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LINK Interchange - Good But No Big Cigar As Yet?

This article is really for those who already understand LINK Interchange. However, if you don't and want to, here you go.

LINK is the organisation that provides networking for virtually all the ATMs in the UK.  Almost all banks, other financial institutions and independent ATM operators are members of LINK, using their membership to interconnect their ATMs.

The LINK Interchange is the payment made by one LINK member to another when that member's customer uses the other member's ATM.  Example, if a HSBC customer uses a Barclays ATM, HSBC pay Barclays the relevant LINK interchange by way of recompense for providing the cash on behalf of HSBC.

Now, in many ways, the UK public - you and me - are lucky to have LINK. The networking of ATMs provided by LINK allows us all access to cash at virtually any ATM in the country. In other words, we get the convenience of not having to look for a bank branch ( a diminishing species) or one of our own bank's ATMs.

In a number of countries, access to cash is not so convenient., because there is no national network connecting all of the ATMs.

So, two cheers for LINK.

Why not three? Well, because good is not perfect. If we want the LINK ATM networking model to be one that becomes the standard for the whole of Europe - or even the world - there are some improvements that will have to be made. First and foremost, the UK public will benefit - and so will people elsewhere, when the model is adopted as a standard around the globe.

Here are some of the key issues, in no particular order. They all need to be addressed, if the UK is to provide leadership, and become a standard bearer for ATMs and cash access on the planet.

* LINK Interchange is calculated each year, based on cost data from the previous year. After the calculation is agreed, the new level of Interchange becomes payable from the following 1 January. Example : LINK interchange was calculated a few months ago, based on figures from 2014 and the new level will apply from 1 January 2016. Problem: this is too big a time lag, especially when costs are rising quickly. Solution: there are some cost components relatively easy to measure and therefore capable of being adjusted more frequently e.g. interest rates. In our view, therefore, there should be quarterly reviews of such elements, with Interchange being capable of being reset 4 times a year.

* The components and methodology for calculating LINK Interchange were established over a decade ago. It is past time for a major review. The aim must be to remove all "estimates" from the calculations. Every element must be fully transparent and capable of being audited. Interchange must fully reflect the cost of providing ATMs PLUS a profit for the ATM operators (see below for more on the profit issue).

* LINK uses a third party company to gather the figures and calculate the new interchange. This is not a fully granular audit; at best, it is a "sanity check". This is simply not adequate in an era where transparency is seen as vital in Financial Services. A full annual audit is required.

* Those responsible for the original modeling of LINK Interchange neglected to add a component for profit. They took the rather naive view that cost recovery was adequate, because all players would strive equally hard to provide the UK public with good access to cash through ATMs. Alas, this has not proved to be the case. The cost recovery model has lead some major issuers of debit cards to conclude that they might as well let  "someone else" install and operate ATMs, because they as card issuers will simply have to pay the cost price for the service. This non-commercial approach, plus the failure of the current methodology to full reflect the cost of installing and operating ATMs, is unsustainable. It is putting the LINK network at risk of breaking-up and, in turn, threatening convenient access to cash for the UK public. This needs to be addressed quickly. The enterprise of organisations continuing to install ATMs, giving rural and urban communities around the UK access to cash, must be properly rewarded. Sensible profit margins must be built into the LINK Interchange calculations.

* In many countries, where there is no local ATM networking organisation such as the UK's LINK, major international card schemes set ATM Interchange. This is patently unacceptable, since those schemes have a vested interest in reducing access to cash. Quite simply, they make little if the public use cash BUT they make big profits if the public can be put into a position where non-cash payments are the only "choice" i.e. if the public have no choice at all. Such a situation is unacceptable to those who value choice, freedom and independence, all attributes that apply to cash as a payment method. So international card schemes cannot be left to arbitrarily set ATM Interchange. What we - the public throughout Europe - need is a fully transparent Interchange model, which can be used in all 28 markets of the European Union. The cost values inserted would vary from market to market - prices in the UK are not the same as in Lithuania - but the components would be identical.

* LINK Interchange is not restricted to cash withdrawals. There are Interchanges which have already been established for a number of transactions. Examples are balance enquiries and PIN change. However, ATMs in the UK need to offer many more transactions, especially as the number of bank branches continues to fall. "Smart " ATMs need to be part of the answer; machines where the UK public can carry out 95%+ of those transactions currently on offer at branches. Examples of new transactions that need to be added across the LINK network are: cash deposit ( notes and coin); image deposit of cheques; many kinds of bill payment...and so on.  In some countries, ATM users can already carry out 40 or more transactions at the machines. The UK is lagging well behind and, with bank branches closing, this cannot be allowed to continue. Financial inclusion and the prosperity of all UK citizens are at stake.

So changes are needed to LINK Interchange, including the addition of  new transaction sets. i.e. INNOVATION.

The UK government has set up a Payment Systems Regulator (PSR) to help foster, amongst other things, innovation, more competition in the public interest and improved customer service. 

The PSR has a chance to succeed where the now defunct UK Payments Council failed. Central to that success will be ensuring that LINK Interchange is changed and improved as indicated in the commentary. The UK can be a world leader in this respect - but will not be unless the PSR acts - and QUICKLY.

Friday, 18th September 2015

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