UK Government’s Vision to Challenge Visa and Mastercard Dominance

The UK government aims to lessen the influence of Visa and Mastercard in the payments landscape. Many banking executives who gathered to discuss this on Thursday probably see the value in this initiative. It’s worth noting that there was a time when banks had a viable alternative to these two payment giants, but they were compelled to sell it, notably to Mastercard.

According to UK Finance, debit and credit cards account for about two-thirds of payments in the UK, with most transactions being handled by Visa or Mastercard. Generally, consumers don’t seem to mind this concentration; after all, using a card is easy, cost-free, and reliable. Yet, retailers who accept card payments often express frustration over the hefty fees associated with them.

The 2024 National Payments Vision presents a straightforward alternative: bypassing card networks altogether by facilitating direct transfers between bank accounts. The UK used to be a leader in account-to-account (A2A) payments, having introduced the Faster Payments System around two decades ago. However, it’s been ten years since regulators instructed banks to divest Vocalink, a company co-owned with its developer, which was acquired by Mastercard for under £1 billion.

Beyond competition issues, there’s a political dimension to consider, especially given the current delicate state of transatlantic relations. European leaders seem to share the urgency of reducing reliance on these two American firms. Martina Weimert, CEO of the European Payments Initiative, spoke to this pressing need. There’s also a broader philosophical question about allowing private companies to dictate access to the mainstream economy.

When regulators mandated the sale of Vocalink in 2016, they likely didn’t foresee such a significant political shift. Mastercard announced its partnership shortly after the UK voted to exit the EU, at a time when the government still hoped to attract international investors.

However, payments experts have likely watched A2A begin to emerge as a rival to cards, and Mastercard has taken note. Michael Miebach, the company’s CEO, remarked that A2A aligns with the “future of payments” when the deal was accepted.

Consequently, while Mastercard fortified its position against potential disruptors, the UK ended up with a scenario where one payment group dominates most alternatives. Alongside faster payments, Vocalink supports a variety of systems for payroll, bill, and benefit disbursements, as well as the national ATM network and check-clearing processes.

Options for banks appear limited at this point. They’re looking at potentially reviving an alternative to Faster Payments, which could enhance competition and strengthen the UK’s payment ecosystem. Still, these goals might have been easier and more cost-effective to achieve with a different approach.

The situation offers valuable insights for regulators concerning the risks of a narrow view regarding competition. The UK’s payments regulator initially sought to curb the power of banking oligopolies, but instead, it seems to have reinforced the existing duopoly.