Government to open up payments system

By Brooke Masters, Chief Regulation Correspondent

The government will intervene in the UK payments system to speed up cheque clearing for ordinary customers and make it easier for new banks to compete with established ones, George Osborne, chancellor, announced on Monday.

Comparing the payments system to telecoms and the electricity grid, Mr Osborne told an audience in Bournemouth that the structure is too heavily dominated by the four big banks that now handle 75 per cent of all current accounts. New entrants cannot just plug into the system but must instead seek access via an established rival.

“Why is it that big banks can move their money around instantly, but when a small business wants to make a payment it takes days?” Mr Osborne asked. “The system isn’t working for customers, so we will change it.”

Concerns have been growing about the payments system for several years, ever since the biggest banks briefly tried to phase out the use of paper cheques and were forced to back down amid a customer revolt.

Reformers, such as the Bank of England’s Andy Haldane, have advocated the creation of a highly automated payments system that all banks, new and old, would be required to plug into. 

Such a system would make it much easier to clear payments quickly and would also facilitate account switching. A centralised system could also benefit established banks who are saddled with “legacy” technology systems of the sort that caused a major IT failure at Royal Bank of Scotland last summer.

Currently it can take as long as 30 days to move a retail current account, although banks will have to cut that to seven days by September. But that is still too long for many critics.

Mr Osborne told an audience at JPMorgan Chase that the government “will bring forward detailed proposals to open up the payment systems. We will make sure that new players in the market can access these systems in a fair and transparent way.”

The speech also outlined Mr Osborne’s plans to “electrify”the planned ringfence between retail and investment banking. Mr Osborne bowed to political pressure and said banks that attempt to circumvent the ringfence will be broken up.

The mechanism to do so will be part of amendments to the planned Banking Reform Bill, which already includes ringfencing rules. Banks will be required to keep retail and corporate lending and other critical services in a separate legal entity that has higher capital requirements.

The amendments will give regulators, with the approval of elected officials, powers to force a full separation if institutions are found to be cheating.

Susan Kramer, a Liberal Democrat peer who sits on the Banking Standards Commission, said she was concerned that banks would exploit weaknesses in the system. 

“We’re very conscious that the history of the banks suggests that as soon as you put in place a ringfence . . . there will be banks that will try and game it and find a way around it,” she told the BBC on Monday. 

Andrew Bailey, the chief banking supervisor at the Financial Services Authority, has said he thought it would be critical for elected officials to be involved in any effort to enforce the ringfence through a formal break-up.

 Copyright The Financial Times Limited 2013.