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CORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 710-ii
HOUSE OF COMMONS
HOUSE OF LORDS
TAKEN BEFORE THE
PARLIAMENTARY COMMISSION ON BANKING STANDARDS
SUB-COMMITTEE F-PANEL ON RETAIL COMPETITION
TUESDAY 4 DECEMBER 2012
ANDREA LEADSOM MP
CHRIS DUNNE and DAVID YATES
Evidence heard in Public
Questions 98 - 200
USE OF THE TRANSCRIPT
This is a corrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee, and copies have been made available by the Vote Office for the use of Members and others.
The transcript is an approved formal record of these proceedings. It will be printed in due course.
Taken before the Parliamentary Commission on Banking Standards
Sub-Committee F-Panel on Retail Competition
on Tuesday 4 December 2012
Baroness Kramer (Chair)
Mr Andrew Love
Lord McFall of Alcluith
Examination of Witness
Witness: Andrea Leadsom MP, examined.
Chair: Welcome everybody. We are starting a couple of minute early, if that is okay with everybody. John McFall is trying to shuffle two Committees at exactly the same time, so he will be in and out, but he will be joining us in a few minutes. It is possible that all the MPs will have a vote in the middle of all of this. If everyone is prepared for that, it will not be a problem.
Before I start, would you prefer to called "Mrs Leadsom" or "Andrea"?
Andrea Leadsom: I had better say "Mrs Leadsom"-there is a history, as my colleagues on the Treasury Committee know only too well.
Q98 Chair: Thank you very much indeed, Mrs Leadsom, for coming before us today. We are the Panel on Retail Competition, which is a subset of the Parliamentary Commission on Banking Standards. I suppose that you could say that the panel is investigating what it says on the tin, so our focus is very much on the retail competition area. Our goal at this point is to take roughly 45 minutes but, of course, we may be interrupted, as you know, by votes.
I shall begin with a couple of very general questions, because I am aware that this is an area that has long been an interest of yours and that you have a very strong background in, as well. We all agree that standards in the banking industry are not high enough or we wouldn’t be here today. To what extent should raising standards be addressed through more regulation and structural change, as opposed to increased competition? What would your view be?
Andrea Leadsom: History shows that more regulation has not improved standards, yet at the same time as increasing regulation, we have allowed competition to be reduced by the actions of the banks themselves. My conclusion from history would be that we need to see more competition and that more competition would enable banks to set one another’s standards higher. There would be more ability for people to choose and differentiate between banks and so on. Certainly, I think that regulation has failed us in the recent decade.
Q99 Chair: So you see competition as driving not just product choice, but culture as well. Would that be correct?
Andrea Leadsom: Yes. It depends what we mean by competition, of course, because it means something very different in the retail market as opposed to the global investment banking market. If I can just give you an example: in investment banking, equity underwriting and corporate finance, some of the fees that have been charged have been astronomic and a culture has grown up whereby a particular investment bank has acquired a name for being good in a particular field. Therefore, whether they have actually been good or not, or good value for money or not, has had little to do with the fact that they end up being the bank of choice. That is a clear example, I think, of where more competition could lead to less magical thinking of, "We must have Bank A, because they are good at corporate finance in eastern Europe" or something like that.
At the retail end, the same is true-very much so-in the personal current account market, where 55% of people have never moved their current account, in spite of the fact that many people-something like 40%-are not particularly satisfied with the customer service they receive. Standards aren’t great, and nor is competition.
Q100 Chair: Banking is a complex market, isn’t it? There are many distinct sub-markets, particularly on the retail side. You mentioned the current account part of the market. Are there other areas you would pinpoint where competition has been particularly poor, or where the concentration is particularly great?
Andrea Leadsom: The other appalling example is the small and medium enterprise market, where, I believe, 79% of all SME accounts are held by five banks. The problem there that we are investigating at the moment is the mis-selling of swaps. I have examples of constituents in my own area who have effectively been told that they have to fix the interest rate on their loans for up to 90% of their loans, at rates where the bank can break the swap if it goes against the bank, but the customer must endure all the time it is against the interests of the customer. These have been part of the bank’s terms and conditions of making the loan. For me, as an ex-banker, that is utterly appalling-it’s completely poor banking at any level.
Q101 Chair: So in a sense, you are looking at competition as one of the mechanisms for dealing with mis-selling?
Andrea Leadsom: Yes I am. One of the key reasons that small businesses have stuck with the same bank and accepted its terms is because they haven’t had any choice. A bank will require that a business has its overdraft with that bank, and its cash accounts and long-term loans. It possibly has to buy all its foreign exchange through that bank and so on. There has not been a raft of new banks beating a path to the door of small and medium enterprises that has meant that they can shop around and get a better deal.
The statistics for switching are, again, very poor for small and medium enterprises. There are some statistics from Which? that show that something like 80% of small and medium enterprises have not moved their bank accounts in the last three years. It was a really high number, when you consider how very much more flexible businesses tend to be in other parts of their corporate life.
Q102 Mark Garnier: Can I turn to the issue of control of the Payments Council and VocaLink? As you probably know, a consortium of 18 banks and building societies owns VocaLink Holdings. The membership of the board basically includes industry representatives appointed by shareholders, three independent non-executive directors, a chief executive officer and a chief financial officer. Importantly, the industry representatives are all from the largest banks: Lloyds, RBS, HSBC, Barclays, Santander, and Nationwide. From a competition point of view, do you think it is a bad thing that you have that domination by the big four or five?
Andrea Leadsom: Yes, I would say almost certainly. The Payments Council is the governing council for three-day clearing, faster payments services and Link. There is very little product innovation there. Yet, what you find is that in card services, which do not come under the Payments Council, there is quite a good deal of product innovation. Obviously, this is very difficult to test, but I think there is evidence from OFT that the Payments Council is constraining innovation in payments.
Certainly, with faster payments services, when you talk to small businesses, you find that their default is to three-day clearing, so you have to specify if you want to make a faster, same-day payment. All these things suggest that the ownership, or at least the governance, of the Payments Council is holding back competition.
Q103 Mark Garnier: Do you think that that is a deliberate policy-even if it is an unspoken policy-or deliberate action by the big banks to hold back competition?
Andrea Leadsom: That is difficult for me to say. Certainly it would be the logical thing for major banks to be doing. We have seen how agency banks have to go to the big clearing banks for agency services, and they are held away from changing-innovating-in product areas, so it would be a rational activity for the big banks to try and create barriers to entry by virtue of the governance of the Payments Council. You would not put Google in charge of the internet. It is a counterintuitive method of governing payments.
Q104 Mark Garnier: In a broad sense, do you think there is any other way that this management structure, this control structure, will restrict competition?
Andrea Leadsom: As far as I am concerned, the Payments Council is an illogical structure anyway. Why does it govern only payments and not cards-acquirers, prepaid cards, debit cards and so on? It is nonsense, it is illogical, it is based on ancient history and it does not make any sense in the 21st century, given how we use money and finance. It seems to me that, with the emerging Financial Conduct Authority, it would make a lot more sense either for the Payments Council to be an overall industry body that all banks are part of the governance of, or for you to abolish it entirely and to have some governing council derived from the Financial Conduct Authority.
Q105 Mark Garnier: You raised an important point, which is that the big banks are acting as agents on behalf of the smaller banks that are coming into the market. I have read some of your comments on whether that helps competition or, potentially, acts as a long-term hindrance to competition.
Sitting suspended for a Division in the House.
Q106 Mark Garnier: The big banks-Lloyds, RBS, HSBC and Barclays-all provide agency banking services for new entrants and smaller banks in the market. On the face of it, that looks like a very helpful thing for them to do. But do you think that this framework places smaller banks at a competitive disadvantage, given the fact that they have to go through the big banks, and the big banks can basically call the shots?
Andrea Leadsom: Yes, that is one of the key problems. There are two sides to that. One is that the smaller banks are having to pay more than the bigger banks for transacting and clearing through VocaLink. That is of the order of 3p to one of the clearing banks versus potentially 20p or more per transaction for the agency banks. There is a distinct competitive disadvantage. There is also the fact that, as has been put, the big banks clearing systems are like the Victorian sewers. They are simply not up to the job of 21st century banking.
As a result, agency banks-those smaller challenger banks-that have to clear via the big banks are finding problems. For example, that when NatWest had two weeks of down time that impacted on all of those banks that clear through it. They are only as good as the banks they are clearing through. That is a distinct disadvantage to the new challenger banks that are trying to differentiate themselves on grounds of superior service, because they are in effect being prevented from giving that service by the poor systems of the bank they are clearing through.
Q107 Mark Garnier: Do you think the structure of VocaLink is what it could be for the future?
Andrea Leadsom: Again, VocaLink being the body that carries out the payments and yet being owned by the industry that it serves, is another problem. Certainly, an ex-board member of VocaLink has said to me that they tried very hard to get other shareholders in VocaLink to float at least part of it, because it did not feel right that it was in the hands of a core group of banks. I think that goes to the heart of the whole question about bank competition. Have we got systems and organisations in place that are stifling competition? Yes, we do. The ownership of VocaLink and the Payments Council are both examples of that.
Q108 Mark Garnier: You would like to move to a common utility platform, owned by the state or the local community?
Andrea Leadsom: I don’t see that that would necessarily matter. I think that what is vital for competition is that there isn’t either control or ownership by a small group of banks, whose rational thought processes would lead them to stifle any new entrants coming in.
Instead of being owned in common by the banks, VocaLink might become a central utility and floated-like the London Stock Exchange is a private company-and then regulated perhaps by the Bank of England, the FCA or the PRA; or it might be owned by the FCA, the Bank of England or by all banks in common. The concern I have-and the Treasury Committee has presided over inquiries into this-is that that ownership by a minority of banks leads to the encouragement of anti-competitive practices.
Q109 Mark Garnier: Do you think the Payments Council is also fit for purpose, especially after the recent debacle with the cheques?
Andrea Leadsom: At the Treasury Committee we were furious about the Payments Council’s effective decision to get rid of cheques without putting in place anything that could replace them. They insisted that they were not getting rid of cheques and yet a number of their core owners had already sent customers notification that cheques would finish. That caused a great deal of upset to many elderly people and small companies. It was completely unacceptable. Again, it illustrates that it is an organisation acting on behalf of its core governance structure as opposed to in the interests of the consumer.
Chair: I am going to have to vote. I shall hand the Chair to you, Mark. I suggest just keeping going between the two of you, Andy, if it is okay.
[MARK GARNIER in the Chair]
Q110 Chair: The common utility platform. Andy Haldane recently gave a speech in which he advocated placing core banking services in the hands of a shared utility, which we had started on. That would be, importantly, where banks can "plug and play" with a white label access. Is that ultimately going to strip the big banks of their ownership and control of VocaLink? Do you think that is the right way to do it? What do you see as the competitive advantages of doing a sort of plug and play-type of utility model?
Andrea Leadsom: That would be a complete game changer. It would radically turn banking on its head in Britain. What is quite interesting is that I had a round-table meeting with senior bankers and VocaLink, the Payments Council and Bank of England officials, and you, to discuss specifically this issue. It was clear in the room that if we were going to move to full account portability, we should lead the world, not follow the world. Britain is a world player in financial services; our banking sector is state of the art, and if we were going to do it, we should be the first, not wait for someone else to do it. I thought that that was a very important agreement among pretty much all the banks.
The absolute key to this is if we were to move to a central utility, there would be no reason to reinvent the wheel. I have been on a Treasury Committee visit to VocaLink, who have state of the art systems. They are very impressive, but you would not necessarily want to replicate those, although you would want to change the ownership and governance structure of VocaLink entirely.
Of course, you would have to create further capability within VocaLink to take on effectively the core utility that, currently, banks divide up between them. For example, in VocaLink at the moment, payments take place and there are various archiving facilities and so on. What you would have to concentrate in VocaLink, to have this central utility, is all the allocation of bank account numbers and, indeed, all the allocation of sort code numbers, the details of direct debits, standing orders and so on. That would all have to be held within the central utility, with the only differentiator between bank A and bank B being a unique identifier code.
That would be, if you like, a minimalist way of achieving full account portability, because it would continue to retain bank account numbers and sort codes. Certainly, when we had our inquiry into competition and choice in the banking sector, a number of the big banks argued that the problem with bank account portability is that if you lost sort codes, you would not be able to make international remittances. So by keeping those elements exactly the same as now, but insourcing it to a central utility and away from the individual banks, we would enable many other banks-all that wanted to-to access that central utility direct. That would mean that you could switch banks without actually changing your bank account number or sort code if you did not want to.
Q111 Chair: Both you and Andy Haldane have mentioned that the internal bank legacy systems are like a Victorian sewer, which, having seen the spectacle of RBS blowing up earlier this year, probably no one would disagree with. Do you think that we face an opportunity where not only can we redo the VocaLink in the payment system, but, at the same time, bring the banks into the 21st century?
I believe there is a statistic that 80% of the money that banks spend on IT is on rubber bands and Sellotape to hold the existing systems together. Do you think that this is an opportunity that we should seize in order to do the whole thing, including banks’ internal systems, in one go?
Andrea Leadsom: I think that you can divide it into two parts. If you were just looking to create full account portability and to do a minimalist version of it that would not be too expensive for the banks-let us not forget that, at the Treasury Committee inquiry into competition and choice, effectively the banks were saying that this would cost absolutely billions, it would be off the scale and we are looking at upwards of £100 billion. They were looking at a scenario where they would be throwing away their whole clearing system and starting again from scratch, so they would be getting rid of all their customer-facing systems, sort codes, bank account numbers and all the rest of it, which you can well imagine would be an enormous bill.
If, instead, you were to look to the minimalist version-where, rather than that allocation being done by individual banks, it was insourced to a central utility-while banks would have to change their interface with the central utility, they would not have to change their systems significantly.
You have got almost two choices. You can either take a minimalist approach and move what banks currently do in their own systems to a central utility, with them building an interface to it over a period of time, or, alternatively, the banks recreate, start from scratch, build their own new systems. What a minimalist approach would not do is to force the banks to do that much bigger project of upgrading their systems. So you could achieve full account portability without incurring that expense, but here is the very important thing: in order to compete on a level playing field, where the big banks would be up against new challenger banks that do not have the legacy systems with the warts and all, they then could find themselves being competed out of the market. If somebody like a Metro Bank or a Virgin Money can offer seamless customer straight-through processing with excellent quality of service, versus NatWest, which goes down every couple of months because its systems cannot cope, it would obviously get competed away. I suspect that if you went towards a fairly minimal version of account portability, you would end up in a situation where the big banks would choose to improve or rewrite their own systems over a period of time.
As you say, the IT trade body, Intellect, has said that the banks are spending 80% of their IT budget each year on just trying to keep their systems going. The implication of that is that fraud levels are extremely high, too, so to offset against the cost of renewing systems, you would have implications for better customer-focused services-so, greater competitive advantage, a massive reduction in fraud and also the fact that they would then be in a position to upgrade their own processes and not have the personnel and cost of trying to keep them together with string and Sellotape.
[Baroness Kramer in the Chair]
Q112 Chair: I think I caught the tail-end of the discussion on account portability, and perhaps we could move on to that, as it were, more the centrepiece of the discussion. Again, I apologise if you are now about to repeat some things that you have just said. Mrs Leadsom, you have been a passionate advocate of full account portability, and I was wondering if you could tell us exactly what you mean by full account portability.
Andrea Leadsom: Yes. Full account portability is a bit like when you move your mobile phone from one provider to another, and you can choose to take your phone number with you. So with full bank account portability, you, as any personal current account customer or as a small business customer, can choose to keep your bank account details and just move from one bank to another, with all your standing orders, direct debits and your bank account number remaining absolutely intact-not being transferred anywhere, but you can move from one bank to another.
Q113 Chair: Having heard a lot of the banking community, you will be aware that they take the view that it is a wonderful idea, but in a practical sense, seven-day switching is what they might say they see as the way to go. In your submission to the Parliamentary Commission on Banking Standards, you welcomed the introduction of seven-day switching, which will come in September next year, but you argue that it does not go "nearly far enough". Could you take us through that argument? What is the advantage of full account portability over something like seven-day switching, which, after all, does not sound as though it is that onerous?
Andrea Leadsom: First, seven-day account switching is absolutely a good move. It is very quick to implement and it points to the right direction. It will, I am sure, have the result that more people choose to switch, so some of the fear that means that 55% of people have never moved their account will go away, because they have a guaranteed seven-day switching period, but I do not feel that it goes nearly far enough.
For one thing, at the very corporate-focused end, it does mean that every time anybody switches their account, all those businesses with whom you have a standing order or a direct debit-if you pay for your newspapers and your milk online-have to record new bank details for you, even when you pay your car parking and so on. The impact on businesses, as well as on the individual, is enormous. You, as the individual, if you move your bank account, have a huge amount of work to do to notify people that you have changed. There is the risk that things will go wrong and that, of course, is why there is so much reluctance to move accounts and why there are so many costs, particularly to small businesses, of having to deal with the implications when people do move their bank accounts. At that end, seven-day switching does not make any difference to the system that we have now.
Q114 Chair: Is the point you are making basically that there are high costs associated with moving to seven-day? It is just that they do not particularly fall on the banks; they fall on the customers themselves and on the people with whom the customer is doing business.
Andrea Leadsom: Yes. It is an irony, isn’t it, because we want more people to feel that they can switch? But the implication of switching, if we are successful in the seven-day switching, will be that the onus of dealing with all of that falls on individuals to notify their suppliers and on the businesses, which then have to sort out their systems too. So the banks have effectively made it a problem of the general market and the customers to sort out for themselves. Notwithstanding that they undertake to do it, still somebody has to record that change of bank account. So, yes, in a sense, ironically, if we see improved switching, the onus and the cost will be put on the wider economy and not on the banks.
Actually, the fundamental reason for full account portability over seven-day switching is this one of consumer choice and bank competition. At the moment, as I was saying earlier, the big banks have a monopoly of clearing, so if you are a smaller, new challenger bank, you have to go cap in hand to one of those banks and ask it to be your clearer for you, and then you are subject to the vagaries of its systems. If its systems fall down, your systems fall down. You have to pay more than it does to access the payments clearing through VocaLink, and all of the implications that go with that.
There are also questions that come in on issues such as free while in credit, which is something that the big banks have been able to offer and which, as we know from our hearings at the Treasury Committee, is not free at all. In fact, banks make quite a lot of money out of our credit balances, so, in return for that, they do not charge us for having a bank account. It is certainly not a free service, but it is an enormous barrier to entry to new banks, which cannot offer it because there is an up-front cost to giving people banking while you wait for their credit balances to build up. Again, those barriers to entry stem from the ability of the big banks to hold that oligopoly over the marketplace. I would like to see those things change.
You have consumer choice and bank competition, and those two items are absolutely critical. If you moved to full account portability, for a start new challenger banks would access the market directly. They can then pitch to customers to give them a try, and they can try out new customer propositions. If you wanted to try a new challenger bank but then move back to the bank you have been with for 20 years, you could do that in the space of a week-you could move to a different bank and then back again in the space of a week-so it really is a radically different approach.
One of the things that was interesting from a recent Which? survey was that most people-over 50%-feel that there is nothing to differentiate between one bank and another. Again, that tells you that there is very little competition, because it is not the case that there can be no differentiation in banking. There can be a great deal of different service offerings, with fees versus credit interest versus different special insurances and that sort of thing that you could be offered. The fact that that is not happening, and that there is no public perception of any differentiation at all, tells you that there is just no competition.
Q115 Chair: We are going to get that seven-day switching, as it were, come September next. The banks have argued that it should be a great success. Do you think that there are some benchmarks that we could put in place to tell us whether it is a success? Are there some measures that you would use to say, "Oh, wait a minute, perhaps I was wrong about this; it really is working effectively"?
Andrea Leadsom: With seven-day account switching, the only thing that changes is the potential outcome for the customer, so the only difference in seven-day account switching from what we have now is that more people may feel that they can switch their bank account. There is no solution to the issue of new challenger banks. It does not solve anything there or make it any easier for new entrants into the market. It does not solve any of the problems with banks’ legacy systems that are creaking and not fit for the 21st century. It does not solve any of the problems that arise from the high level of fraud as a result of legacy systems. Frankly, it also does nothing to improve the quality of the banks’ customer-facing systems, which enable them to know their customer better-again, legacy systems do not solve that problem.
Q116 Chair: Are you suggesting those could be put into measurable tests that we could look at to see if fraud has been tackled more effectively, or are we simply looking at saying that after a certain period we look at the number of accounts that have switched and if it has not been a particularly significant number, we then are determined that seven-day switching has not achieved our goals? I don’t want to put words in your mouth; I’m just trying to understand how you will view that project, which begins in September, and judge whether or not it has been a success.
Andrea Leadsom: If I was trying to see whether what we have moved to is better for society, for competition and for the consumer, I would not just be looking at the levels of account switching. You would look at the levels of account switching and see if they have improved, and the likelihood is that, yes, they will. Then you would look at the costs to the rest of the economy. Have those increased as a result of seven-day account switching? They will increase commensurate with that. As I said earlier, all of the costs of implementing account switching falls on the economy, the shopkeeper, the supplier and the account holders themselves.
Then I would want to ask, has seven-day account switching encouraged new competition to the banking sector? I would suspect not. Has it encouraged the legacy banks to improve their customer facing systems? I suspect it won’t make any difference. Has it reduced the amount of fraud in the banking sector? I suspect it won’t make any difference.
The other key point that account portability could resolve that seven-day switching won’t is resolution. At the moment, we have put in place through Basel III and through our new Bank of England regulatory regime far better systems to prevent a bank failure in the future. However, in the almost certain event that a bank will fail in the future, how will we resolve it? Seven-day account switching is not going to solve that problem either. So those would be my seven or so measures, and seven-day account switching only solves one them, and I suspect not by as much as the banks claim it will, with the disadvantage of the increased cost to the economy.
Q117 Chair: That sets an interesting standard to look at. Just a moment ago you said that if a bank fails then account switching allows us very quickly to move accounts into an alternate bank. One of the arguments that is made constantly against account portability is that it makes runs on a bank a very easy process. That can happen not just when a bank is failing, but on the basis of a rumour, perhaps unsubstantiated, and certainly creates a set of problems for the regulator because of the very rapid movement of deposits. Do you have a comment to make on that?
Andrea Leadsom: Yes. It is a bit like the London stock exchange; it is a private organisation and if a stock trades limit up or limit down then trading is restricted as a matter of good regulation. So of course, whether or not that central utility was private sector owned, owned in common by the banks, or indeed owned by the Bank of England or the FCA, you would have to have a regulatory regime over the top of it that would ensure that you couldn’t transfer more than a certain number of accounts in any one day. You could have an unintentional run on a bank, or indeed a malicious run on a bank if you did not put something in place to prevent that.
There are precedents with the stock exchange for example, and the Commodities Future Trading Commission and so on, where measures are in place to prevent unintentional or malicious circumstances. It would be entirely feasible to be able to do that; that is not a reason for not enabling people to switch.
Q118 Chair: I want to press you on that because the question is whether one could find ways around it if, for example, one was allowed to move X number of accounts on a certain day and you happened to be the individual who was X plus one. It is rather different if you are a sophisticated buyer and seller on the stock exchange, than if you are someone who lives down the street who is not a sophisticated investor of any kind, but suddenly finds yourself left with an institution about which you are very concerned. We would need something more to cope with that wouldn’t we?
Andrea Leadsom: I do not really think so, Baroness Kramer. If you think back to the run on Northern Rock, there were queues of people down the streets, who were queuing all day to get their money out and going home dissatisfied having not got to the front of the queue. In the event you speak of where the public were exceedingly concerned about a particular bank, you would expect, under an account portability scenario, the Bank of England to have something to say about that, either to reassure investors that the bank is solvent or to use the fact that account switching is perfectly feasible to simply transfer accounts itself. So what we are talking about as a limit-up and limit-down on any one day would be around issues of malicious or unintentional runs on banks. That would be what you would be looking to prevent, as opposed to the scenario where a bank was really in big trouble, where account switching is infinitely preferable to what we saw in the case of Northern Rock.
Q119 Chair: One of the other arguments against account portability is the issue of the sort code. It is integral to international transactions and part of the global financing infrastructure that you can’t have accountability and the sort code at the same time. Have you thought about those issues particularly, and do you have a response?
Andrea Leadsom: Yes. And certainly if one were to have a central utility, and if one were to use VocaLink to be that burgeoning central utility on the grounds that it is halfway there already, what you would have to do is to create the ability for that central utility to be the allocator of bank account numbers and indeed sort codes. You would keep the sort code as the means to continue to interface with international remittances. In other words, you would not want to change completely the structure of payments, because then you come up against a problem that the rest of the world can no longer interface with you, but you would change the allocator away from the big clearing banks at the moment to the central utility. So you would still be doing exactly the same activity, but you would be doing it from a different place.
Q120 Mr Love: May I come on to the costs of full account portability? You commented earlier about the platform. But just on introducing it as of itself, you will remember that on the Treasury Committee we had great difficulty in getting any figures from the large banks. However, they said it would be prohibitively expensive and the costs would outweigh-in every shape or form-the benefits that we would receive. Have you been able to find out the costs and what is your argument against the cost-benefit analysis that the banks have done?
Andrea Leadsom: For a start, nobody has done any real cost analysis. In fact, I have been speaking with Stephen Hester at RBS, who has very kindly offered to look into the issue of account portability, but still there needs to be a sort of working definition of how you would achieve it in order for any bank to look into it seriously.
I think the key point, Mr Love, is that when we did our inquiry into choice and competition in the banking sector, when we talked about bank account portability we were all thinking along the lines of the banks effectively throwing away their current systems and throwing away the idea of having a bank account number and a sort code, and starting again. As I said earlier, of course that would be extraordinarily, eye-wateringly expensive. It would be very hard to put a price on it, but from talking to organisations such as VocaLink and RBS they have talked in the region of £100 billion, but nobody has done the work-I want to stress that.
What we are looking at as a far more minimalist approach is the idea of continuing to do all of the processes that banks currently undertake-allocating bank account numbers, sort codes and so on-but simply moving the allocation of those numbers, the recording of those numbers and the recording of direct debits, standing orders and so on from the banks themselves and into a central utility. So what you would be talking about is the outsourcing from the banks themselves into a central utility of their current processes, and that has to be a far less significant expense.
That work hasn’t been done, but in talking to Intellect-the IT trade body-it has said, and I have a number of quotes on the record from it, that it considers that the costs of doing that would not be prohibitively expensive and there would be a very realistic cost-benefit analysis to be done. I personally believe that that work really needs to be done as a matter of urgency.
I just want to stress again-not instead of seven-day account switching. We definitely want to do that as an interim point. But as a longer-term goal, we should be looking to full account portability, to lead the world in that direction.
Q121 Mr Love: In setting out that agenda and that timetable, are you suggesting that we need to be prompting the industry to carry out that essential work, to find out what the real costs of account portability are?
Andrea Leadsom: Yes, and I think that the industry is just about ready to start to do some of that work. Certainly some of the banks have been very interested and keen to take part in that sort of work. We must not only look at it as a kind of punishment for what has gone before-here is the punishment being meted out. If we were to look at it as a long-term project, perhaps along the same timeline as retail ring-fencing, to be brought in within a 10-year time frame, and if we were also to consider the potential business opportunity that arises from creating a central utility that is open to all comers to participate in, in the context of a European banking union and the fact that the European Commission has already talked about the prospect in the future for a shared payments infrastructure in Europe, it could be a massive business opportunity for UK plc.
Q122 Mr Love: One of our earlier witnesses told us about the changes brought in in the Netherlands, where they have introduced something equivalent to a seven-day switching service, which seems to be operating rather well. Unfortunately, the number of customers who are switching has not gone up at all. Of course, there are many reasons, other than the difficulty or the perceived difficulty, of switching, why people and small businesses don’t switch. Are you at all worried that we might invest in account portability but that the numbers won’t then go up sufficiently so that the banks’ criticism that the costs will outweigh the benefits will come about?
Andrea Leadsom: There would need to be a consultation, but my instinct is that the key difference between seven-day account switching and full account portability is the removal of barriers to entry. If you open up a market to newcomers, they will find the competitive edge.
The problem we have right now, that is completely backed up by surveys and statistics, is that people don’t see any difference between bank A and bank B. So if you open it up to newcomers, they will create the differentiation. Looking at the Dutch example, seven-day account switching merely makes it easier for me to change to bank B, but if I don’t perceive any advantage in changing to bank B, and I can see hassle-notwithstanding that it can happen in seven days, I still have that hassle of telling my employer that my bank account number has changed and all the rest of it-I probably won’t do it. If, however, there are newcomers to the market-new entrants-in other words, a reduction of barriers to entry, those people will find a way to make it look more attractive to me, to try to attract my business. That is the key difference.
Q123 Mr Love: I am acutely aware that as far as the deposit insurance scheme is concerned the £85,000 is being advertised. They have just written to me at home, confirming the £85,000 limit. Are there other steps we can take that will ensure that rising numbers exercise the opportunity to switch?
Andrea Leadsom: Again, newcomers with new business offerings, new methods of pricing and perhaps new add-on services will make a big difference. We have seen that. Some banks will offer perhaps travel insurance or even guidance on whatever it might be, booking a holiday or other financial services or investment advice and so on, so there is the potential for a very differentiated offering. I genuinely think that it is the idea of new entrants, with different things to talk about, in financial services that will encourage people to switch.
Q124 Mr Love: Is there a minimum number required to switch? Should we have a target? Switching levels in other industries are much higher than in the banking industry, but are they are a relevant benchmark on which to base a new system? Account portability would be, as you say, at the leading edge of developments in banking. How do we decide whether it is successful or not? What targets should we set ourselves?
Andrea Leadsom: In terms of seven-day account switching, the obvious target is to look at the improvement in levels of switching, but we have to ask ourselves, as people who are responsible for reducing barriers to entry and improving competition and so on, what we want to see in financial services. Historically, there has been an enormous consolidation in the sector. There were 44 key banks back in the late ’90s, now there are 21 key banks in the UK. It has halved. Their exposures, in terms of the size of their balance sheet, has dramatically increased. We have this enormous moral hazard from the concentration in those banks. We have poor switching and people finding themselves unable to tell the difference between the offering of one bank and another. That should tell us that there is something fundamentally structurally wrong with the industry.
In terms of targets, we would want to change all those things. In terms of what has gone on with retail ring-fencing, the Basel III capital requirements, with the macro-prudential tools at the Bank of England, we have done a lot to try and make sure that we have raised the hurdle to make it harder for banks for fail. What we have not dealt with is the barriers to entry, and we have not dealt with the barriers to exit. We have not dealt with what happens if a bank fails and we have not dealt with how we are going to get more banks in.
Bank account portability presses those buttons-there no doubt it does-so in answer to your question "What targets can we set ourselves?", it needs to be all of the things, including reducing bank fraud, improving bank systems. This is not just about do we want to change things, it is also recognising the fact that-are we happy with a banking sector that can go down for two whole weeks, meaning that people cannot pay their staff or make any transfers at all? Are we happy that they continue to have those systems and continue with batch processing? Are we happy with the level of fraud, with people making payments to each other on their mobile phones? Of course, we are not. So actually, it is not just about how better do we want it to be, but it is also a case of trying to address some of the structural problems that we find with the banking sector right now.
Q125 Mr Love: There are some suggestions that the next step should be not full account portability, but something in between seven days-perhaps two days or one day. Would your argument against that be that you do not then get the benefits of full account portability?
Andrea Leadsom: Yes. It is as simple as that. You can make switching as fast as you like, but the point is, if you continue to leave the clearing in the hands of the oligopoly, if you continue to force people to move their bank accounts, you can only ever improve the switching levels. If you move to account portability, you have taken away the barriers to entry from the market-obviously, not regulatory barriers to entry-and you have effectively upped the bar for those legacy systems banks to have to improve their offering to compete with the new competitors who will come in.
Actually, you have really made a game changer if you move to full account portability, whereas if you move to even one-day switching, you have not actually changed anything fundamentally, you have simply made it faster for people to switch, but they still have to undergo all the pain. And there is that clear downside. The more switching you have, with transferring bank account numbers, the more onus you are putting on the broader economy to deal with it. Imagine if seven-day account switching is incredibly successful and we all move our bank accounts next year, many SMEs would just fold under the pressure-the cost of trying to deal with all those bank accounts changing. There is a direct cost of increasing the level of switching without enabling people to keep their account numbers with them.
Q126 Mr Love: When Which? gave evidence to another panel, they suggested, when pressed on this, that we should set a date-a target-long into the future. In your evidence, you suggested we ought to tie it into the implementation of the ring fence.
Andrea Leadsom: Yes.
Q127 Mr Love: Why? And what would be the advantage of that?
Andrea Leadsom: The key thing is that, when we had our inquiry into competition and choice in the banking sector, one of the things that the banks said is that it would be a radical revolution in their systems area. So I genuinely believe that if you make the lead time long enough-pretty much the same principle as with the retail ring fencing-and allow a long enough lead-in, then you remove that panic of not being able to achieve something within the time frame.
It would be aspirational to achieve full account portability, but I also think it then enables us to move with the emerging technology, to really have a serious review and look at what would be the best way to do this in future, and so on. A long lead time makes a lot of sense, I think.
Q128 Mr Love: One final thing. Milestones. It is rather nebulous to say that you have to do it by 2019. Are there milestones that you can reach along the way to show that the industry is carrying out the function of moving in that direction?
Andrea Leadsom: Yes, I think there definitely are, and this is probably a question for your next witnesses rather than me, but it seems to me that if you were going to effectively turn VocaLink into a central utility, because of what it currently does for the Department for Work and Pensions, it has the equivalent of a bank account set-up for benefits recipients. So it already has the ability to set up a shadow bank account, and effectively that is what you would be wanting that central utility to be doing for all bank customers. You could either migrate group by group, or you could set a target that, for example, bank account numbers are allocated by the central utility in the first instance, followed by sort codes, followed by direct debits. You could do it sequentially to make a staged achievement towards the goal.
Q129 Mark Garnier: Is seven-day switching just a fudge to avoid the inevitable?
Andrea Leadsom: Yes. I genuinely believe it is. I think it is just a way of saying, "Look, we’re trying to make things better." It does not really achieve anything.
Q130 Mark Garnier: I recently spoke at a dinner hosted by VocaLink for its shareholders, partners and stakeholders who were predominantly with the larger banks. As I got on to the subject of account portability, you could see the frost forming on the tables around the room. Do you get a better reaction from the banks when you speak to them about account portability?
Andrea Leadsom: I am starting to. What was interesting for me was the Bank of England saying that it could be the answer to resolution. That is incredibly important, and that has got to be something all the banks are interested in too. Certainly, senior bankers of the new challenger banks want to "Bring it on. It can’t happen soon enough." That tells you something. The big oligopoly banks are resisting it, because to them it is an existential threat. They know they do not have the systems to compete. What they do have is power over the Payments Council, VocaLink, and the new challenger banks, so they can suppress competition.
Q131 Mark Garnier: You have been in Parliament for two and half years, and you have been campaigning robustly on this for two and a half years. Do you sense that the oil tanker is turning in the direction you want, and that this is now something that when you first started was not going to happen, but now more and more people are getting behind the project?
Andrea Leadsom: I have been here two and a half years, and when I was first here it was all about regulation, regulatory reform and how we were going to make sure the banks are so tightly regulated that they can never fail again. As we have gone through inquiry after inquiry, we have all recognised the limits to regulation. I for one do not believe that the next financial crisis will come from anything that looks like leverage or credit bubbles. It will look more like derivatives and over the counter. You can only ever solve the last crisis. You cannot solve the next one, but you can ensure that if a bank fails in future no one minds. The shareholders lose their shirt, and it does not cause a drop in the ocean.
When I was running the investment bank’s team in Barclays back in 1995, and Barings went bust, I recall spending the weekend ringing international banks saying, "This is all in hand. Eddie George has got it covered. Don’t panic." You could see that the accountability rested with him, and that confidence was there. When Barings went bust, it did not cause a ripple. That was partly because the Bank of England was entirely accountable. It was partly because there was a much bigger banking sector with far less concentration, and it was partly because of the determination to give comfort to the industry. All those things have been blown out of the water now, so we must get back to a system that more closely resembles that, and you could envisage a bank being allowed to fail without causing a major international incident.
Q132 Mark Garnier: To be fair, Barings was not quite as systemically important as RBS and HBOS. You raised the regulatory issue, and you have done a lot of work with the challenger banks, talking to them about the authorisation process. To what extent do you think the FSA is acting as a barrier to entry with the approval process?
Andrea Leadsom: That is the other massive problem. We have talked about competition barriers to entry, and regulatory barriers to entry are very real. You and I have heard from a number of would-be bankers who have fantastic credentials and who have been set the target of, for example, building a dealing room. Then the FSA comes in, after they have spent getting on for £1 million, and says, "Actually, no, we are not going to give you a banking licence." The barriers to entry put up by the regulator are ridiculous. Recently, we met with the Bank of Dave-an entrepreneur who is very keen to develop community banks in a small way. Again, he was giving us examples of how the FSA requires a bank such as his, which has £100,000 coming in and £100,000 going out every month, to have something like £10 million of capital set aside just in case. If you are setting up a community bank, you cannot possibly expect to do something like that. So, yes, regulatory barriers to entry are enormous. On the Treasury Committee, we have tried very hard to ensure that the new regulators have a specific competition mandate, but, sadly, we have not reached that point. They "have regards to", but I for one certainly regret that.
Q133 Mark Garnier: Would that be your key thing? My next question was about the significant differences between the FSA, the PRA and the FCA. What changes would you like to see, particularly to the PRA authorisation process? Do you think that that is absolutely key, and what other changes would you like to see?
Andrea Leadsom: What we have seen, and the FSA as it is currently, would also sign up to this, is that they have a skewed incentive. They have absolutely every incentive not to allow a bank to fail, and absolutely no incentive to promote competition. You can quite well see why it is entirely rational for them to put up enormous barriers to entry for new banks and to penalise smaller banks which, in the grand scheme of things, are more likely to fail. So, yes, if they were to have a clear incentive to promote competition and to reduce barriers to entry that needed to be evidenced and measured then I think that that would change the goal posts.
Q134 Mark Garnier: The FSA is going through a process of reviewing its authorisation process for challenger banks and new entrant banks. Do you get any sense that they are heeding the problems of the smaller banks?
Andrea Leadsom: I have not seen any evidence of that. What has been interesting is that quite often the conversations that you have with would-be bankers outside a formally appointed Select Committee hearing are very different from when they are in front of you and on the record. That is a real problem. Behind the scenes, potential bankers say that they do not find the FSA at all helpful to them, but on the record, they will say that it is entirely helpful. That is a fundamental problem that we have. The FSA has admitted that it does not have the incentive now to take a risk in allowing a bank to establish itself, even if it is a very small and regionally focused bank.
Q135 Mark Garnier: My final question is about the smaller bank once it has been authorised, as one or two of them have. The regulations that the banks have to adhere to on an ongoing basis seem to favour the larger banks, certainly in terms of the granularity that they have and the different levels in their database and therefore the various ways to capital. Do you think that there needs to be more done in order to, if you like, take the heat off the smaller banks, given that they are smaller? Do you think the FSA should cut you a bit of slack if you are a smaller bank in terms of meeting the regulatory requirements because there is a different set of issues to tackle?
Andrea Leadsom: I do not think that it is a case of cutting them some slack. It is a case of looking at them in a different way. It is right to reflect in the prudential requirements for smaller banks the greater likelihood that they may fold simply because they may not have the volume of business, but, on the other hand, there has to be a robust regime, but it has to be appropriate to that size of bank, so we need to be a bit more creative. Again, if there were a direct incentive to reduce barriers to entry and promote competition, that would encourage the regulators to look more creatively at how they could regulate smaller banks differently.
Q136 Lord McFall of Alcluith: Looking at the architecture of banking, the concepts of too big to fail, too big to manage, too complex to understand are still with us. There is quite a debate in the US on this with a number of Federal Reserve representatives making this point about smaller banks Some investors, such as Wilbur Ross, the billionaire, are saying that the banks are too complex to manage. Andy Haldane said here, as you will know, that he does not see economies of scale in banks greater than, say, £100 billion. What is your view on that issue? How would you like to see the banking architecture in the country, because you mentioned earlier 44 banks coming down to 21 key banks?
Andrea Leadsom: I suppose that I am not allowed to say that I would turn the clock back, because you can never do that. Certainly, however, it seems to me that we could potentially do more with the taxpayer-owned banks at the moment. For example, the sale of branches that did not go through to Santander could be looked at again with a view even to morphing that into the small business bank that the Government are establishing. There is potential to set up new challenger banks of some size. You would have to facilitate that happening. The difficulty with the infrastructure that we have right now is, as we have just gone through, the fact that they would have to clear through one of the big clearers. They would have those barriers to entry and so on.
I would certainly agree with Andy Haldane. The problem of "too big to fail" has not been solved. Ironically, with retail ring-fencing, you could potentially maintain the moral hazard simply because if I was a pensioner and investing my life savings in a bank, I would rather put it in a retail ring-fenced bank, because, by definition, it is too big to fail. In a sense, you are creating even more moral hazard.
I would certainly favour seeing banks reduced in size. Before I came into Parliament, I did a lot of thinking about how you could create a specific financial competition commission that would look at banks with an overarching monopolistic position in a particular sector, because, as you know, Lord McFall, banks cover a huge raft of different activities, so you could have one bank that perhaps has a huge position in Government bond trading and another one that is massive in corporate finance and another that is enormous in personal current accounts, so what you almost need to do is to look at them piece by piece and try to reduce those competitive situations within those banks. You need to force them to reduce them or sell them off or whatever. In other words, rather than just looking at the overall size of the bank, you start to get a bit cleverer about looking at the different activities that they are undertaking.
Q137 Lord McFall of Alcluith: At Lloyds, disinvestment is taking place at the moment, but it still has a huge footprint in the UK economy. Do you think there is a case for having a Competition Commission investigation into areas such as Lloyds and maybe RBS?
Andrea Leadsom: Definitely. The fact is that Lloyds HBOS still has something like 40% of the UK mortgage market. That is not just an oligopoly; it is a straightforward monopoly. At a time when we are desperate to see new buyers who want to get their first home and to get on to the property ladder, we have to be absolutely on top of any structural glitches in the system that mean that such people are not getting access to funding. So, yes, I would certainly do that with Lloyds HBOS. Personally, I bitterly regret that the previous Government enabled or, in fact, persuaded that merger to go ahead. While it would be an exceedingly radical move, I would love to see it reversed.
Q138 Lord McFall of Alcluith: I was at a talk a number of months ago by the German ambassador, who was talking about boring Rhineland banks. As politicians, we have been harking on about the banks needing to let, and yet in the House of Lords at Question Time today, there was a question from the Liberal Lord Sharkey about why they are not lending. Is there a case for looking at the overarching political considerations, such as banks needing to lend and supporting regional economies that have a different architecture from the banking system? If we are going to the Competition Commission, we need to have a vision from the Government to say, "These are the types of bank that we want." They can be smaller or more regional. They can help fill the spare tyre, which was the point made by Adam Posen, the former MPC member. Is there merit in that?
Chair: I ask for a brief response-you have to vote in a Division.
Andrea Leadsom: Okay, thank you. There is certainly merit in the Government giving some thought to the structure of the banking that we want to see. Obviously, the reason why the banks are not lending to the real economy is because they are still trying to de-lever. I was pretty shocked when Mervyn King said that there is still a £60 billion black hole in their balance sheets, so there continues to be a fundamental problem. There is that sort of short-term crisis situation where we have to get funding into SMEs, but then there is the bigger strategic view of what kind of banking system we want to have. I personally would welcome that kind of review being carried out.
Chair: Thank you very much, Mrs Leadsom. You go and vote. I will call the session to a close. We will reconvene for our next session when our various MPs return from voting.
Examination of Witnesses
Witnesses: Mr David Yates, CEO, VocaLink, and Mr Chris Dunne, Payment Services Director, VocaLink, examined.
Chair: Mr Yates and Mr Dunne, you will be aware that this is the Panel on Retail Competition, which is a subset of the Parliamentary Commission on Banking Standards. We very much appreciate your attendance here today. I am going to ask Lord McFall to open up the questioning.
Q139 Lord McFall of Alcluith: Good afternoon. So, who are you, who owns you, and what are you doing here?
David Yates: My name is David Yates, and I am chief executive of VocaLink. I joined at the beginning of the year. I have been around in the payments industry for about 30 years, mostly outside the UK, and I have covered pretty much every aspect of payments.
Chris Dunne: I am Chris Dunne, and I am the payment services director of VocaLink. I am responsible for the core scheme businesses, which are Bacs, Faster Payments and Link, the operation of those infrastructures, and also for the management of various stakeholder bodies. Within payments there are a lot of moving parts-the Payments Council, the scheme companies, the regulator, the Bank of England. Effectively, that is my call.
Q140 Lord McFall of Alcluith: You are owned by a consortium of 18 banks and building societies, and I gather that the representatives of Lloyds, RBS, HSBC, Barclays, Santander and Nationwide comprise a majority on your board. What do you say to the comment others have levelled at you that VocaLink is a cartel owned by the payments industry?
David Yates: It is certainly true that our ownership is the large banks in the UK-five of them make up approximately 85% of our shareholding. They are all represented on the board, plus Nationwide. We have six independents in all-two in management-who are fully independent directors. In that sense, there is a bit of a balance on the board, so there are six and six, bank and non-bank. I would say that the characterisation of the banks blocking progress is not really the way that I understand it. Although the banks own us, what I think actually happens is that we have a very complex set of governance structures that sit above VocaLink, and just getting things through so many layers of governance proves to be extremely hard. We sit in the middle of what is meant to be a collaborative environment that connects every single consumer and business account in the country, and actually the banks have to be inordinately careful not to be accused of abusing that collaborative position, and to be seen to be clean. It slows everything down, so we have a very slow environment.
I will just describe that governance structure to you. We operate, on behalf of the banks in the UK, all the systems that connect every bank account together. Above that, there are three scheme companies: BACs, Faster Payments and Link. Those companies set the rules according to which the underlying systems can be used. The question of who gets access to the systems is determined by the scheme companies. The scheme companies are in turn monitored by the Payments Council, which is comprised of some bank and some non-bank representatives, who oversee those rules. I guess that that organisation is overseen collectively by the Treasury and the Bank of England, and there is some involvement from the competition authorities. Within that structure, decision making becomes extremely slow, so although there is huge power in the infrastructure, and we could do dramatically more with it, actually exploiting that infrastructure and doing things that would be good for UK business is a slow process.
Q141 Lord McFall of Alcluith: What dramatically improved things could you achieve?
David Yates: Today, our structure, if I could describe it briefly, connects through all the banks every single consumer, business, Government Department and charity in the country. It is a rare structure that does that. If you look at international comparisons, there are not very many things that have that level of reach. The things we do with the structure today are: connect people with the three-day payments, using BACs; we do all standing orders; we do all direct debits for bill payments; we are responsible for all electronic salary payments, in essence; and we co-ordinate all the ATMs in the country so that everybody has access to every ATM.
However, given the degree of connectivity that we have, we could be doing things like services to enable us genuinely to find a good process to move away from cheques. We could provide much a better service to enable small businesses to be paid immediately-to ask for an immediate payment and to receive one back. We could also support the payments from businesses going outside the UK, as well as receiving payments from outside and bringing them in. So there are many things that we think we should be innovating around to improve our service to the overall UK plc.
Q142 Lord McFall of Alcluith: What are the barriers preventing you from doing that?
David Yates: If our decision-making structure could be simplified and if we could do things that were both in this collaborative space that we have operating today and also in the commercial space, that would be extremely helpful.
I probably need to explain the last piece about the collaborative versus the commercial. The things that everybody knows about us-in other words, BACs, Faster Payments and Link, and all those services-are essentially provided free to the consumer via the banks. There are some business charges, but by and large for the retail customer, there is no charge for those things. Therefore, maybe there is not as much incentive for their onward development into these new areas as there would need to be.
I believe that we actually need to have a collaborative structure that lets all the banks interoperate for the benefit of the consumer, but also an environment in which the banks can develop commercial services on the back of this fabulous infrastructure.
Q143 Lord McFall of Alcluith: You said the decision-making structure could be simplified. How would you go about that? Could you provide us with more detail?
David Yates: The recent Treasury consultation has suggested some things that could be brought in that we believe could actually make it even more complex than it is today. What we would like to see is a structure in which clearly the interests of the consumer are looked after, and in which the voice of the consumer as well as that of the banks is heard.
It is important that we reflect on access to the systems. Today, the scheme companies determine who is allowed to access the systems. Clearly, there is a demand in the market to open that out to the new entrant banks, as we heard earlier. So opening up access would be important, and another part of opening up access would be about the rules concerning collateral, and that is really a consideration for the Bank of England.
There are three layers: a good governance structure that looks after the interests of all participants in a payment level; a structure that lets access to take place; and a structure that sorts out capital and collateral requirements.
Q144 Lord McFall of Alcluith: If there was a will to promote a common payments system, which this Committee has spoken about-akin to the electricity industry with a grid or whatever-would you be well placed to be the patrons of that?
David Yates: I have frequently used the phrase, "the national grid of the payments world for the UK". It is a very good starting point to connect every single consumer and business in the country. That is what we already do. When people talk about a shared utility for banking, in essence this is the starting point-the shared utility for banking-on the back of which you can build many additional functions.
Q145 Lord McFall of Alcluith: If you could send us more information, that would help, because we have asked that question of others and it would be good to put some flesh on that.
David Yates: Yes, absolutely.
Q146 Chair: That would be much appreciated.
Mr Yates, you talked about an improved governance structure. Are you not really talking about a different ownership structure? With ownership by 18 major banks, of which essentially a handful are dominant, the kind of changes or the opening up that you have talked about is not really conceivable, is it?
David Yates: I am talking about my own owners here-
Q147 Chair: Yes. I can understand if you need to be a little coy on that issue.
David Yates: One could certainly do something to change the ownership structure if it was desired, but even having done that, some other things would also need to be addressed. Things that in addition would need to be addressed would be the question of providing good access for all parties and the question of collateral. Just changing ownership will not solve the problem that you are looking to solve. There is a little more to it.
Chris Dunne: Essentially, we are plumbers. We run the pipes that move the payments around. The rules that govern access to that plumbing are out of our hands and are set by the payment scheme companies. They are not-for-profit companies, limited by guarantee and owned by their members, and they set the access rules and the tariff for accessing that infrastructure.
Q148 Chair: I think you called them gentlemen’s clubs in one of your submissions.
Chris Dunne: They are to some extent in that they exist not to make profit, but just to ensure the safe running of those services. They also set the rules of that club. If you take Faster Payments, that has 10 members at the moment, so that is 10 banks out of a much broader base of banks in the UK, and it is growing enormously. This year it will process 800 million transactions. Last year it was about 535 million, so it is growing enormously fast. It is now the case that the average value of a Faster Payments transaction is slightly higher than the average value of a BACs transaction for the first time. It is growing hugely and there is a lot of demand to be able to access this near real-time infrastructure, but to do so you cannot simply come along and plug into us. You have to access through the scheme.
Q149 Chair: You talked about the ownership structure that you have and the mechanisms that people use to plug into you as one that delays innovation and change. You have to get an extraordinary consensus and it is a cumbersome process with different people in one bit or another. I recognise all of that, but we took some testimony a few minutes ago that discussed the difference in cost burden if you were in or out of the club. Mrs Leadsom said that it was something like 3p per transaction if you were one of the owners as it were and in the club, and something like 26p per transaction if you were outside the club. That is a phenomenal difference. Is that an accurate representation? How does it work if you are one of the agencies or one of the banks which has to use an agency relationship to get into the system?
David Yates: For somebody to become a member of the systems, they need to be able to prove that they are financially stable and they have to be prepared to stand up quite a large chunk of collateral.
Q150 Chair: Is it a joint and several liability?
David Yates: Yes, it is a joint and several liability, and they have to be prepared to stand in, in the event that another member of the service is unable to honour their obligations. Structurally, that is viewed by many new entrants as a big barrier to entry, and as a consequence of that collateral issue, they then go to a bank that is already standing up that kind of collateral and say that they wish to ride on the back of their membership, and in that context they are asked to pay significantly more. It is true that some people using Faster Payments, for example, are paying to one of the lead banks large amounts more than they would pay to us directly if they were a direct member, but we need to resolve that membership question. The two things that I mentioned before-access rules and collateral-need to be resolved. Then we will be delighted to stand up all the technology integration components that would let people use the underlying services.
Q151 Chair: Is it the word "pre-funding" that is sometimes used?
David Yates: Yes.
Q152 Chair: That is a pre-funding arrangement so that each bank collateralises its transactions on a running basis, if I can put it that way.
David Yates: Yes, there is a strong view that pre-funding would resolve these collateral issues and enable smaller participants just to fund their own transactions without having to mutually guarantee other folks’ transactions and that that might level the playing field, and I think there is a large support for that generally.
Q153 Chair: When you say "a large support", is that across the piste, including the big banks, or is that just a view of the challenger banks?
David Yates: I think it even includes the big banks.
Chris Dunne: The Bank of England is looking at that, because part of the CPSS-IOSCO scope is the principle of looking at how systemically important payments systems should be managed. It is pushing towards more pre-funding anyway. There is a direction of travel-it is recognised by the central bank-that the schemes need to look at pre-funding. They have already started that conversation going. How quickly that conversation then completes is a different matter, but it is definitely the direction of travel.
Q154 Chair: This is pre-funding viewed in a sense as a contributor to financial stability, because it does not have the contagion element that the collateralised joint and several liability scheme has.
Chris Dunne: Yes. At the moment, the systems are called deferred net settlement, so settlement happens after the payments have taken place. There is an element of risk there. If you pre-fund, effectively you pay as you go. You are only putting in as much as you are able to afford. If you can’t afford any more, you don’t put any more transactions through, so it removes that element of risk. As I said, that is the direction of travel.
There is one other point to make about the cost. Clearly, that is a commercial relationship between the sponsor bank and its agency, but the prices that are charged from the scheme coming out to the members are uniform so, regardless of whether you are a small bank or a large bank, you pay the same item price for access to BACs or Faster Payments, as long as you are one of the scheme members.
Q155 Chair: To clarify, all those who are members pay exactly the same.
Chris Dunne: Exactly the same unit price. There is no volume discount.
Q156 Chair: But if they offer to act as an agent for another bank that is not a member, that is an entirely independent commercial negotiation between the two.
Chris Dunne: That is right, between the sponsor bank who is the member and the agent.
Q157 Chair: We did have evidence from Jayne Gadhia from Virgin Money and Craig Donaldson from MetroBank, who talked about disadvantages in terms of the service that he could provide his consumers and the price he could offer his consumers. I think that he said something to the effect that the bank would absorb the price differential for the consumer, but it would have the effect of diminishing other services that he might be able to offer that consumer if he were on the same price basis as a major bank.
Do you accept that, from the perspective of the end client, it does mean that the client of a bank that is a member versus the client of a bank who is not a member is faced with the price differential because of the way in which they relate through to VocaLink and payment services?
Chris Dunne: It is both a commercial piece and also a technology piece. You are absolutely right. They will connect through their sponsoring banks to the central infrastructure rather than connect directly so, to some extent, they are at the mercy of their sponsor bank. If the sponsor bank has an outage, they also suffer which, I think, was where Mr Donaldson was coming from. Commercially, as well, they have to strike the deal with their sponsor bank rather than simply taking part in the scheme arrangement.
Q158 Chair: You are saying that, if you are a bank that must go through another, you have no control over that system.
Chris Dunne: Yes.
Q159 Chair: I have just one last question, before I hand this over. Mrs Leadsom was talking about a number of the possible kinds of structures that VocaLink or its successors could sit in, in the future, whether as an independent entity that might be owned through normal shareholdings with a regulator, or owned by the FCA, the Bank of England or whatever else. Do you have any comments that you can make on that issue or is that not something on which you can comment?
David Yates: It is clearly our shareholders’ decision that you may be able to influence, but what has happened in the rest of the world is that the vast majority of comparable structures around Europe and in the US and Australia tend to be structures that have traditionally been owned by the banks within a given market, although there are some really quite interesting signs that things are starting to change. It is my expectation that, next year, a couple of these quite important structures in Europe will start to change ownership and move from being collaborative bank-owned entities into a new structure with perhaps private equity ownership or, indeed, other forms of ownership.
Q160 Chair: Can you just tell us which countries those are, because it might be interesting to follow through?
David Yates: Do you mind if I don’t? I know this, simply because of some personal relationships I have, but it is not in the public domain.
Q161 Chair: We would not want to intrude on that. We can contact them and ask what their thinking is.
David Yates: What is also starting to change is that processing structures are starting to become non-country specific, so we at VocaLink have taken on the processing for Sweden. That is the first instance when a European country has passed the national clearing structure outside of its own borders.
The second one will be that the Belgians have given their processing to the French and, in Germany, there is a joint venture that matches up the co-operative bank structure with the Dutch clearing system on a cross-shareholding basis. So these structures are beginning to change, and the ownerships change with the change in structure.
Chair: That is very helpful.
Q162 Mr Love: I am going to ask a series of questions and I am going to ask you to bear with me about any technical matters that you might raise. I hope you will keep it as non-technical as possible. Andy Haldane raised in an earlier session of the full Commission the idea of a utility platform, and I want to investigate what will be necessary to achieve that-time scales and costs. Perhaps you could start off by telling us roughly how the infrastructure of the British banking system is currently organised, and how big a leap it would be to move to a common utility structure.
David Yates: We would say that we already are a common utility structure, and this is a part of the journey where you could take multiple steps along a path, which could be quite extensive. Let me tell you what we do already, and then we can perhaps take a journey and say, "Where could it go to?" Today, we operate two basic services around clearing. One is the three-day clearing service called BACs, and the other is the pretty much instantaneous system called Faster Payments. On the back of those two services run most of the bill payments in the UK. All the utilities collect their bills through direct debits through us, and 70% of those utility bills run through that automated clearing service. All standing orders run through it, and basically the reach is every consumer and business in the country. Without that structure-an example of where it is missing would be Australia-the banks would all have to connect to each other on a bilateral basis, which would be a huge barrier to entry. Here, all banks connect in through us and a customer of bank A can work with the customers of bank B or bank C.
In addition to that, we also operate the collaboration around ATM networks. The banks individually own their ATMs, but we make sure that a consumer can go to any ATM here in the UK and take money out, no matter who they bank with. That is a very important piece of interoperability and consumer service. That is what we do at the most basic level, and through that we transport about £6 trillion-worth of business each year. That is the value of the transactions. To put that into context for you, the card companies in the UK process about €1-and-a-bit trillion-worth of transactions through this structure. If it were not here, the banks would not be able to work with each other without doing bilaterals. That is what we have already today.
We have been asked to introduce the service called seven-day account switching, and I honestly feel that its name undersells what it really is. I might hand to Chris in a minute to explain the real detail, but the seven-day account switching service is rather more than that. Within seven days, bank A has to make sure that the payment instructions for a given consumer move to bank B, but for a period of 13 months after that happens, any erroneous transactions that were directed at the old bank account A have to be moved to bank account B so that payments do not get lost even after the transfer takes place. It goes beyond just bank-account-to-bank-account payments, and it also incorporates debit card payments. In that sense, it is quite a major piece of work and it ought, in practice, to resolve some of the big issues that a consumer might have in terms of their concerns about moving from one bank account to another.
Chair: We are going to come on to some issues around portability.
Q163 Mr Love: Let us just park that for a moment, because we will come back to it later. As I understand it, all those banks hold all the account information about the customer on their platforms, which are separate. You link the platforms together, and what has been suggested is that we have a common platform. How would we move from one to the other?
David Yates: That is right. The banks hold the customer data. They hold the financial data that sits in the customers’ accounts. They hold all the payment instructions. They also assign the account numbers within a predefined sort-code environment. So when you talk about account movability and portability in central utilities, those are the things that are quite tough to deal with. Let us take the analogy of mobile phone portability and then talk about that in the bank context.
When regulators wanted to make sure that mobile phone numbers would be portable, one of the things they needed to make sure was that if a consumer changed from one provider to another, they could keep their number because that is the one on which they received phone calls and from which they could make them. When Andrea Leadsom refers to portability being the retention of that identifier, that becomes a tough thing to do because not only are the sort codes and the account numbers attributable to the individual bank, all the payment instructions associated with that account also reside inside the bank. The essence of the problem around portability is that you would have to un-engineer that and move at least those components into some form of central location in order to change the way in which that could be done.
Q164 Mr Love: I want to park to the side whether the banks would be in favour of this and just talk about the technical feasibility. Is this is a major task requiring a completely new system or are there steps that can be taken that can move from where we are today to where we would want to be if we go for this common platform?
David Yates: If you don’t mind, I just want to complete the story. Some of the descriptions I have heard of account portability go even further than what I have just described. Some folks are talking about a central outsourcing company actually managing all of the current accounts on behalf of the banks. That could be a structure that you could provide for resolution and also then to manage those accounts on a central basis. Now I will answer your question.
It is an enormous technical work-out and it would be quite invasive to the banks’ own operations to do even the first step on that journey. It is not to say it should not be done but it would be a big work-out because you would effectively be changing a core of data sets that drive all payments in and out of the bank network. It would need an immense amount of co-ordination and would take quite a long time. I guess the question then becomes: what is the opportunity cost of doing that versus doing some other pieces of innovation within the market? The sorts of things I referred to before, for example, making a much better payments environment for small businesses and a much better environment for utilities to collect money from, and the bank to consumers and so on and so forth; there are just choices and trade-offs to be made.
Q165 Mr Love: Is it possible to make those choices a logical sequence that would lead in the end to this sort of common platform or would they be kicking you in a different direction? In other words, they would be mutually exclusive.
David Yates: There is a kind of a sequence that would need to be followed to make this possible. We would probably be able to learn quite a lot from our counterparts in Norway, Sweden, Denmark and so on who have already undertaken a part of this journey. One part is about getting consistent identifiers for consumers that are usable both for banks, across the banks, and for Government at the same time. Getting this consistent identification piece sorted out would probably be one of the first steps on the journey. The second step on the journey would then be to simplify the pointers within the system so as to have a new mechanism for identifying the routing for payments that was outside sort code and account number. The third piece would be, I guess, to complete that with ID, sort codes and the account numbers.
Chris Dunne: David has talked about the Nordic states and Swedish processing as an example, and we process autogiro payments on behalf of Bankgirot, which used to be called BGC, in Sweden. Effectively, it is a direct debit system, and the way the system works in Sweden is that the mandates are held centrally. The mandates are not held at the banks; they are held within the central infrastructure. Within that mandate it says that I make a call on Mr Dunne’s account and that he has this citizen number or giro number-there are two numbers in Sweden, but you pretty much have a citizen number as soon as you are born-and it associates you with a bank account number. Once that has been validated by the bank to say, "Yes, I accept this is Mr Dunne, this is his citizen number and this is the bank account number," it is lodged.
If I change my bank, that mandate still sits in the central infrastructure and still has my citizen number on it. The utility company, the gas company, the electricity company, or whatever, will still make a call on that mandate against my citizen number, but my underlying bank could have moved from one Swedish bank to another Swedish bank. Everything will work because they know I am Mr Dunne and they know this is my citizen number. All that has happened within the plumbing at the centre is that that mapping of my citizen number has moved from bank A to bank B; it is invisible to everyone else.
The issue we have in the UK is that the mandates are all held at the banks, not at the centre, and there is no citizen number. You do not have an equivalent identifier at the moment, and you have to look at what outcome you want: is it re-engineering, as David said, the very big work out around the sort code and account number, or is it finding a proxy that says, "This is Mr Dunne, and this is his bank account," and abstracting away from that. Some of the work we are doing around, for example, the common infrastructure platform for mobile payments for the Payments Council is a first step on that journey, because it maps your mobile number to your bank details. So if I make a payment to you, Baroness Kramer, I use your mobile number, and the infrastructure translates that mobile number into a sort code and account number. If you change your bank from Barclays to Lloyds, the entry in that table changes, but your mobile phone number does not. And if I make a payment to you, I still make it to your mobile phone number. So to me it is invisible.
So it is about outcomes, rather than trying to solutionise the chopping up of sort codes or account numbers.
Q166 Mr Love: So, to be clear, the Swedish model is a halfway house that allows the banks to continue to have the information on accounts and customers while allowing transactions to be ordered from the centre? Is that correct?
Chris Dunne: Yes. They have abstracted the individual, the citizen, away from that bank account number. They already have a proxy, which is the citizen number. To some extent, we are talking about using a mobile number, but this is a way of enabling the banks to maintain their own infrastructures without a very big work out.
David Yates: Another way to describe it is that the payments are attached to the person, rather than to the bank. So the person says, "I now want these payments, which are my payments, to go from bank A, rather than bank B." That becomes a much easier thing to do.
Q167 Mr Love: So the individual and their payments are done centrally, but the rest of the information is still held by the banks, who feel more secure in those circumstances? Is that roughly it?
Chris Dunne: It pretty much is. The issue is that the banks do not all treat sort codes and account numbers the same. The way they run their internal systems does vary from bank to bank. Unfortunately, they are not homogenous, and some banks will find it very challenging to try to move away from that structure. Others will find it less so, but it varies from bank to bank.
Q168 Chair: Would you mind developing a note for us on that? I know it is techy and intricate, but I think it might be really interesting for us-not just this panel but the broader Commission-to understand that more broadly.
Chris Dunne: Yes.
David Yates: Yes.
Q169 Mr Love: I know it will be difficult to be very definitive in these circumstances, because we are talking about a long way, but we would appreciate some idea of the steps that would be necessary, the length of time they would take and, if only very roughly, some sort of order of magnitude.
Chris Dunne: Putting it at the very simplest level, everything we do at the moment with central infrastructures is pretty much directing things in the right way. So either the bank will send in a payment to us saying, "Send this amount to that account over there," or they will send a mandate, saying, "Extract this amount from that account over there." We will do that routeing and the pointing, but the instructions sit with the banks at the moment, and indeed the bank accounts sit with banks at the moment. The conversation we have had so far is about perhaps putting more of that into the centre. If we can explain where we are at the moment and then what the steps are on the way, that would help to see some of the challenges.
Chair: A road map would give us some clarity.
Q170 Mark Garnier: Australia apparently recently dropped plans to move to full account portability. Did you follow what happened there?
David Yates: Actually, we are busy in Australia right now, because we are trying to export our technology to Australia. They have also written up a plan to implement something very similar to Faster Payments. We are bidding to put our systems from here into Australia as the underpinnings of that, as we are doing in Singapore right now. That project in Singapore is under way.
Q171 Mark Garnier: In terms of the account portability?
David Yates: In terms of the account portability, they have dropped it mainly because they have no central utility structure around which they could build that capability today. Once we-or somebody-put in place something like Faster Payments, that begins to provide the structure around which you could do it.
Q172 Mark Garnier: So in effect you are saying that you are several steps ahead of the game in Australia, so we are closer to account portability in this country.
David Yates: We have the underpinning. Because we connect to every bank account, regardless of which bank it is or the individual business, we have the ability to provide that interconnection.
Q173 Mark Garnier: Have you done costings of this? There is talk of £100 billion. Is that pie in the sky? Has anyone done any serious costings?
David Yates: We have not done any serious costing. That is partly because we need to agree the scope and how far along the continuum people want to go. We would be happy to do it. On the assumption that we can agree the outcome that is desired, we will design it.
Q174 Mark Garnier: But here comes the $100 billion question, which is that your shareholders are actually quite happy with the system you have.
David Yates: I would say that our shareholders also believe that there are things that we could do better. If we were asked to provide costings to do the sort of account switching that you describe, I am sure that we would be quite able to do that.
Q175 Mark Garnier: I will ask the same question I asked Mrs Leadsom: is seven-day switching really just a fudge to avoid having to do the inevitable, which is to go to-
Chris Dunne: It is an enormous improvement on the situation at the moment. At the moment, if you want to change your bank account, your experience as a consumer varies according to which bank you are going from and to, so it is not consistent. It also takes between 18 and 30 days to move your account.
Q176 Mark Garnier: I have just done it. It took six weeks. It was awful.
Chris Dunne: Yes, and I remember when you talked before, I think "unmitigated hell and disaster" was the phrase. It can be difficult, and that is largely the heart of it. People are concerned about things going wrong. Because their salary payments are going in and their mortgage payments are coming out, there are quite a lot of unpleasant consequences of it not working. If you have, as Mrs Leadsom was saying, undifferentiated offerings between the banks, your risk-to-benefit as a consumer is difficult. You think, "Well, if you’re all pretty much the same and I run the risk of things going wrong, why should I move?" That is one of the underlying reasons for the low movement.
With seven-day switching, because it will move in seven days, it will transfer your payments. For 13 months after you move, whatever is fired into your old account will be picked up and sent into your new account. Your old account is shut, but anything heading that way-an international payment, BACs payments, Faster Payments, the range of recurring debit card transactions-will be redirected, so there is no need for a mad flurry of activity to get things changed on the first day that you open a new account. Effectively, you have 13 months to ensure that everybody who is paying your salary into your account and drawing direct debits from your account knows that you have moved. Yes, there is still an element of work to be done, but the redirection takes away an awful lot of the immediacy of needing to do things.
The other aspect around the seven-day switching service is the guarantee. There will be an industry-based guarantee that says, "If it goes wrong, it will be put right", so you will not suffer any financial loss as the result of a mistake on the side of either the old bank or the new bank.
Q177 Mark Garnier: Isn’t it the case that when most people switch, what they will do is open a second bank account and migrate things across over a period of time? Then, when they feel entirely comfortable with that, they will close off the first one. What I am trying to get to is, is this a bit of a red herring? Are we not necessarily really analysing people’s behaviour, and just sort of trying to come up with an answer? I am playing devil’s advocate here.
Chris Dunne: You are talking about something called partial switching, which is where, effectively, you keep the old account open and move things over piece by piece. The seven-day switching service is a full switch. On day 7 or day 8, your old account is shut, so it is gone. Things that are being sent to the old account will be redirected, but you will have moved.
We expect to see people, effectively, trying before they buy, so, going for a partial switch: opening up a new account, transferring their direct debits and standing orders, but not closing the old account or implementing a full switch until they are happy. It is very much a one-way street at the moment. Once you are committed to make your seven-day switch, you are going there and you will land. If you want to move back to your old bank, you will have to move back to a new account at that old bank with the new banking details.
Q178 Mark Garnier: So you would have to do a seven-day switch back again?
Chris Dunne: Yes, absolutely.
Q179 Mark Garnier: Do you think that this will increase switching numbers, this seven-day service? Do you think it will make a difference in terms of switching levels?
Chris Dunne: The research done by the Payments Council up to now identified customer dissatisfaction-people who are very unhappy with their bank accounts moving-or a financial incentive, so, being offered £100 to move to a Halifax account or whatever it is, or moving to a Santander 123 account to get the various different points. It is going to be largely driven by how much the industry and the banks advertise the service, and how much the individual banks will then drum up business.
In and of itself, the seven-day switching service will not drive up switching. It will help to remove some of the fear, but there needs to be a carrot and a stick. You are taking away some of the stick, which is, "It looks like it’s scary if things go wrong." The other side is a carrot, and that is very much down to the banking industry. Someone like Tesco may well come in with a very compelling offer based on its current market penetration with stores, linking with club card points or doing whatever, but that would be based on their commercial offer rather than anything else. That will be most likely what drives people.
You have talked about six weeks of hell. Everybody who sat in our dinner went away thinking, "That was really painful."
Q180 Mark Garnier: Did they? I hope they did.
Chris Dunne: Yes. If, however, people started with the seven-day service and said, "Actually, I’ve moved my bank account. It was as simple as moving my gas or electricity supplier. It wasn’t an issue," it would reduce the public perception of risk in moving accounts.
Q181 Mark Garnier: Getting back to the whole payment system, if you were to design it from scratch now, would you come up with a system similar to the one we have now, or would you come up with something completely different?
Chris Dunne: It is the Irish taxi driver problem: you wouldn’t want to start from here.
Q182 Mark Garnier: Yes, I agree with that, but we are talking about internal banking systems that were designed 40 or 50 years ago, when they first had computers-with punch cards, presumably. Locally, it would have been designed to interact with that.
The fact of the matter is, we are now many, many decades past those initial stages, and we have phenomenally good computer systems. We also understand much more about systems in general that you can get on a computer than we ever did before. This intelligence is moving at such a pace that you are almost going to the stage where you can design computers that will design other computers to design this stuff-beyond what humans can do.
The trouble is, there seems to be this colossal inertia by the industry, for a number of different reasons, some of which, on a cynical basis, is because they want to avoid giving the opportunity for competition; another is that they are terrified of moving from this system to a new system, because they have all these legacy systems and it will be a bit of hard work for them. Fundamentally, if we don’t do it this year or next year, are we finally going to have to do it in 10 or 20 years’ time anyway? At some point, someone has to go into this creaking Victorian sewerage system and say, "We have to start again, because we can, and the systems are now easy to design." At what point do we just say, "This is a load of old rubbish. We have to chuck it out"?
Not only that-since I’m on a bit of a roll-you now have large conglomerate banks that have got together, and their systems don’t even match with each other’s. They are spending fortunes integrating the banks-when Lloyd’s took over HBOS it took four years of trying to get the IT systems to match, and even then, they are rubbish. So do we start again? Do we just say, "Enough is enough; here is an opportunity. This is the line in the sand; let’s get started on something that works"?
David Yates: It is a very complex question, but let me try to take it in a few different pieces. The infrastructures that sit inside of VocaLink have their origins way back-originally, in the ’60s, as far as BACs is concerned-but the Faster Payments structures are actually very new.
Q183 Mark Garnier: But they are designed to fit in this old system-ish?
David Yates: The BACs part was designed to fit in the old system. The Faster Payments piece is really a pretty much up to the minute sort of answer to a requirement to be able to move money instantly. That is almost a prerequisite if you want to operate in an e-commerce world and a mobile world: you can’t have a slow clearing system while you are moving at internet speed and mobile speed; it does not work. That structure is truly fit for purpose. The piece that has not kept pace, in my mind, is the one around identities. The more you remove the physical person from the physical merchant, the more important it is to get the identity management sorted out, or you just create fraud and unusability. What needs to happen at this stage is that, at least at the central layer, we need to get that identity management working correctly with mobile payment services and to build those into the e-commerce and m-commerce streams that are emerging quite quickly.
Within the banks-and I have done many bank core systems implementations personally-the workout involved in trying to consolidate multiple portfolios and multiple underlying bank account systems is huge. When people talk in tens of billions, or even three-figure billions, to work through all that, it honestly does not particularly surprise me, because it is an enormous job. The question is what we can do, in spite of that, to make things move better. There is quite a piece of innovation that could be done from the centre out, to provide real consumer utility and real small business utility, and get international transactions operating better, which will be of value to the economy. There is a lot we can do.
Q184 Mark Garnier: But is the simple answer not simply attaching the sort code to the account number and then driving that into your system, and then Bob’s your uncle?
David Yates: That achieves the objective that we have been talking about, which is account portability, but we have not yet added any new functions in. It would be important to add some new capability for customers and businesses to do things that they cannot do easily today. No problem with doing that: I think we should bring the paper back that you asked for, which describes, at a structured level, how that should happen; but at the same time I think there is a job to be done to make it easier for small businesses to be paid, to make it easier for utilities to collect money so they can reduce their charges and to make it easier for people to do e-commerce and m-commerce online directly from their bank accounts. We have many thoughts on how to make that happen as well. It needs to be both.
Q185 Mark Garnier: You gave quite an interesting number a bit earlier: £6 trillion pounds of transactions per year. It can take up to three days for some of this to move through. Have you worked out how much money in total is stuck in the system throughout an entire year?
David Yates: At any given point in time?
Mark Garnier: Yes. Absolutely.
David Yates: We could probably work that out. It is a little too complex a calculation to do right now. But bear in mind that, for every payment that is stuck-
Q186 Mark Garnier: It will be three 250ths of 6 trillion, won’t it?
David Yates: No, not quite, because some of it is Faster Payments, which does not count, and some of it is Link, which does not count, either. You are talking about BACs volumes. On the one hand, you have money that is stuck, if you like, in the three-day clearing cycle, but on the other hand, the banks are also stuck with having to place collateral for all of that money. When you offset the one against the other, it probably does not result in the same net benefit to the banks as you might assume.
Chris Dunne: I would also just point out that the value of BACs payments last year was £4.36 billion, so they are a substantial amount of that £6 trillion we were talking about. It was £4.36 billion; the number of transactions is 5.7 billion transactions.
Q187 Mark Garnier: So £4.36 billion? That is not that much money.
Chris Dunne: Yes, but it is important recognise that on a BACs transaction-
Q188 Mark Garnier: Do you mean trillion rather than billion?
Chris Dunne: Billion. So the total value of BACs payments-sorry, £4,363 billion, so £4.36 trillion. I am losing my decimal places. They are all very large numbers. The important thing about BACS transactions is that debit and credit happen simultaneously on day three, so there is no float. You used to have float in standing orders. If I sent money to Baroness Kramer by standing order, money left my account on Monday and landed in Baroness Kramer’s account on Wednesday. There was a float by the banks. That has now gone, so standing orders go via faster payments for exactly that reason, as they were not compliant with payment services regulations.
With a BACS transaction, although it is a three-day service, the debit and credit happen simultaneously on day three, so, effectively, there is one day when the transactions come into us, the second day we send them out to the banks, and the third day the bank posts them to its accounts. It is very much based on a batch system, because of the legacy from back in the 1970s.
Q189 Mark Garnier: So the money is not leaving your account?
Chris Dunne: Exactly. If you are running a business and you have a direct debit claim on me, the direct debit instruction will come in on the Monday, but on the Wednesday my account gets debited by £100 and your account gets credited by £100, but-
Q190 Mark Garnier: So the bank is not sitting on the money?
Chris Dunne: The bank is not sitting on the money, which is an important point.
David Yates: It is correct to say that a small business that wanted to be paid, or the utility company that wanted to be paid, did not receive it.
Chris Dunne: Yes, they received it on Wednesday rather than on Monday.
David Yates: And there are ways that we have where we can speed up those cash flows in the market
Q191 Mark Garnier: Why don’t you just put the order in a few days earlier? If I have a direct debit for the fourth of the month, why don’t you just put it in the first?
Chris Dunne: A lot of people do. Between a fifth and a quarter of the daily volume is in the warehouse. The instructions have been put in well ahead of time, and then we process them on the day, but there are still the remaining mass of 70% to 80% coming on the day for processing for two days hence.
Q192 Mark Garnier: It is a creaky old system, isn’t it? It is ripe for renewal. You are telling your story very well.
Chris Dunne: It is based on magnetic tapes coming into an infrastructure and then having to be moved around. The banking system has built up on the back of that, but it is a case of if it’s not-
Q193 Mark Garnier: Are you saying we are still using magnetic tape?
Chris Dunne: No, magnetic tape stopped in 1999, but-
Q194 Mark Garnier: That recently?
Chris Dunne: Yes, but the three-day system is still effectively based around the fact that there were tapes-
David Yates: The logic of it.
Chris Dunne: Yes.
Q195 Mark Garnier: In terms of financial stability, it is difficult. The new FPC is coming in in due course. If we went to a better system, would it be clearer what is going on in the financial system? If the FPC wants to understand what is happening, would that make it clearer? Or is that a bit of a red herring?
Chris Dunne: It might be a bit of a red herring. In terms of volumes and values, there is one thing you have to bear in mind. I will get my digits right this time. I think the value of BACS payment is about 4.3 trillion. Faster payments last year was about 235 billion, so obviously small, but CHAPS payments were just under 64 trillion, so a huge amount going through CHAPS. There are only about 34 million transactions, so it was a very small number of very large transactions.
Q196 Mark Garnier: So BACS was 4.36.
Chris Dunne: 4.36 trillion.
Q197 Mark Garnier: Faster payments were 234 billion.
Chris Dunne: Yes, and CHAPS payments are-
Q198 Mark Garnier: 64 trillion?
Chris Dunne: Yes, 64 trillion going through CHAPS. We don’t operate that. That runs through the real-time gross settlement system at the Bank of England. It is a bit of a red herring because of the aggregate value of BACS and faster payments. Although there are lots and lots of transactions, the value is dwarfed by CHAPS. If you are looking from a financial stability integrity point of view, the CHAPS payments are where the really big numbers are, rather than BACS and faster payments.
David Yates: Albeit from a consumer perspective, CHAPS is perhaps not quite as important.
Chris Dunne: No, absolutely.
David Yates: If you are looking at consumer stability, the number to focus on is probably that BACS, faster payment and, to a lesser extent, link transaction numbers.
Q199 Chair: Thank you. That sort of road map will be exceedingly helpful to us. I think you are picking up a sense from the Commission that we are at least thinking through the issues and whether the time has come to bite the bullet and bury a 1960s system that seems to be holding us back.
From everything that you have said, I have a sense that you feel that at VocaLink you have the capacity to accelerate and deliver 21st-century services pretty much at the cutting edge. Your problem is that you feed into a banking system typically made up of 18 players who are essentially operating variations on their 1960s systems, adapted for the ’70s, the ’80s and the ’90s with various adaptations and complications attached, and you can really only go as fast as those banks are currently moving. Is that a description of where we are today?
David Yates: I think we can truly innovate and deliver new things to many participants in the economy, but we have to be backwards-compatible as well.
Q200 Chair: But backwards-compatible would be the main weight holding you back? Would that be an accurate description?
Chris Dunne: We have to ensure that every day payments continue to flow, so we cannot suddenly stop the bus and get on a new one. Things have to keep working, and that is fundamental to what we do-ensure that payments work day in, day out, so everything we do has to be predicated on not interrupting that delivery of service.
Chair: Thank you for giving me a helpful context. If we are going to have change, it is not just a case of changing you; it is a case of changing the entire system. Thank you very much. We appreciate your time.