more than 641 million out on loan to members and 918 million in deposits. 1 Credit unions work to provide inclusive financial services has been valued by successive Governments. Credit unions participation in the Growth Fund from saw over 400,000 affordable loans made with funding from the Financial Inclusion Fund. The DWP has contracted ABCUL to lead a consortium of credit unions under the Credit Union Expansion Project, which will invest up to 38 million in the sector and aims to make significant steps towards sustainability. Response to consultation On behalf of our member credit unions, we would like to express strong overall support for the importance of a payment systems regulator which takes a broad view of its remit and role in order to encompass as wide as possible a range of payment systems and services. Credit unions, as small deposit-taking co-operative financial institutions, increasingly seek to provide payment and transactional banking services to their members through products such as the Credit Union Current Account or the Credit Union Prepaid Card in order to attract a wide range of members and to operate sustainably. The full service model is one that has fuelled success for credit union sectors around the world where, in the US and Canada, for instance, as many as 40% of people 1 Figures from unaudited quarterly returns provided to the Prudential Regulation Authority

2 belong to a credit union. This is the kind of success which we wish to see emulated by credit unions in Great Britain and fair access to payment systems is central to that. Currently, small providers of payment systems, such as credit unions are reliant upon arrangements with sponsoring banks in order to provide payment services. Credit unions have found significant difficulty in reaching agreements with such banks since their willingness to enter into sponsorship and agency arrangements is strictly limited. Where such agreements have, however, been reached it is very difficult for credit unions or similar operators to a. understand whether the access terms they are receiving are competitive since the payments structure and its operation by owner-user banks is so opaque and b. even were full knowledge of comparable terms is available, negotiate competitive terms where the supply of banks willing to facilitate access is so limited given the relative market power of the negotiating parties this necessarily creates. Therefore we would like to see a payments systems regulator which has authority over the full range of payments infrastructure in the UK. We would also like to see it take a far-reaching view of the possible action it might take to reform the landscape keeping radical measures such as divestments on the table as the system and its conflicts of interest are reviewed. It should also look at fundamental structural and minimum capacity barriers within the availability of access arrangements for small players and how the number of willing agency and sponsoring banks can be increased. We are also conscious that the payments infrastructure is critical part of the economic system and innovation within it is vital in this respect. Due attention must be taken to ensure any measures the new regulator pursues do not inadvertently hinder this important process. That said, we also feel that while collaborative action is critical to innovation in payments, there is also the potential for conflicts of interest to stifle innovation and improvement and the new regulator should look closely at these issues. Consultation questions Q1. Do you have any views on which payments systems should be considered for designation? If this includes parties other than the UK payments systems listed above, please explain why. In general, we feel that the entire payments system infrastructure should be brought under the purview of the new regulator. This includes at least all of those payment systems listed. In order for the regulator to ensure a level playing field between payment services providers it is vital that all relevant payment systems are within its remit to review and intervene in. Q2. Where do you believe competition is effective or ineffective within UK payment systems? Competition between payments systems providers is not evident in any great degree given the collaborative development of payment infrastructure and the tendency for the each type of payment system to meet a particular niche need or market. The uniformity across UK payments and in terms of system providers and owners brings some benefits in terms of consistency of service across the country and avoids potential costs of more fragmented and disintegrated payment infrastructure for the consumer. However, there are concerns that this lack of competition

3 might undermine consumer interests in terms of allowing costs to be held up or, critically for our purposes, preventing entry at retail level by small payment providers. We do not attempt to provide a clear answer to these issues but wish primarily to urge that the new regulator looks carefully at these questions and the balance of interests between competition and collaboration without pre-empting the process by taking any early decisions on action. Q3. At which level(s) is there potential for competition to drive benefits for service-users, in terms of costs, quality or innovation? We feel that greater competition has the potential to yield significant benefits at all levels within the payment system infrastructure. Our particular concern is greater competition at retail level driven by measures to ensure fair access to payments infrastructure for small payment service providers, such as credit unions. Better access terms in this respect will drive competition between payment providers which will ultimately improve both outcomes for consumers but also financial stability through improved corporate diversity in financial services. Beyond the case for competition at the retail level, however, there are strong arguments for the new regulator to examine the impact of competition or lack thereof in relation to payments systems themselves and in terms of innovations. Were new payment systems able to set up and integrate with existing systems more easily, for instance, this could increase the competitive pressures driving innovation elsewhere and improvement of services overall. The regulator should examine the full payment infrastructure and how it might respond to greater competition. It should consider the examples of payments internationally both in the developed and developing world where more open regimes are yielding great benefits in terms of innovation and consumer choice. Q4. What are the main factors impeding more effective competition at each level? There are a number of factors here that we would like to highlight. Firstly, there would appear to be signs that the conflict of interest between ownership of payment infrastructure and usage thereof is having a negative effect on competition. Secondly, the lack of competing platforms for different payment instruments is a concern. Thirdly, the market for agency banks, required by small players is particularly stifling of competition since it limits the opportunity to search the market since no real market exists. Fourthly, the lack of transparency around costs and access terms for various providers and a range of levels impedes effective negotiation. Fifthly, there are questions of volume and scale which can present a barrier to entry for small players both in respect of investment capital or lack thereof and in terms of access terms in relation to fees per payment and such like. Sixthly, there are questions about the opportunities for payments innovators to build new payments infrastructure outwith the existing infrastructure owners and structures without the ability to effectively integrate with said systems. While we are in no position to suggest the degree to which each of these factors is stifling competitive forces or to propose clear solutions, we feel all of them are questions which the new regulator should seek to promptly address. Q5. What functions do you think need to be performed collaboratively in the industry? How best can this be achieved?

4 We agree that the payment systems and infrastructure, by their nature, are required to be collaboratively developed at at least the level of setting the key protocols and standards as to how the system operates. However, the precise limits of the collaboration argument against encouraging too much competition in payments infrastructure must be a key task for the regulator to examine and establish. We would suggest that the level of collaboration and integration in UK payments to date is extremely close relative to systems operating in other places and that, therefore, the question should be how far this is necessary and desirable in light of other concerns over competition and consumer outcomes. Q6. Do you think the current ownership structure creates problems? If so, please explain your concerns with the current structure. Yes. Our principal concern is quite clear in that there would appear to be the potential for a conflict of interest since those firms which own the payments infrastructure are its main users in terms of providing payment services to consumers. Therefore, as long as small providers are required to negotiate terms through these same providers, they have no incentive to provide this on a fair and comparable basis. Similarly, there are question marks regarding the minimum benchmarks which are set to access payment infrastructure directly and whether these could be lowered to avoid the need for agency arrangements. Q7. How might the regulator address any issues with the current ownership structure? Please explain how any remedy, including alternate model, might address any or all of the issues you have identified and also highlight any potential concerns associated with such alternate ownership. We do not have any clear preference as to how this might best be resolved. There would appear, however, to be two options the first of these would be divestment and the creation of new payment infrastructure providers in order to create new competition; secondly, one could stop short of divestment but instead create a separate governance structure to oversee payment concerns with a clear focus on enhancing competition and consumer outcomes. In any case, the key criterion of success should be resolving conflicts of interest either through divestment or tighter regulation and the test of this should be the degree to which improved access terms are evident in addition to further innovation and transparency. Q8. Do you have any concerns about the current governance of UK payment systems? We do have concerns relating to payment system governance. Our principal concern is the lack of a clear avenue by which small payment providers without an ownership stake might take a role in payments governance. We would like to see such a role created under any reformed governance structure for payments post-regulation. Q9. What do you believe is the appropriate governance structure for UK payments systems? As above, we would be keen for any reformed governance structure to provide a voice for small payment providers and wider societal and consumer concerns regarding payment infrastructure. Q10. How do you access UK payment systems?

5 Our member credit unions access payment systems in a number of ways and with a range of levels of sophistication. At the most basic level, this amounts to operating through the credit union s own bank account service and operating payments semi-manually in the same way that an ordinary business customer would do. This is limiting for a credit union, as a financial institution, in terms of being able to serve its own members effectively since it builds in extra delays and inefficient processing. At a further level up from this, some credit unions are able to provide payment systems such as the Credit Union Current Account or the Credit Union Prepaid Card which operate through agency bank arrangements. The Credit Union Current Account is hosted on the Co-operative Bank s banking platform and provides full account number and sort code facilities to each credit union which operates the system. The account operates on Visa Debit and therefore allows point of sale and ATM access globally. There are disadvantages to the agency arrangement here since the credit unions do not benefit from multi-interchange fees and the account does not provide the full range of payments and access channels that direct participation might. Furthermore, there are limitations in respect of the fees which credit unions are required to pay for various account operations which we have difficulty in assessing against the market due to lack of clear pricing information. The Credit Union Prepaid Card also has Visa Debit functionality but as a prepaid card does not offer the broader payment options available to the Current Account. The key element of note here is that, fees and charges for this product are tied closely to volumes which credit unions can find difficulty in achieving effectively in order to make the product sustainable. Similarly, we have recently experienced difficulties in relation to the availability of sponsoring banks as the bank we had used decided to withdraw from the market and there is a very limited availability of sponsoring banks in the prepaid card market with whom to partner. ABCUL, as part of the Credit Union Expansion Project, is investing in the development of a banking platform which should provide the processing capacity to engage more closely with payment infrastructure through a collaborative model. Critical to this, however, will be the access terms that the new entity is able to negotiation with the available agency banks. Q11. For the access you describe above, are the access terms and conditions fair and reasonable? If not, please provide details. This is a difficult question to answer definitively. There are a combination of factors at play which partly relate to required capacity for direct participation in payment infrastructure and partly relate to access terms in terms of fees and such. Similarly, the lack of available partner banks puts small providers at a distinct disadvantage in negotiation with sponsoring banks. We believe that it is certainly the case that the terms we enjoy could be improved substantially were any of these key barriers addressed. Q12. Does the access arrangement you currently have limit your ability to compete or impact on the service-users experience in any way? Yes. Credit unions at the most simplistic level i.e. without even indirect access to payment systems other than as a retail customer have very high barriers to fairly compete since their processes are necessarily inefficient and there are extra delays and costs for consumers from the laborious processing that is required. At the more sophisticated level, this is also the case since

6 credit unions are not able to provide the full service that a market-leading provider can provide and also are required to pay higher costs both Current Account and Prepaid Card are fee-charging to members and this is very uncompetitive for those who have options about which provider to use. Q13. If you access payment systems indirectly through a sponsoring agreement with a direct member banks, do you have sufficient choice in sponsoring banks? Would you prefer to access payment systems directly? What do you see as the benefits and risks of doing so? As set out above, credit unions can only access payments systems indirectly and to varying degrees. Where payment services are provided in any significant way, i.e. for those credit unions providing the Credit Union Current Account or the Credit Union Prepaid Card, the credit union sector has faced a strictly limited number of available sponsoring banks willing to facilitate access to payment systems for credit union members. The availability of sponsoring banks, or lack thereof, has been a particular concern in relation to the Prepaid Card service very recently since the credit unions' existing partner has withdrawn from the market with very few others available. The only alternative to agreeing these arrangements as a sector directly with sponsoring banks is to go through a third-party processor and this adds significant extra cost. As a sector we would be very interested in exploring the possibility of accessing payment systems directly or, failing that, for the provision of access to small payment providers to be mandated in some other way. Direct access, in principle, would generally be the favoured approach, however, there are currently obligations and minimum requirements in which must be met and it is not clear whether credit unions would meet these in the short term as they are set. A key task of the new regulator should be in reviewing and testing these minimum requirements to ensure that they are not presenting undue barriers to access and market entry for small payment providers whose presence would otherwise yield competition benefits for the consumer. Q14. Do you act as a sponsoring bank, providing indirect access to any payment system participant in the UK? No Q15. What changes to access rules and conditions would you like to see? Are there any alternative routes to gain access to payment systems that you believe should be developed (e.g. a second tier membership to payment system operators)? We would like to see a new regulator make a detailed examination of the access rules and conditions for payment systems with a view to removing and lowering any barriers to entry for small players such as credit unions. Currently, there are significant barriers, such as the requirement to have access to central bank funds which prevent credit unions' access wholesale. On the basis of such a review, we would hope that either unnecessary barriers could be removed or least that alternative options to give small providers a more-direct access route to payment systems be considered. This could involve a new class of system membership or some other arrangement but the key objective should be to widen access and for access to be made as direct as feasible. Q16. Do you have any other comments regarding access?

7 We would only like to stress the need for greater transparency around payment system access terms because currently it is very difficult to establish how far terms are competitive and fair. Better awareness and standardisation of access costs and such would be extremely beneficial to provide a well-functioning market with well-informed participants. Q17. What improvements or changes do you believe are required in the provision and use of infrastructure in the UK? We would also be interested in your views on the cost of such changes, for you or for the industry as a whole. What considerations, if any, need to be considered regarding the impact of any chances or improvements on the resilience and reliability of payment systems? We feel the payment infrastructure in the UK is in need of significant investment and improvement. Recent examples of banking down time are testament to this. Furthermore, currently the investment requirement for access to payment systems in order to obtain the appropriate level of automation and capacity is very significant. We wonder whether the new regulator could play a role in facilitating cheaper access to banking platform technology in order to address some of these challenges. Q18. What changes, if any, are needed regarding messaging standards in the UK? For example, would the adoption of ISO20022 standards alleviate any concerns or improve any constraints you experience? What timeframe and considerations would need to be taken into account in adopting new standards? We would only say here, in the absence of more detailed knowledge, that messaging standards should always be designed and implemented in order to ensure effective access for small providers. Q19. What solutions can be developed to increase competition in the provision of infrastructure and / or managed services to support the technical and operational functions of agency banks participating in UK payment systems? How can this be achieved and what will the impact and benefits be to your business? There are no clear answers to this question assuming that the regulator would not be willing to take a direct interventionist role in the market in the sense of creating competitors and such. We would urge the new regulator to look at any steps it has available to it to increase the provision of infrastructure for accessing payment systems. There may be a case for some special intervention in order to ensure that all small payment providers can access infrastructure providers. At the least the regulator should examine where any barriers might exist to new providers entering the market. There would be untold benefits for businesses such as our members were the number of available infrastructure providers increased significantly. Q20. Are incentives to innovate clear under current arrangements? Please also include any concerns you may have regarding fee arrangements and the impact of changing fee structures (such as changes to interchange fees).

8 We do not feel that the incentives to innovate are particularly strong under the current arrangements. We feel that questions around ownership, market power and conflicts of interest have a key part to play in this which have already been addressed above. We would also stress here again transparency in the market it is very difficult to establish the true cost or otherwise of running payment systems which is illustrated by the OFT having to operate on inference and appearance, rather than clear data, in assessing the question. We hope that the new regulator will be able to establish more clarity around these questions in order that better policy can be made. Q21. Do any factors limit your ability or incentives, either collectively or unilaterally, to innovate within UK payment systems? Credit unions are limited here firstly due to their size and lack of available funds for investment. For small players more generally, there are barriers due to the difficulty of integrating new systems with the legacy systems which already exist. In other parts of the world particularly the developing world innovating mobile-based payment systems have become established extremely quickly thanks to the lack of legacy infrastructure with which to fit in and learning some of the lessons from this innovative environment will be useful in driving innovation in the UK. Q22. What changes, if any, are needed to facilitate a greater pace of innovation in UK banking and payments? Please refer to your previous answers where relevant. We feel that the issues of ownership, governance, transparency and access should all facilitate a greater pace of innovation in payments. There will be a need to open the market to new entrants and to provide the ability to integrate new systems with existing ones more easily than is currently the case. Q23. What do you believe are the benefits and limitations of collectively-driven innovation vs. unilateral innovation? Clearly, an element of collectivism is critical to the success of payment systems which require multiple parties to co-operate in order to function effectively. However, we feel that there is a greater place for smaller groups or individual innovators to operate more unilaterally in order to create a more competitive environment where incumbents are forced to keep up with more nimble innovators. Q24. Do you have any other comments or concerns that you would like to highlight? No Q25. What, if any, are the significant benefits you see regulation bringing? Regulation should provide an environment in which payment systems are challenged to justify their powerful market position. There are clearly a range of causes for concern which the regulator will be able to address particularly around ownership, competition, innovation, governance and access terms. A regulator able to look at and take action on these areas with a view to improving the experience of end-users should greatly enhance the operation of payment systems in the UK.

9 Q26. What, if any, are the risks arising from regulation of payment systems? There is the possibility that inappropriate intervention in the market could take payment systems backward by not effectively recognising the pressures which payment system providers face and the significant investment requirements, for instance, which are required in improving payment systems. If the regulator is careful about how it addresses these questions, however, it should be able to improve the payment services market without negatively affecting the existing system. Q27. How do you think regulation might affect your business and your participation in UK payment systems? We hope that regulation will greatly improve access terms and availability for small payment providers such as credit unions which will allow us to compete more effectively and, therefore, to provide more effective competition in payment services thereby enhancing our ability to improve the financial well-being of our members. Once again, we are grateful for the opportunity to respond to this consultation. We would be more than happy to discuss any of the points raised above in more detail. Please feel free to contact us. Yours sincerely, Mark Lyonette Chief Executive ABCUL