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Student ID: 120053867 ECM 101

Access Regulation:
In November 2014, the Payment System Regulator proposed a new
regulatory framework for payment systems in The UK. The
Consultation Paper sets out a proposed approach to regulating
payment systems operators, payment service providers and
infrastructure providers. The reforms are expected to generate
greater benefits for consumers/service users, who use payment
systems and services provided over payment systems.

What are the key economic cost concepts relevant to pricing access to

payment system network?
What are the advantages







Sanya Osisanya
Word Count:1998


We review The Payment Systems Regulator’s (The PSR) recently published framework for payment systems in the UK and identify the key economic cost concepts relevant to access pricing. 2004 2 . In Section IV. regulation is usually applied to prevent anti-competitive behaviour. is necessary to foster competition. we draw a conclusion on the subject. advantages and disadvantages of the proposed approaches are discussed.1 Natural monopolies are common across economic systems. 1 OECD Reports : Access Pricing. determines the ease of entry in the competitive segments and the efficiency of operation of the monopoly (Leinyuy. When they exist. 2015). Furthermore. Access regulation is necessary as it manages the interface between competitive and regulated segments. particularly upstream access. Regulating such markets. The report consists of 4 sections. This is more crucial when a vertically integrated monopolist seeks to extend its upstream power downstream. Section I provides a background of The UK Payment System. Section II discusses issues and proposals relating to access-pricing while Section III explores the merits and demerits of Access-Regulation approaches proposed by The PSR.Student ID: 120053867 ECM 101 “It is hard to find a more controversial issue in industrial policy than that concerning the terms on which entrants can gain access to an incumbent firm’s network”.

2014). They support services used in transfer of funds between individuals. more than 21 billion transfers worth over £75 trillion were made using the system (The PSR. In 2014. C&CC and CHAPS. Payment Service Providers (PSPs). Some of these concerns are:       technical and operating requirements fee requirements general lack of detailed information to facilitate access limited choice of Sponsor Banks (SB) reliance on downstream competitors (acting as SB) for access availability of alternative sources of access The PSR (The PSR. Building societies. consumer interests and innovation (The PSR. 2014) proposes three principles-based access rules to address these concerns. They must be able to send and receive payment messages that enable the processing of funds in addition to meeting financial. The range of services provided includes cash withdrawal from machines. Banks. offer these services. businesses and institutions. including security and reliability). PSP access to the infrastructure – technical aspects (hardware & software. Direct Access (DA) involves them having a direct relationship with the PS while Indirect Access (IA) requires that the PSP has a relationship with a Direct PSP (acting as a Sponsor Bank) of the PS. The Payment Systems Regulator (PSR) oversees this sector of UK financial system with the objectives of promoting effective competition. PSPs can access the PS either directly or indirectly. Stakeholders have expressed concerns over difficulties in securing access to some payment systems (The PSR. 2014). The PSR identifies a preferred option: “An Operator should have 3 . Examples of PSs in the UK include Bacs. legal and risk requirements.Student ID: 120053867 ECM 101 Background Payment systems (PS) are a vital part of the UK financial system. operating under conditions set-out by PS Operators. Among crucial for the effectiveness and efficiency of the system. 2014). payment of direct debits and salaries into bank accounts. Payment Institutions and Electronic Money Institutions are examples of PSPs in the UK.

2014). which permit fair and open access”. Issues and Proposals Direct Access 4 . risk based and publicly disclosed Access Requirements.Student ID: 120053867 ECM 101 objective. Figure 1 Overview of access methodologies between PSPs and PS (The PSR.

Stakeholder complain that the requirement of significant amount of time and resources for compliance increase access-costs. the degree of risk posed. This is because they individually negotiate access fees with existing Direct PSPs. 5 . The PSR proposes that Operators clearly delineate Access Requirements on their websites supporting them with an annual compliance report. 2014).e. Those that impact access-costs include: reliance on downstream competitors for access. some have costs implications on direct access (The PSR. Fees Requirements. This could reduce initial and running costs of gaining technical access. Prospective PSPs complain that access-costs are increased by their inability to ascertain upfront the costs of having their sort-codes admitted into existing PSPs networks (The PSR. 2014). The PSR proposes a risk-based approach where requirements are commensurate with PSP sizes i. The PSR expects the newly proposed clearing model to address this issue. Transparency and Availability of information. Indirect Access and Proposals Stakeholder concerns on gaining access to PS for Indirect Access (IA) were also identified. The paucity of information available on Access Requirements including costs and criteria also increases the cost of access. Technical/Operating Requirements ensure PSP compatibility with PS infrastructure and also provide system integrity. These include Technical/Operating requirements. The Fees requirement provides for the recovery of system costs and associated costs.Student ID: 120053867 ECM 101 Among the access-related concerns raised by Stakeholders.

They also raised concerns about the incentives for such SBs to improve the quality of services offered. both of these should reduce access costs. The PSR proposes no immediate action on these noting that both subjects could be considered for regulation following future reviews of the market.Student ID: 120053867 ECM 101 difficulties in accessing and assessing information about IA options. Some of the expectations of Operators 6 . In defence of Payment System Operators Having identified some access-price related issues faced by PSPs. 2014). The CoC complements bi-lateral agreements between PSPs and PS Operators ensuring that SB publically commit to it. This would foster competition between SBs and also position Indirect PSPs better during negotiations for access. The PSR notes that the issue will be addressed by the recently proposed Sponsor Bank Code of Conduct (CoC). Insufficient documentation of the requirements of SBs and in some instances limited transparency of same including fees structures are some of the concerns raised by Stakeholders (The PSR. Stakeholders also expressed concerns about the “high fees” of securing Indirect Access. The PSR proposes that SBs publish clear descriptions of information that will facilitate PSP comparison of the services they offer. Some Indirect PSPs complain that limitations in the number of willing Sponsors weaken their bargaining powers during negotiations for access. Indirect PSPs claim that Sponsor banks who are also downstream competitors request commercially sensitive business information while they sought access. Although there were no evidences to support these claims. It also provides potential Indirect PSPs with fore knowledge of their responsibilities. lack of choice of Sponsor Banks and access fees. understanding these issues from the PS Operator’s view-point suffices.

2014) which should minimise costs of compliance. Publishing access-related requirements on their websites and updating them should also incur minimal costs since the Operators already have and maintain websites. The Access Rule (preferred option of 7 . Merits and Demerits of The PSRs Access-Price related Proposals. The number of SBs providing Indirect Access is limited by the high costs of providing regulatory compliant services and managing the risks posed by certain Indirect PSPs (The PSR. Measures proposed by The PSR would cause the Operators to incur additional costs. Fewer SBs are available to EMIs and PIs who are more prone to money laundering activities which attract heavy penalties. Furthermore. additional costs of serving IA PSPs are only profitable if Operators had enough volumes. 2014). 2014). they ensure sustained integrity and resilience of their PSs (The PSR.Student ID: 120053867 ECM 101 are justified. The PSR notes that some Operators have increased amounts of information on securing access to their systems by redesigning their websites. 2014). The PSR in addressing Direct Access-related concerns proposes a principles-based Access Rule rather than a prescriptive rule (The PSR. The proposed set of rules builds on existing industry principles (The PSR.

we discuss the proposed principles-based rule highlighting its merits over prescriptive rules. Within the scope of access pricing. The principles-based rules encourages:  Operators to charge PSPs access costs commensurate with the risks individually posed.  Operators to increase their risk tolerance thereby increasing the options for meeting access-related technical requirements. thereby strengthening their bargaining position when seeking access. which permit fair and open access’. This provides PSPs with the option of reasonably comparing the access criteria of different Operators. Behavioural compliance since the Operators are more likely to achieve the objective of the rule given the scope of options to do so.where the regulated firm adheres to the letter of the rule without necessarily fulfilling its objective. low-level and narrower in scope. potentially reducing cost. This reduces costs as opposed to the ‘one size fits’ all approach/cost which prescriptive measures tend to suggest. Operators to increase transparency of their access requirements by publishing them on their websites. risk-based. Prescriptive rules on the other hand are generally more specific. This offers PSPs a wider variety of choice. The 3 principles-based options proposed by The PSR are then compared.  Operators to support future requirements of PSPs since the rules are flexible. This has a potential of minimising the costs of providing and accessing such services when required.Student ID: 120053867 ECM 101 3) states that: ‘An Operator should have objective. They tend to provide greater certainty about the requirements for compliance compared with principles-based rules. Prescriptive measures by their nature have higher scope for “creative compliance” . and publicly disclosed Access Requirements. 8 .

2. Prescriptive-based rules are generally easier to interpret. Their preferred option states that: “An Operator should have objective. risk based and publicly disclosed Access Requirements. Operators could be conservative in the interpretation of acceptable conducts. which permit fair and open access”.Student ID: 120053867 ECM 101 Principles-based rules have some demerits. Increased transparency and technical access options should also minimise the costs of indirect access. 2014) proposes three principles-based access rules to address Stakeholder concerns on Direct Access to PS. By facilitating direct access. The PSR also notes that the principle-based rules proposed for Direct Access (DA) PSPs should also benefit Indirect Access (IA) PSPs. The PSR expects some IA Providers to switch to DA. This concern is not particularly unfounded as The PSR is a new regulator. Al. Comparing The PSR’s three principles-based options The PSR (The PSR. potentially seeking less legal advice on the grounds that the scope for interpretation of the rules is broad (Black et. 1. 3. potentially increasing their access costs. This could limit the amounts of information they provide PSPs. 2014). The PSR acknowledges this stating that more prescriptive rules may be applied to Direct Access regulation in future if need be (The PSR. 2007). Principles-based rules require greater judgment (vs prescriptive rules) in their applications and could result in some form of complexity if the regulators/regulated firms lack adequate degree of expertise. The second option states that: 9 . We consider some in the context of accesspricing.

or b) protect the financial and operational stability of the system” The third. The term “non-discriminatory” could be broadly interpreted and a clearer description could remove ambiguities. 2014). states that: “An Operator should have fair. Operators are also less familiar with it. 10 . reasonable and open criteria for access to its system” The first is coined after existing Industry standard (the CPSS-IOSCO Principle 18) which Stakeholders are familiar with (The PSR. operational risk or business risk. The third option is option also highlights the requirements for openness and reasonableness but is less desirable as it’s untested. By emphasizing open access. it could achieve some of the benefits of the first option. These said. a hybrid of both. restrict or inhibit access or participation more than necessary to a) safeguard against specific risks such as settlement risk. offer minimal increase in costs and pose fewer challenges in its adoption. it should address some of the concerns of smaller providers like EMIs and PIs. It should therefore. The second option provides a greater scope for “creative compliance” by being specific with the risks addressed.Student ID: 120053867 ECM 101 “An Operator should have objective proportionate and non-discriminatory rules for access to its system that do not prevent.

Hopper. and pp. We have discussed Stakeholders concern with emphasis on those that impact access-pricing to payment systems.2015] [4] Financial Conduct Authority Payment System Regulator (2014) Access to payment systems Available: http://www.ECM101 Economics of (Accessed: 07 March 2015). J. M.pdf [07 ID: 120053867 ECM 101 Conclusion This report reviews The PSR’s recently published Consultation Paper on regulating payment systems in The [2] Black. it is important that the regulator monitors the market adopting measures that are best suited to the prevailing market structure. (2015) 'Week 3: ‘Methods of Regulation'. The report shows that while a principle based approach to access price regulation is more desirable than the prescriptivebased approach. Making a success of Principles-based regulation.191-206 [3] Financial Conduct Authority Payment System Regulator (2014) A new regulatory framework for payment systems in the UK Available: http://www. (2007). We also discussed the principle-based options to access regulation proposed by The PSR. Law and Financial Markets Review 1(3). J.fca.2015] 11 . Available at: [07 March. C. Merits and demerits of these approaches were explored. References [1] Leinyuy.