Call for input: market players need to engage with the process for the procurement of the NPA

By Stuart Davis, David Little, Christian McDermott, Brett Carr, and Nathan Wilkins

This Call for Input is part of the development of the Payment Systems Regulator’s (PSR) policy for the future regulation of the newly procured New Payments Architecture (NPA). The PSR is asking for stakeholders’ views about possible competition issues so that it can provide greater clarity about the nature of regulation that might be applied to the NPA. The deadline for input is 24 March 2020.

The NPA will be the payment industry’s new way of organising the clearing and settlement of most of the UK’s domestic interbank payments, including payments that currently use the Bacs and Faster Payments systems.

The PSR plans to set out its regulatory policy in a consultation, and then publish its final policy statement by the end of 2020 (coordinating with Pay.UK’s NPA central infrastructure services (CIS) procurement timetable).

The PSR aims to be as clear as possible about the likely form of any future regulation, so that CIS bidders and Pay.UK can take this information into account before the end of Pay.UK’s procurement for the NPA.

Stakeholders, including direct and indirect payment system participants, payment service providers that will look to provide overlay services underpinned by the NPA, and bidders in the NPA procurement, should consider airing their views.

In particular, the PSR wants to know:

  • All potential risks to effective competition, and mitigations to those risks
  • The likelihood and significance of competition risks materialising
  • The likely effectiveness and cost of mitigation measures


This replacement payments architecture was proposed by the Payments Strategy Forum, comprising a representative group of industry stakeholders, in response to the PSR’s request that it develop a long-term strategy for the UK payments industry to meet existing and emerging user needs.

The PSR has tasked Pay.UK, the current operator of the UK’s retail payment systems, with competitively procuring a strategic partner to deliver and operate the UK’s NPA core clearing and settlement infrastructure. The core clearing and settlement layer, which will take over the processing of more than £6.7 trillion of Bacs payments, Faster Payments, and potentially cheque payments every year, is forecast for implementation after 2021. The NPA will create a new framework that will allow new “overlay services” to be easily developed, leading to greater competition and innovation, with new and better payments products and services.

One of the main features of the industry-proposed design of the NPA is a simple (or “thin”) common central infrastructure that provides basic interbank clearing and settlement-related services that enable one payment service provider (PSP) to make a payment to another PSP. Faster Payments, Bacs payments, and cheque payments have historically been processed using separate infrastructures — resulting in a mix of rules, standards, and processes to follow. Bringing all of these payment schemes together has, in the words of Pay.UK, created a historic opportunity to rebuild the core clearing and settlement infrastructure from the bottom up, simplifying requirements for PSPs through interoperability and catalysing innovation.

Pay.UK completed the first phase (a pre-qualification questionnaire), of a five-stage competitive procurement process for the NPA CIS in March 2019 and is currently finalising the second phase (a request for information).

Competition concerns

The PSR recognises that decisions made during this procurement process could have significant implications for how competition in the UK payments ecosystem develops. A transparent procurement framework should ensure that there is a competitive process for appointment of the NPA CIS operator. The PSR has also considered how competition may evolve after this appointment, in the provision of overlay services within the NPA or related payment services outside the NPA ecosystem.

In January 2018, the PSR sent Pay.UK an open letter setting out its expectations about how Pay.UK would manage the competitive procurement process in order to minimise the risk of the winning bidder (which is likely to have extensive experience providing payments infrastructure and services) using its unique position to affect competition in related markets (such as overlay services in the NPA). The PSR published a second open letter in May 2019 that identified two scenarios:

  • Scenario 1: The NPA CIS provider also provides overlay services (either directly or indirectly through commercial interests in other businesses) in the NPA.
  • Scenario 2: The NPA CIS provider also provides other payment services (either directly or indirectly through commercial interests in other businesses) outside the NPA ecosystem that could be substituted for services that will be provided within the NPA ecosystem.

The two scenarios recognise that the NPA CIS operator may occupy a gatekeeper role for third parties wishing to access important payments infrastructure, while also competing with those third parties in the provision of overlay and related services. The PSR’s preparatory work for its call for input listed six problematic behaviours by NPA CIS provider that could result from this apparent conflict of interest, to the detriment of competition in UK payment services. The six problematic behaviours include:

  1. Exploiting first-mover advantages to raise barriers to entry for others
  2. Overcharging for access
  3. Distorting prospective third-party competitors’ access to the central infrastructure
  4. Gaining unfair commercial advantage through knowledge of competitors’ commercial strategies
  5. Abusing access to and use of NPA payments data to its advantage
  6. Discriminating against services provided in the NPA in favour of a (prospectively) substitutable service outside the NPA ecosystem in which it has a commercial interest

The PSR’s list of potential concerns is orthodox, outlining some of the most common concerns that may arise when the owner or operator of important market infrastructure seeks to extend its activities into adjacent areas that key off this infrastructure. Concerns may be “exclusionary” in character (e.g., items 1, 3, 4, 5, and 6 in the PSR’s list), whereby the operator exploits infrastructure strategically to exclude prospective rivals in neighbouring markets, including those offering emerging technologies that could one day develop into viable substitutes for the established infrastructure. Concerns may also be “exploitative” in character (e.g., item 2), whereby the operator uses its position to extract unfairly high prices or unfavourable terms from users of the infrastructure, with adverse effects for consumers.

Potential mitigations

Pay.UK is expected to demonstrate to the PSR how it proposes to mitigate those potential  issues. To this end, the PSR has developed a non-exhaustive list of pre-emptive measures that might mitigate the NPA CIS provider’s incentive and/or ability to engage in the problematic behaviours. The pre-emptive measures include:

  • Ensuring appropriate technical design of the NPA
  • Implementing strong governance arrangements (enforced through contractual provisions where appropriate)
  • Removing or reducing the economic interest of the NPA CIS provider in overlay markets or competing payment systems through a form of separation

The PSR’s proposed remedies have similarly been deployed in past competition and regulatory cases involving incumbent operators of commercially or technically important infrastructure, in order to mitigate similar conflicts of interest. Such cases include:

  • Technical interoperability. Competition authorities and regulators have required dominant platform operators to make technical interoperability information available to third parties (including prospective rivals) that wish to develop complementary services. Although such remedies can be effective, they may also be costly to implement, requiring a degree of ongoing expert oversight (g., by a monitoring trustee, unless the regulator wishes to assume this role itself) to ensure that access is provided promptly and in a workable format. The intervention must strike a delicate balance between opening up critical technical infrastructure to facilitate greater competition while preserving the provider’s incentives to innovate and providing adequate compensation for property rights.
  • Governance arrangements and separation. Competition authorities and regulators have used a variety of separation structures to address potential conflicts of interest (sometimes in combination), including:
    • Full ownership separation (e., separation and divestiture or spin-off)
    • Operational separation or “ring-fencing” (commonly used in utilities regulation). Operational separation typically relies on various measures to encourage commonly controlled assets to operate independently (but stopping short of a requirement to sell assets), such as appointing separate management teams (or developing a set of reserved matters to create a form of two-tier board structure within the existing framework), implementing physical and electronic firewalls between business teams, and/or requiring common entities to trade on an arm’s-length basis, as they would with third parties. Such measures can also reduce the risk of commercially sensitive information relating to third parties flowing from reserved business areas to business areas exposed to competition with third parties.
    • Accounting separation (e., requiring separated entities to report as if they were independent firms). The separated entities, accountable only for their own balance sheets, would therefore be free to pursue activities in their own commercial interests. Thus, the dominant infrastructure provider, in theory, would have the same incentives as a stand-alone licensor to maximize revenues through a broad licensing/access strategy.

As with the interoperability measures, operational and accounting separation are likely to require some form of monitoring and oversight.

The PSR will no doubt consider other measures capable of influencing the NPA CIS provider’s incentives or controlling market outcomes. For example, in compulsory licensing and discrimination cases, competition authorities have mandated supply or imposed equal treatment conditions to ensure that third parties can access important inputs securely and predictably, on reasonable commercial terms that would allow an efficient rival to operate profitably downstream. However, similarly to interoperability and certain forms of separation remedy, such measures are rarely self-executing and may require the appointment of third-party auditors to oversee the terms of access and their practical implementation.

What is the PSR seeking from stakeholders?

The PSR has a range of powers, including powers under the Financial Services (Banking Reform) Act 2013, that allow it to monitor payment systems, to give directions to any participant in a regulated payment system, or to require disposal of an interest in a regulated payment system (including the disposal of an interest in an infrastructure provider to the system). The PSR is looking to fully understand the potential for competition concerns and cost-benefit measures to pre-empt such concerns before exercising any such power.