Keynote speech by Mark Falcon, head of regulatory policy and strategy at the PSR, at the PayExpo 2015 Future of Payments Summit in London, 9 June 2015.
This is the text of the speech as drafted and may differ from the delivered version.
You can view the slides Mark used alongside his speech by clicking the download icon on the left.
Good morning, and thank you for inviting the Payment Systems Regulator – the PSR – to be at PayExpo. We are honoured to be here and I am really excited to be at this year's event.
Today I’d like to tell you about the PSR: what type of regulator we are, our objectives and how we’re starting to carry them out.
The new economic regulator for payment systems...
So, the PSR is the new independent economic regulator for UK payment systems. We’ve been building the PSR behind the scenes for the last year. We formally came into operation in April this year.
We’re also the first dedicated payments regulator in the world and we look with interest to see if other countries will follow.
So, we'd like to think that we will regulate the supply of oxygen to the payment systems - but what is economic regulation and what will it mean for payment systems?
Primary role is to promote competition…
The primary job of economic regulation is to promote competition, where this is possible. This does not mean competition for the sake of competition, but competition to drive lower prices, better service, greater innovation and sustainable investment.
This about safeguarding access to scarce resources, such as monopoly infrastructure, i.e. ensuring a level playing field between competitors. And we have the powers to do this, through directing the terms of access to payment systems or change of ownership of payment systems.
Where competition is not possible, the role of economic regulation is to be a proxy for competition. For example, by direct regulation of prices, retail or wholesale. This is the standard model in other utilities, such as energy, water or telecoms.
Either way, economic regulation is ultimately designed to protect consumers and promote economic growth.
Economic regulation must also be predictable and transparent, as this is what long-investment needs.
It’s also important to say what the PSR is not and our role versus other regulators.
Not a conduct regulator
First, we are not a conduct regulator, responsible for consumer product regulation and rooting out bad practice. Conduct regulation is of course critical, not just for protecting consumers, but for protecting competition: by ensuring that competition remains fair and honest, that bad firms and practices do not drive out good.
In the UK, the Financial Conduct Authority – the FCA – is the conduct regulator for payment services as part of its wider financial services regulation responsibility.
Or a financial stability regulator
The PSR is also not a financial stability – or prudential – regulator. This is the role of the Bank of England.
Payment systems certainly create systemic risk to the financial system, which is why all the largest retail and wholesale payment systems are regulated by the Bank of England. We also do not want to see payment systems falling over.
We recognise that having multiple regulators of payment systems risks confusion, which is why we will stay joined up across the regulators and explain our different roles as clearly as possible. We also have a formal Memorandum of Understanding between the PSR, the FCA and Bank of England.
So why is economic regulation relevant to payment systems more than any other industry?
Payment systems are driven by network effects
Everyone in the payments business knows that payment systems are driven by network effects: that the value of a payment system depends on how many other users are also connected to the same system.
This creates the standard chicken and egg problem for any new payment system wanting to set up: namely, payment systems are large entry barriers. This can limit competition and mean that established payment systems have a high degree of market power and opportunity for monopoly. Moreover, the existence of large network effects in payment systems is the UK Government’s underlying reason for creating the PSR.
Before the PSR, I was most recently in the mobile industry, at Hutchison Whampoa, the largest foreign direct investor into the UK. The mobile internet is particularly relevant for payment systems:
- first, because the same powerful network effects are present at the centre of telecoms and the internet,
- second, it entails similar long-lived investment, and
- third, it now involves much of the same underlying technology and innovation.
These are all relevant to the PSR.
So, what are the PSR’s specific objectives and what is our current work programme?
Three primary objectives
The PSR has three primary objectives – our statutory duties – to promote competition, innovation and the interests of users of payment systems.
Promoting innovation is a unique objective among economic regulators, but entirely appropriate, as innovation is what drives the greatest user benefits, rather than lower prices alone.
Moreover, the PSR’s objectives are not three independent goals, but intimately related.
Our ultimate aim is the interests’ of users of payment systems. Competition and innovation are our chief tools for achieving this. But competition itself drives innovation: and innovation in turn drives greater competition. It's a virtuous loop.
So, where do we want competition to get better in payment systems?
Promoting competition through the payments value chain
The PSR has a duty to promote competition through the payments value chain, in particular:
- competition in supply of payment systems infrastructure,
- competition between payment systems, and
- competition between payment service providers.
This slide illustrates, at a high level, the relationship between payment systems infrastructure providers, payment systems operators, payment service providers and payments users. This is not supposed to be a complete representation of the UK payments system.
By users, we mean all payments users, so for example:
- small businesses
- large retailers
...and organisations that make a lot of payments, such as:
- insurance companies
- the Government
- every employer.
HM Treasury has designated that we should regulate all of the payment systems on this slide, except for American Express. The PSR nevertheless has regulatory oversight for all payment systems and their participants.
A key role to promote collaborative innovation
The PSR also has a key role to promote collaborative innovation. This follows from the large network effects in payment systems, where innovation needs to happen from the centre.
The same is true in any industry where common standards and interoperability are important. This innovation can happen in a number of ways, for example:
- private development and licensing of proprietary technologies,
- shared development and distribution of open source technologies, for example, by trade associations or other bodies, and
- public development of common standards and industry strategies, such as standards setting bodies, industry forums and regulation.
The development of telecoms and the internet is full of examples of this, from:
- the creation of the 19th century global telegraph system,
- the development of the World Wide Web protocols,
- the standardisation of fixed and mobile broadband network equipment and devices, and
- the design of mobile spectrum auctions.
These have all contributed to the ease with which I can make a call, send an email, text, photo or video around the world in seconds, which sadly is not yet quite so easy in the world of payments.
This is where we would like to play a role. We will soon be launching the UK Payments Strategy Forum, a partnership between industry and regulator. The prime purpose of this is to drive collaborative innovation in payment systems and we look forward to telling you more about this as it develops.
Closing comments: our initial policy programme spans payments
So, to end, our initial policy programme spans the payments market.
First, our immediate focus is on access to payment systems – direct and indirect – to ensure that access is not a barrier to competition in relevant downstream markets, for example, personal or business bank accounts.
We are doing this by putting directions on the major payment systems for their access criteria to be objective and transparent. We are also starting a market review into indirect access to payment systems.
Second, as I have mentioned, our other big focus is innovation. The Payments Strategy Forum is about collaborative innovation across payment systems from the perspective of users.
Third, the PSR is likely to become the competent authority for the new European Interchange Fee Regulation for credit and debit cards. Our Cards Programme is intended to consider this, in the wider context of the card payment systems and relevant cards markets.
And finally, we are also planning a market review into payment systems infrastructure, to support our statutory duty to promote competition in infrastructure provision.
So, to close, thank for your interest in the new Payment Systems Regulator. My purpose in being here today was to make sure that you know we’re open for business and for us to learn more. I'm really looking forward to the rest of PayExpo, and I hope to meet many of you as a I walk around later today.
PayExpo2015 - Mark Falcon slides.pdf
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