What VocaLink sale means for payments industry

By Sarah Gill | 26 April 2016

Momentum is building around reports that Mastercard is in deeper talks to buy VocaLink, the UK-based system that powers a lot of the country’s core payments infrastructure and handled 11bn transactions last year. A new report from Sky claims the US card giant is now in exclusive talks to buy the service for around £1bn in a move that would give the company a bigger share of UK card payments and boost its competition with rival Visa. It would also take control of the service out of the hands of the banks and help loosen the grip a small number of financial institutions have on financial services in the UK.

VocaLink is currently owned by a group of banks including the UK “big four” (Barclays, RBS, Lloyds and HSBC) as well as Santander. The consortium was told by the Payment Systems Regulator (PSR) in February to sell their stakes to boost competition and drive a more open payments industry.

 

 

VocaLink by the numbers
> VocaLink processed more than 11bn transactions worth £6 trillion in 2015
> It processes more than 90% salaries in the UK
> 70% household bills in the UK and almost all benefits handled by VocaLink
> VocaLink enables Bacs credit and debit schemes (more than 2bn direct credits per year)
> 100m direct debit transactions move through Vocalink data centres on a peak day

Even if people haven’t heard of VocaLink they are likely to interact with it on a daily basis as the system behind services such as Bacs, Faster Payments and Link. 

A VocaLink sale has been on the cards for some time now, so what’s the update? According to Sky, banks including the Barclays and Lloyds that are shareholders in VocaLink have now signed off on a period of exclusivity for MasterCard to negotiate a proposal. If reports that the deal is going to be worth in the region of £1bn there will be a juicy pay-out for banks. A report from the Financial Times earlier in March said that the firm was competing with one other company over the deal.

VocaLink history at a glance
> 2007 - Formed from merger between Voca Ltd and LINK Interchange Network
> 2008 - Delivered Faster Payments Service in 2008 for Faster Payments Scheme
> 2014 – Paym mobile banking tool launched, powered by VocaLink
> 2015 – PSR launches review into VocaLink ownership
> 2015 – Private equity buyers including CVC Capital Partners and Permira linked to M&A talks
> 2016 – February: the PSR says banks should sell their stake in VocaLink to boost competition

Spelled out by the numbers, it’s clear why Mastercard is likely to want a piece of the action as it looks to grab a bigger piece of the UK payments market and gain an edge on rival Visa – especially in the UK debit space where Visa is more powerful. Visa bought its European subsidiary last year, creating one single company in a deal that added 3,000 issuers, 500m accounts and EUR1.5 trillion in payments volumes to its portfolio. Visa’s recent amendment to the deal to appease regulators is a timely reminder that whoever ends up buying VocaLink will come under close scrutiny from the government and regulators to make sure a deal is indeed boosting competition and helping open up the industry, rather than compounding existing issues in the global payment systems space.

Acquisition wave

The PSR’s report from earlier this year said that common ownership of VocaLink by such a small number of banks “is having a negative impact” on innovation and competition in the industry. It said that by selling their stakes, the sale would help open up the market and pave the way for more competition and innovation.

This comes amid growing merger and acquisition activity in the payments industry, with Nets snapped up from a group of Nordic banks including Danske Bank, Nordea and DNB by Advent International and Bain Capital last year alongside Danish pension fund ATP for USD3.1bn. Bain and Advent also own WorldPay, which they bought back in 2010 from RBS and which went public in London’s biggest fintech IPO to date. Consolidation is only expected to continue around financial software systems providers in the coming years. 

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