UK regulator seeks to get retail payments infrastructure upgrade back on track

https://www.linklaters.com/en/insights/blogs/fintechlinks/2021/february/uk-regulator-seeks-to-get-retail-payments-infrastructure-upgrade-back-on-track
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The UK’s Payment Systems Regulator has launched a consultation on the New Payments Architecture programme. The NPA, which was first outlined in 2017, aims to improve the UK’s retail interbank payments infrastructure. Progress has, however, been slow, in part due to challenges in procuring a suitable provider. The PSR consultation seeks views on possible solutions to get the project back on track. 

What is the NPA?

The UK is in the process of renewing the clearing and settlement infrastructure for interbank retail payments. The idea is for the new infrastructure to enable increased participation, encourage greater innovation and competition, and improve resilience, among other things. The project is known as the New Payments Architecture (NPA) programme.

Pay.UK, the operator of the UK’s main retail payment systems, has been tasked with realising this vision. The process is being overseen by the Payment Systems Regulator (PSR) in collaboration with the Bank of England.

Challenges and delays

The NPA programme has faced several challenges and delays since its initial launch in 2017. Most recently, a key group of stakeholders raised concerns around costs, timescales and migration difficulties and recommended (among other things) that the ongoing competitive procurement process for a central infrastructure services provider be cancelled in favour of instructing the incumbent provider, Vocalink. In response, Pay.UK paused the procurement process and requested an exemption from its obligations to run a competitive procurement. The PSR rejected this request last month, citing concerns around fair competition and value for money.

The NPA experience illustrates some of the practical difficulties in modernising legacy infrastructure, a process that many incumbent players in the financial sector have had to grapple with.

PSR consultation

It is against this backdrop that the PSR has launched a consultation. The consultation paper acknowledges the challenges faced by Pay.UK and the need to tackle some of the risks posed by the programme. To that end, it is seeking stakeholder views on various remedies. 

In particular:

1. Scope of the procurement

The original plan was for the procurement contract to include core clearing and settlement services plus an additional set of common services to migrate both Faster Payments and Bacs transactions to the NPA. The PSR considers the complexity involved in providing all these services to be a key source of delay. It suggests the services to support Bacs migration could be carved out of the initial procurement contract, and that such services could be procured at a later stage or provided through market-led propositions.

2. Approach to procurement

Given the disruption to the procurement process over the last year, the PSR is seeking views on whether Pay.UK should continue with the current competitive procurement, start a new competitive procurement or directly negotiate with Vocalink without a competitive procurement. It acknowledges there are advantages and disadvantages to all three options.

3. Promoting competition and innovation

Following a call for input on the NPA last year, the PSR proposes a list of design principles it expects Pay.UK to follow. This includes, for example, ensuring that the central infrastructure has a “thin” collaborative infrastructure and a wide range of access options in order to encourage competition and innovation. 

It also proposes various measures and governance principles to mitigate against the risk of the central infrastructure service provider gaining a dominant position within the NPA ecosystem. 

4. Pricing

The PSR proposes that Pay.UK should have a role in setting the price levels for users. It notes that prices should be set using proportionate, objective and non-discriminatory criteria (in line with existing regulatory requirements) and proposes five additional pricing principles. Under these principles, prices would need to: (i) reflect efficiently incurred costs; (ii) incentivise utilisation of the NPA; (iii) foster competition in services to end users; (iv) be transparent and predictable; and (v) adapt to changing competitive conditions.

Next steps

The consultation paper sets out various specific questions for feedback.

In relation to the questions relating to the scope of, and approach to, procurement, stakeholders have until 19 March 2021 to respond. The PSR aims to provide its initial response in Q3 2021 and final decision in Q4 2021. The NPA procurement process will remain on hold in the meantime.

In relation to questions relating to competition, innovation and pricing, stakeholders have until 5 May 2021 to respond. These responses will inform a policy statement, expected to be published in Q4 2021.

https://www.linklaters.com/en/insights/blogs/fintechlinks/2021/february/uk-regulator-seeks-to-get-retail-payments-infrastructure-upgrade-back-on-track