UK payments watchdog holds fire as banks retreat

By Huw Jones

LONDON, July 21 (Reuters) - Britain's regulator for the payment systems used by banks to shift cash said it would hold off from taking further action to boost competition as lenders sold off their holdings in a core payments system to MasterCard .

Britain is trying to increase competition in a banking sector dominated by a handful of large players like Barclays (Swiss: BARC.SW - news) and RBS (LSE: RBS.L - news) which own chunks of the payments system.

Easy and commercially attractive access to the country's payment systems is essential for newcomer banks which can't afford to build their own systems.

The Payments Systems Regulator (PSR) said in the final conclusions of its market review into competition in the sector that access to new entrants was becoming easier.

PSR's report coincided with an announcement by MasterCard that it was buying VocaLink, one of Britain's core payment systems, for 700 million pounds ($922.32 million), triggering announcements from Barclays (LSE: BARC.L - news) , RBS and others about how much cash they will receive from the sale of stakes.

In February, the PSR had said that 18 banks and building societies should cut their stakes in VocaLink to increase competition.

Common ownership of VocaLink by a small number of banks was having a negative effect on innovation and competition, it said at the time. VocaLink processes more than 90 percent of salaries, over 70 percent of household bills and almost all state benefits.

PSR's market review looked at so-called indirect access, meaning a new bank or payment company plugging into the system via another bank and the charges that entails.

Some banks are less willing to give access to money remitters due to concerns about complying with tougher rules to crack down on money-laundering but these rules were being looked at, the PSR said.

Switching between indirect access providers was also difficult in some cases, it said.

The watchdog said the impact of anticipated market developments would address many concerns and it had therefore decided not to take any further action at this point.

More banks with direct access to the payments system planned to become indirect access providers within the next nine months, it added.

"The more we can open up access, the more challenger banks and building societies will be able to come to market and compete on a level playing field," PSR Managing Director Hannah Nixon said in a statement.

"This in turn will give more options to consumers."

The PSR, a unit of the Financial Conduct Authority, also launched a public consultation on how it proposes to use its powers to force a payment system operator to grant access or vary the terms of existing access. ($1 = 0.7590 pounds) (Reporting by Huw Jones; editing by Adrian Croft)