Britain’s banks such as Lloyds Banking Group (LSE: LLOY), Barclays (LSE: BARC) and Royal Bank of Scotland Group (LSE: RBS) continue to withdraw from high-earning and risky lines of international business to focus on the home market in the UK.
Just as these firms contract and shrink their asset-heavy and geared balance sheets, competition for Britain’s banking business revenues intensifies. Next month’s scheduled launch of the Payments Systems Regulator (PSR) implies the UK-focused banks will receive another hammer blow from the nation’s regulators who seem determined to keep the London-listed banks in their place.
One of the PSR’s main objectives is to make it easier for competitors and new-entrant financial firms to grab a slice of Britain’s £75 trillion payments systems industry. Just as the banks narrow their focus to concentrate on the home market, more barriers to entry seem set to fall, making domestic trading conditions potentially tougher.
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What is the Payments Systems Regulator?
Payment systems form a vital part of the UK’s financial scene by enabling the services that allow us to transfer funds between people and institutions. Payment systems provide the means for us to pay a deposit on a house, withdraw money from a cash machine, pay by direct debit, receive our salaries directly into a bank account and transfer money via our smartphones — the nuts and bolts of everyday modern banking, in other words.
The PSR is a subsidiary of the Financial Conduct Authority (FCA), and both are accountable to the treasury and parliament. However, the PSR has its own statutory objectives, managing director and board and is armed to the teeth with strong competition and regulatory powers. The banks and financial firms within industry itself fund both the FCA and the PSR through mandatory fees.
The managing director of the PSA reckons the organisation will change the payments industry, injecting competition and innovation where it is needed most, while putting the interests of the people and businesses that use payment systems front and centre.
What does it mean for our banking investments?
This is great news for all of us who want to see the few banks that corner Britain’s payment systems industry held in check. This is one more expression of the will of the people, and it’s clear we don’t ever want to allow the banks to become again so bloated, arrogant and reckless that they can once more damage the economic system of the UK. We, the people, express our will through elected representatives in government and that will manifests in regulation via regulatory bodies such as the PSR.
It’s not such great news for those of us holding shares in banks operating mainly in Britain, though. The focus is on users, not on bank shareholders. Until now, the banks in the industry owned and ran the payments systems. Now, the PSR will supervise such systems with a core aim to make it easier and cheaper for new “challenger” banks to use them. Such tearing down of barriers to entry dosen’t bode well for the big banks’ earning prospects in the future.
There’ll be no getting around the harsh realities of this assault on previous cosy business practices. The PSR has the power to force divestments as well as to impose traditional regulatory rules and fines for breaches of conduct. If the banks are naughty on this, they risk having their payments systems taken away from them.
