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VIXIO spoke recently to Mark Falcon, an ex-regulator who helped to set up the Payment Systems Regulator (PSR) in the UK. His opinions about the six-year-old regulator were stinging and ranged from structural problems to its mandate to promote competition.
Mark Falcon, a director at Zephyre who helped to set up the PSR, spoke to VIXIO recently about the £14bn case that Walter Merricks is levelling against Mastercard. He thought that both Visa and Mastercard were far too powerful in the market and that they dominated the market by "coercing merchants into feeling that they have no choice".
Referring to Visa as the largest financial services company in the world, he implied that it and Mastercard were operating a duopoly in all but name.
The interview takes the form of a question-and-answer session.
Q: Why do you think the Competition and Markets Authority has overlooked this supposed duopoly?
A: Well they have, you're right. It's not necessarily the CMA. The predecessor to the CMA, the Office of Fair Trading, did look into Visa and Mastercard quite extensively. Then an EU regulation came in which was supposed to solve the problem, so they stopped at that point. But that regulation, called the Interchange Regulation, has largely been a failure because Visa and Mastercard have found a way round it.
But at the same time, the government did create a new regulator called the Payment Systems Regulator and they've also been a complete failure because they have just dodged ... I mean, I helped to set the PSR up but I was extremely frustrated that they weren't willing to take on the card schemes.
At one point, one of the senior advisors said they're too powerful. Now that was shocking to hear somebody inside a regulator say that. That was the regulator's job! The regulator's job is to take them on and regulate them.
So the regulators have been very lax and that's why Walter has had to bring this claim and the retailers have to bring the claim, because the regulators have failed to do their job properly.
Q: The PSR is still supposed to be in its infancy, isn't it?
A: It's six years old. They're still using that excuse, to say they're in their infancy, but almost everything they've done has set things backwards rather than forwards.
One of the biggest mistakes, for which actually the Competition and Markets Authority is to blame, is that they allowed Mastercard to acquire a firm called Vocalink, which is the payments processor for all the interbank payments, Faster Payments and BACS. BACS supports all wage and salary payments. Faster Payments is the real-time payments system that allows you to make a payment from your account to someone else's account.
The CMA, with the PSR's approval, allowed Mastercard to acquire Vocalink and it's been a disaster. It's a complete conflict of interest because they're supposed to be competing. Instead, Mastercard has really killed off and smothered Vocalink and it's become completely directionless so that Mastercard could take over that market itself with its own business and products.
Q: So the regulator really has made things worse?
A: I've followed this regulator for most of my career because the PSR was originally proposed back in a real ground-breaking report 20 years ago called the Cruickshank Review, which recommended the need for a payments regulator. This is a very important market. It's got characteristics much more like utilities than banking. It needs a regulator, but the government dithered and didn't set up the PSR until 2015.
It's got a clear mandate to regulate this market but everything it's done shows that it's just been captured by industry interests. All it's done is serve the industry and make things worse. It's really a case study in regulatory failure. It's a paradigm case of regulatory capture.
Q: Is there anything structurally wrong with it?
A: Well, the other big problem with the PSR is that it was set up under the FCA. That was a fundamental mistake because it's been smothered by the FCA and the FCA's mentality. Our regulatory set-up is called Twin Peaks [i.e. the two wings of conduct regulation and prudential regulation] but in actual fact it's not just Twin Peaks, there is also an important third peak which is competition. The FCA mentality is purely conduct regulation.
The name's on the tin — it's the Financial Conduct Authority. It's principally a conduct regulator. Even when the FCA was being set up, it strongly resisted having competition responsibilities. This was also a huge error because competition can often be a more effective tool than trying to regulate products directly because it's much more intrusive. Regulating products should actually be a last resort, not a first resort.
Q: So the PSR should have been a proper independent regulator?
A: Yes. At the very least it should have had an independent chair and a separate board. Instead, the chair of the PSR is the chair of the FCA, who has two hours a week to spend on the PSR because the FCA is such a big job in its own right. The PSR gets completely crowded out and ignored and it's treated as just another department of the FCA rather than a regulator in its own right.
