6 degrees of separation – from reality

Many of us will have heard the theory of 6 degrees of separation. This suggests that anyone could be introduced to anyone else on the planet in 6 steps or less. This has in turn spawned a version called 6 degrees of Kevin Bacon, where any actor can be linked to Kevin Bacon – try typing Bacon's Number into Google with an actor’s name and it will show you the number and connection route. In the payments industry, that separation is probably closer to 2 than 6. It’s inevitable that most of us who have worked in the UK will know someone close to the recent Payments Council Roadmap. When I say how thorough and well written it is, this isn’t out of politeness however. The Payments Council find themselves somewhat between a rock and a hard place, with the regulator seeming set on radical change come what may, rather than based on any tangible or rationale reason. Hence the terrible play on words in the title – the 6 outcomes set out by the roadmap suffer from 6 degrees of separation from reality. To be fair, the paper does not purport to be doing anything other than set out the options. But the danger is that the politicians will see these as possible solutions, rather than the setting out a set of theoretical options. The single largest barrier for many of the options is that significant investments have already been made in the banks payment systems and infrastructure, and often at the behest of the regulator. For instance, do a simple sum of the costs of the following initiatives:

• the upgrade of VocaLink to the new processing platform;
• adoption of SEPA standards;
• the cost of implementing Faster Payments;
• and the investments made in banks new payment platforms to respond to these changes

Even using conservative estimates, this must be an investment in excess of $500m at least for the largest 5 banks, and quite possibly double that. Yet, one proposal on the table would seem to be to scrap all of that investment, and create a central platform that everyone would use. That might make sense if the market was new or immature, but not now, where we find ourselves today. A further suggestion was even more radical, and suggested centralising the core banking platforms as well. Many of you may know that in recent articles and presentations, I’ve been calling on banks to think more radically. (A later blog post will talk about some of these discussions). This is to try and push banks to think more about what is they want to achieve, rather than to start with what they believe the answer does (or doesn’t) look like. But equally, that thinking has to be grounded in a clear set of objectives and realities. That’s the next stage for the politicians. The industry needs some objectives from the politicians. Those objectives need also to be prioritised, as some of the statements to date would seem to include objectives that are mutually exclusive, contradictory, or not bound in fact but in misplaced belief. The politicians need to understand that the changes that they are proposing equally have risks and costs associated with them. There is a real danger that, instead of creating competition, they actually limit it, and that London could very well cease to be such a vital and vibrant financial services centre, and in a very short period of time.