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Press releases 2003 -

OFT publishes market study on payment systems

PN 66/03     22 May 2003

Some progress has been made with competition issues relating to payment systems but important questions remain requiring further action, says the OFT in a report, UK payment systems, published today.

Download the report UK payment systems in pdf format (641 kb).

The OFT report contains:

  • a factual update, following a three-month study, on developments over the last three years in the UK's money transmission clearing systems (direct debits, standing orders, direct credits, cheques, paper credits and instantaneous credits)
  • an account of recent OFT competition work on card networks.

The report therefore covers all the main payment systems. Its scope does not extend to retail banking services.

The report welcomes the industry's progress in agreeing proposals to shorten clearing cycles and separate the ownership of clearing schemes from their technical infrastructure in BACS. The OFT calls on the industry to commit to a firm implementation date for these developments. The OFT published its Competition Act decision in 2001 on the level at which LINK members set their ATM multilateral interchange fee (see PN 43/01).

Further action for the OFT includes:

  • examining the effectiveness of the commitment within the Banking Code to inform consumers about the length of clearing cycles. The OFT will be discussing this issue with the industry 
  • concluding the Competition Act investigation into the level at which Mastercard set their multilateral interchange fee (MIF)
  • determining whether action is required on access to merchant acquiring and on debit card networks 
  • continuing to monitor the effectiveness of the Competition Commission undertakings relating to the supply of banking services to small and medium-sized enterprises (SMEs).

Clearing schemes and the float

The OFT assessed in its three-month study whether the clearing schemes permit open access to financial institutions; whether there are any features of the schemes which prevent financial institutions from developing innovative services which would enable them to compete effectively for retail customers; and whether the schemes' charges are efficient and transparent.

The study found that:

  • although direct access to the schemes remains costly for smaller institutions, the terms for indirect access enable them to compete effectively with direct members
  • clearing schemes charges account for less than four per cent of the total cost of providing payment services in the UK. The bulk of the costs incurred in providing payment services to customers lie with the individual institutions and not the shared schemes. The impact of the level and structure of scheme charges on retail competition is therefore likely to be small
  • features of the clearing schemes did not appear to hinder innovation. Institutions are able to develop differentiated products and compete for customers at the retail level. Examples of competitive innovations making use of the existing clearing schemes include electronic bill presentment and payment, person-to-person email payments and mobile telephone payments.

The OFT also welcomes proposed innovative developments within clearing schemes. For example, next-day clearing for direct debit, direct credit and standing orders is planned.

The OFT also examined the costs to consumers of float. Float occurs when money reaches the beneficiary customer's account some time after it leaves the paying customer's account.

With the exception of CHAPS payments, where settlement occurs in real time, the paying bank and receiving bank accounts at the Bank of England are debited and credited at the same time: on the second day after the cut-off time for submitting transactions into the clearing scheme. Float therefore occurs, strictly speaking, as a result of individual financial institutions' decisions about when to debit the payer's and credit the beneficiary's accounts at their own banks. 

However, with standing orders, internet and telephone banking payments the OFT estimates that the annual cost to consumers of float is £30 million (see note 5). The revised Banking Code, effective 1 March 2003, promises for the first time that financial institutions will inform customers about the length of the clearing cycle. The OFT welcomes this commitment, and will be discussing with the industry, over the summer, what this means in practice for improved transparency for consumers.

Given the large number of different accounts on offer to UK consumers, the OFT has not been able during this three month study to estimate the cost to consumers of the float on cheque clearing. The report notes, however, that the use of cheques by consumers is decreasing as a result of the wider availability and usage of plastic cards, and this trend is predicted to continue.

Card systems

The report also incorporates a review of the OFT's work on credit and ATM card networks since the Competition Act came into force. The OFT has considered the rules of LINK and is currently considering the rules of Mastercard UK Members Forum under the Competition Act. In both cases, the OFT has been assessing the effects on competition of the schemes' fallback level of the multilateral interchange fee.

The OFT decided that the benefits to consumers of LINK's rules on its cost-based ATM interchange fees outweigh their possible anti-competitive effects.  

The OFT's preliminary conclusion on the Mastercard UK Members Forum MIF agreement is that it restricts competition and does not meet the criteria necessary to qualify for exemption under the Competition Act at the MIF's current level. 

John Vickers, OFT Chairman, said:

'Today's report provides an updated analysis of competition issues in UK payment systems. The report shows that some progress is in train, but big questions remain. The OFT's wider work on competition and consumer issues in banking services continues.'


1. The publication of the Cruickshank report in March 2000 identified a number of competition, efficiency and incentive issues in the UK's main payment systems markets. In its April 2003 budget statement the Government reiterated its intention to introduce legislation granting the OFT sectoral regulatory powers enabling it to promote effective competition in the markets for payment systems.

2. On 27 November 2002 the OFT announced its intention to examine recent payments systems developments and their implications ahead of the Government's planned introduction of legislation. It published the terms of reference for its market study of payment systems on 31 January 2003 following consultation with interested parties.

3. The OFT obtained behavioural undertakings from the eight main clearing banks to implement the remedies set out in the Competition Commission's report on banking services to small and medium-sized enterprises. (See HM Treasury and DTI press notice 14 March 2002)

4. There are three clearing schemes:

  • the Bankers Automated Clearing Services (BACS), used to clear direct debits, direct credits and standing orders
  • the Cheque and Credit Clearing Company Limited (CCCL), used to clear cheques and paper credits
  • the Clearing House Automated Payment Scheme (CHAPS), used to clear high-value, real time settlements such as house purchases.

5. In arriving at the figure of £30 million for the costs to consumers of float, the OFT based its calculations on a total estimated annual value of inter-bank standing orders of £50 billion and of inter-bank remote banking transactions of £25 billion. At an annual interest rate of five per cent, float income generated equals 5 per cent x 2.8/365 days x £75 billion which equals approximately £30 million. Full details are contained in Part II, Chapter 7  of the report.

6. The Banking Code was first introduced in March 1992. The most recent edition, published in March 2003, incorporates a commitment from signatories to tell consumers about the clearing cycle, including when money can be withdrawn from an account, and when funds start to earn interest.

7. The OFT announced its LINK ATM decision on 16 October 2001 (see PN 43/01).

8. The OFT published a short companion paper explaining its preliminary conclusion in the Mastercard Competition Act investigation

9. You can download the report UK payment systems in pdf format (641 kb).  Alternatively you can order it from the publications page or by telephone from 0870 60 60 321.

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