Review of Banking and Merchant Acquiring Arrangements
Completed by
September 2021
Review of Banking and Merchant Acquiring Arrangements
1.1. Brighton & Hove City Council (hereafter referred to as the Council) maintains its banking contract with Lloyds Bank and its main merchant acquiring arrangements with Lloyds Cardnet. The contracts were extended in 2020 and are due to expire in April 2022.
1.2. Merchant acquiring arrangements are also maintained with AIB Merchant Services for the collection of parking payments.
1.3. The Council has decided to undertake a review of banking and merchant acquiring arrangements to establish whether they provide value for money. As part of the review, we have also commented on the Council’s purchasing card arrangements with Lloyds Bank.
1.4. This report reviews the tariffs/costs charged by each provider and compares them to the most competitive tariffs that could be achieved either through a tender process or by using an appropriate framework agreement. The review was undertaken by Focus on Banking who specialise in reviewing and tendering public sector banking and merchant acquiring arrangements.
2. Banking Contract - Lloyds Bank
2.1.1. Since the start of the pandemic, very few public sector organisations have tendered their banking contract. In the last 18 months, most banks have agreed to extend contracts (e.g. for 12 months) without adjusting pricing.
2.1.2. Prior to the pandemic, a typical local authority tender process would result in interest from three banks – NatWest, Lloyds and Barclays:
NatWest
NatWest will always compete to retain local authority contracts although occasionally they will choose not to compete for new business.
Although NatWest have increased pricing in recent years, the most recent tenders we have seen from them have generally been competitive.
Lloyds Bank
Lloyds have been competing aggressively for new local authority contracts for the last 10 years or so. Their pricing has been very competitive and they have won a significant number of new contracts.
However, in the last 2-3 years we have seen Lloyds begin to increase pricing and in some cases the increases have been significant (e.g. for existing customers we have seen cost increases of between 50% and 100% proposed.)
Barclays Bank
Similar to Lloyds, Barclays have historically been very aggressive when competing for local authority contracts.
However, in 2019 Barclays increased their pricing significantly and as a result they lost a number of local authority contracts. Since losing business, they have reduced their pricing for automated transactions such as BACS etc but tariffs for cash/counter transactions remain relatively high.
2.1.3. Although HSBC also provide banking services to a number of local authorities, it is extremely rare to see them quote for new local authority business. They will however tender to retain existing contracts although their pricing is often uncompetitive.
2.2. The Technology Procurement Association Ltd (TPA) Framework Agreement
2.2.1. In December 2020 a ‘Banking and Finance’ framework agreement was awarded by The Technology Procurement Association Ltd (TPA). Lot 1 of the framework is for banking services and is a single supplier agreement awarded to Lloyds Bank.
2.2.2. Although we cannot comment as to whether the agreement is legal (e.g. The Technology Procurement Association Ltd does not appear to be a public body) we are aware that some authorities that currently bank with Lloyds are looking at the agreement.
2.2.3. Although the agreement does offer guideline pricing, we understand that bespoke pricing will be provided by Lloyds for each individual contract.
2.2.4. We have been advised that organisations that use the agreement are required to pay a commission of 20% of the savings achieved by the using the framework (charged monthly in arrears). We understand that this commission is payable throughout the life of the contract.
2.3. Benchmark of Tariffs
2.3.1. Our benchmark analysis compares the Council’s current tariffs against the terms that are likely to be proposed by Lloyds, NatWest, and Barclays at tender. The pricing we have indicated for Lloyds is also the level likely to be achieved through the TPA framework agreement. We have excluded HSBC from our comparison as it is extremely unlikely that they would compete if the contract was subjected to a formal tender process.
2.3.2. The spreadsheet at Appendix 1 provides our detailed comparison. Annual transaction volumes have been estimated based on the Lloyds charging data provided by the Council for the three month period ending February 2021. A summary of the estimated annual costs is provided below:
|
Current Charge |
Lloyds Tender |
NatWest Tender |
Barclays Tender |
|
£26,836 |
£45,124 |
£52,416 |
£46,837 |
2.3.3. As indicated above, the current tariffs are very competitive and below the levels we would expect to see proposed by any bank at tender. The following bullet points provide further comment on the high-cost transactions.
§ Automated/Faster Payment Credits. The current tariff of 3p is competitive. Although Barclays will often quote a tariff of 2p for larger local authority contracts, NatWest and Lloyds will typically quote at least 4p.
§ Notes/Coin Deposited - Processing Centre (Parking). As indicated in our spreadsheet, the transaction volumes we were provided suggest that Lloyds do not currently charge for the notes/coin deposited from the Council’s parking machines. The value of parking cash deposited has therefore been estimated based on figures provided by the Council.
§ BACS Transactions. Lloyds currently charge a tariff of 1p for BACS transactions. This is the lowest we see offered by any bank for local authority business and we would expect all banks to quote this at tender.
§ BACS Files. The current tariff of £1.75 is very competitive. Lloyds will often propose a tariff of £2.50 at tender and we would expect Barclays and NatWest to quote at least £3 and £3.50 respectively.
§ Internet Banking (Commercial Banking Online) – Monthly Fee. All banks will typically quote a fixed monthly fee to provide their internet banking service. We found no evidence of Lloyds currently charging this type of fee.
Monthly fees quoted will vary depending on the number of bank accounts reported. In the Council’s case we would expect to see £100 to £400 per month proposed.
§ BACS Payments. The majority of BACS payments initiated via Commercial Banking Online are initiated from school bank accounts. The current tariff is very competitive at 10p - at tender we would expect Lloyds to quote 20p. Barclays and NatWest will typically propose tariffs of 35p and 45p respectively.
Based on the invoices we reviewed, it appears that charges for nearly 8,000 BACS payments are automatically refunded by Lloyds (i.e. annual refund estimated at around £800). It is not clear why the charges are refunded although it is possible it is a Lloyds error. Although we do not recommend this issue is raised with Lloyds, the Council should be aware that Lloyds may identify their error in due course.
§ CHAPS Payments. The current tariff of £5 is very competitive. Barclays and Lloyds will typically quote around £8 and NatWest consistently propose tariffs of at least £10.
§ Faster Payments. Based on the invoices we reviewed, the volume of Faster Payments initiated by the Council has been estimated at nearly 66,000 per annum. We understand however that this figure is inflated due to the number grant payments made in relation to the pandemic.
For the purpose of our comparison, we have included the annual volume of Faster Payments as 1,000 as we would expect to see no more than this initiated by a local authority in a normal year.
Although the current tariff of £2 is reasonable, in a competitive situation we would expect to see Lloyds and Barclays propose a tariff of £1.
§ Reconciliation Data (Entry Collection Service). We were advised that bank account transaction data is automatically delivered by Lloyds to enable the Council to automate the reconciliation process. We there assume that the Lloyds service ‘Entry collection Service’ (ECS) is used by the Council. The alternative to using ECS would be to manually export transaction data using Commercial Banking Online each day.
We were advised that no charges are currently levied for ECS and this is reflected in our comparison.
In recent tenders we have seen Lloyds propose a tariff of £3 per file plus 1.25p per transaction downloaded. Barclays will propose level a similar of fees for their equivalent service whilst NatWest usually propose higher costs of £300 per month together with a transaction fee of 1.4p.
2.4. Discounts for New Business
2.4.1. Historically, it was common to see all banks propose initial discounts for new business in an attempt to offset the cost of moving bank. For example, Lloyds would often propose 12 or 18 months free banking.
2.4.2. However, in the last 2-3 years we have seen banks either offer reduced discounts (e.g. up to 6 months free banking) or no discounts at all.
2.4.3. As our analysis compares annual costs it would be inappropriate to include potential discounts. It should also be noted that even if a discount were offered at tender by another bank, it is likely that the Council’s cost of moving arrangements would be higher than the discount proposed.
2.5. Banking Contract - Way Forward
2.5.1. As indicated in our analysis, the current arrangements are very competitive. It is likely that costs will increase for the new contract (i.e. in 2022) regardless of which procurement route is taken.
2.5.2. Based on our experience, it is possible that the Council will achieve more competitive terms by looking to extend with Lloyds rather than undertaking a formal tender exercise or the framework agreement mentioned at 2.2. By extending the contract, it is possible that Lloyds will feel that they can only impose cost increases up to a certain level whereas a tender process or use of the framework will present the opportunity for them to undertake a wholesale review of all tariffs and charges which could result in a larger cost increase.
2.5.3. It should be noted that we have worked with many local authorities that choose to regularly extend their banking contracts rather than undertake a formal tender process. Although this approach does not conform with procurement regulations, this is often the preferred option as:
1. The market for local authority banking in England is limited. As already highlighted, if the contract is tendered then the maximum number of bids will be three although it is possible that only one or two tenders will be received.
2. The likelihood of another bank challenging a local authority’s decision to extend a contract with the existing provider is minimal. Focus on banking has been assisting local authorities with their banking contracts since the year 2000 and we have never come across a bank questioning or challenging a local authority procurement decision.
3. The internal cost associated with moving to a new service provider can be excessive and for most authorities this will often be greater than the annual contract value. This cost needs to be considered when evaluating tenders which makes the possibility of another bank winning the contract even less likely.
2.5.4. If the Council is happy to consider extending the contract, we recommend that Lloyds are asked to confirm whether they would be happy to extend the arrangements (i.e. based on current tariffs) for a further period (e.g. 2 or 3 years). If however the Council are uncomfortable with simply extending the arrangements, then consideration should be given to using the TPA framework agreement (subject to the Council being comfortable that the agreement is fully compliant). Whilst this will result in a cost increase, assuming the proposed tariffs are at the level we have indicated in our comparison, more competitive terms are unlikely to be achieved through a formal tender process. It should also be noted that as costs will be increasing, no commission will be due to the framework provider.
2.5.5. We look forward to discussing our findings with you further.
3. Merchant Acquiring
3.1. Current Market
3.1.1. Nearly all local authorities currently use one of the four main service providers in the UK for merchant acquiring services – Worldpay, Barclaycard, Global Payments and Lloyds Cardnet.
3.1.2. The pricing we see proposed from these providers is often inconsistent - there are no merchant acquirers that regularly offer the most competitive terms.
3.1.3. The Council’s main merchant acquiring contract (e.g. for the collection of Council Tax etc) is currently with Lloyds Cardnet. Separate arrangements are however maintained for parking transactions and we understand these are handled through a contract with Till Payments. We were advised that AIB Merchant services provide the merchant acquiring service on behalf of Till Payments.
3.2. Background to Merchant Acquiring Tariffs and Costs
3.2.1. Merchant acquiring transaction fees for collecting card payments are made up of three elements:
a) Interchange
A large proportion of the fee taken (e.g. usually more than 60%) is passed on to the card issuing bank. This cost is known as ‘interchange’.
There are several different interchange rates and these vary depending on the card type as well as the method of payment. Interchange rates are identical for all merchant acquirers.
b) Scheme Fees
A smaller amount of the fee collected is paid to Mastercard or Visa as scheme fees. Scheme fees do differ slightly between merchant acquirers.
c) Processing Fee (i.e. margin)
The remaining element of the fee is retained by the merchant acquirer as their margin (i.e. to cover their costs for handling the transaction and provide an element of profit). This is often referred to as the processing fee.
3.2.2. Since 2015 we have seen significant changes to UK interchange rates as a result of the European Commission legislating to cap fees. This means that the interchange rate for all UK consumer credit cards is now 0.3% and 0.2% for all UK consumer debit cards (previously interchange rates for some cards were as high as 1.85% depending on the payment method.) Although some adjustments were made to the interchange rates for commercial cards, they remain relatively high (i.e. up to 1.9% depending on the card type and payment method).
3.2.3. The majority of merchant acquiring contracts are charged based on ‘blended’ rates. This effectively means that a single tariff is charged for each transaction type and this covers interchange, scheme fees and the processing fee. However, the Council is currently charged ‘interchange plus plus’ pricing. This is where a set processing fee/margin is charged above the published interchange rates and scheme fees.
3.2.4. Interchange plus plus is viewed as a fairer and more transparent charging structure as any movements in interchange rates/scheme fees are immediately reflected in the monthly charge. Additionally, the margin/processing fee retained by the merchant acquirer is visible (rather than being hidden within blended rates) as the fees are broken down into the three separate elements.
3.3. Crown Commercial Service (CCS) Framework Agreement
3.3.1. In February 2020 CCS awarded a framework agreement for merchant acquiring and gateway services which can be used by local authorities. Details of the agreement can be found at:
https://www.crowncommercial.gov.uk/agreements/RM6118
3.3.2. The framework agreement has a 3-year contract period with the option of a further 1 year extension. CCS recommend that any call off contracts do not exceed the expiry of the framework agreement itself by more than two years.
3.3.3. The framework agreement is split into several Lots. CCS advise that Lot 1 should be used if the Council require a merchant acquiring and a gateway service and Lot 3 should be used if just a merchant acquiring service is required. Lot 2 can be used if just ‘Cardholder Not Present’ transactions are collected so this would not be appropriate for the Council. The remaining Lots (4,5 and 7) do not include merchant acquiring services.
3.3.4. Lots 1 and 3 includes three suppliers - Global Payments, Barclaycard and Worldpay. These organisations (along with Lloyds Cardnet) provide merchant acquiring services to nearly all local authorities in the UK.
3.3.5. The merchant acquiring tariffs that are available from Global Payments via direct award are competitive and below the levels that most local authorities could expect to achieve via an open tender process. All three providers on the framework agreement have proposed interchange plus plus pricing as follows:
|
Service Provider |
Lot 1 - Proposed Processing Fee Per Transaction (Charged in Addition to Interchange and Scheme Fees) |
Lot 3 - Proposed Processing Fee Per Transaction (Charged in Addition to Interchange and Scheme Fees) |
|
Global Payments |
£0.025 |
£0.025 |
|
Worldpay |
£0.04 |
£0.05 |
|
Barclaycard |
£0.10 |
£0.10 |
3.3.6. As indicated above, Worldpay offer a slightly lower processing fee on Lot 1 (4p) than they do on Lot 3 (5p). We have been advised by CCS that Lot 1 can only be used when a gateway service is required alongside the merchant acquiring service and this therefore justifies the slightly lower tariff. However, there is some doubt over this as we are aware of authorities using Lot 1 to award just a merchant acquiring service. For the purpose of our comparison, we have therefore assumed Lot 1 pricing for Worldpay.
3.4. The Technology Procurement Association Ltd (TPA) Framework Agreement
3.4.1. The TPA Framework agreement (see 2.2) also offers merchant acquiring services under Lot 2. This Lot was awarded to three suppliers – Lloyds Cardnet, AIB Merchant Services and Ayden UK Ltd. We understand that the framework agreement can be used to make a direct to a provider or alternatively a mini-competition process can be undertaken.
3.4.2. For a direct award, bespoke pricing needs to be obtained from the selected provider. The limited pricing we have seen has not been as competitive as the pricing available from the CCS framework agreement.
3.5. Benchmark of Current Lloyds Cardnet Costs
3.5.1. The table below compares current estimated costs with Lloyds Cardnet against the terms available from Global Payments, Worldpay and Barclaycard via the CCS framework agreement.
|
Cost |
Estimated Annual Volume |
Current Tariff |
Global Payments - CCS Framework |
Worldpay - CCS Framework |
Barclaycard - CCS Framework |
||||
|
Interchange Cost |
£154,124 |
£154,124 |
£154,124 |
£154,124 |
|||||
|
Scheme Fees |
£40,904 |
£40,904 |
£40,904 |
£40,904 |
|||||
|
Processing Fees |
2,482,872 |
£0.024 |
£59,589 |
£0.025 |
£62,072 |
£0.04 |
£99,315 |
£0.100 |
£248,287 |
|
Authorisations |
2,543,412 |
£0.005 |
£12,717 |
£0.000 |
£0 |
£0.00 |
£0 |
£0.000 |
£0 |
|
Chargebacks |
196 |
£15.00 |
£2,940 |
£12.00 |
£2,352 |
£5.00 |
£980 |
£8.00 |
£1,568 |
|
Total Annual Cost |
£270,274 |
£259,452 |
£295,323 |
£444,883 |
|||||
3.5.2. The following points should be noted in respect of our comparison:
· Annual transaction volumes and costs have been estimated based on the transaction data provided by the Council for December 2020, January 2021 and March 2021.
· Although interchange fees will be the same with each provider, scheme fees will differ slightly. As we do not have detailed data on the current scheme fees charged by Lloyds Cardnet we have assumed they will be the same with each provider. Any differences will however be relatively small and have minimal affect on the overall contract costs.
3.5.3. As indicated, although the processing fee available from Global Payments (2.5p) is slightly higher than the current fee of 2.4p, Global Payments will not charge authorisation fees which will result in a lower overall contract cost.
3.6.1. With interest rates at the current levels, the timescales for receipt of funds in relation to card payments has a relatively small impact on the contract cost. For example, around £47m is currently collected by card each year. Improving settlement by one day generates a benefit of just £128 per annum assuming a rate of Base Rate (i.e. £47m x 0.1% ÷ 365 days).
3.6.2. Although we were unable to verify current settlement timescales, we would expect settlement to be provided two days after the transaction date. (This is known as T+2 settlement).
3.6.3. The CCS framework agreement does not specify settlement timescales so we have raised this with the providers in the past. Both Barclaycard and Worldpay have indicated they will provide T+2 settlement but Global Payments have suggested they will only provide T+2 if settlement is to a HSBC bank account, otherwise they will provide T+3.
3.7. Benchmark of Current AIB Costs
3.7.1. Unfortunately, the information that was available for our review in relation to the AIB arrangements is limited. However, based on the copies of invoices and data provided it appears that two merchant accounts are maintained with AIB – 013149149 and 013108978.
3.7.2. The table below compare current estimated costs for both AIB merchant accounts against the terms available from Global Payments, Worldpay and Barclaycard via the CCS framework agreement.
|
Transaction |
Estimated Annual Volume |
Current Tariff |
Global Payments - CCS Framework |
Worldpay - CCS Framework |
Barclaycard - CCS Framework |
||||
|
Merchant Account 013149149 |
|||||||||
|
Interchange Cost |
£563 |
£563 |
£563 |
£563 |
|||||
|
Scheme Fees |
£607 |
£607 |
£607 |
£607 |
|||||
|
Processing Fees |
79,764 |
£0.09 |
£7,179 |
£0.025 |
£1,994 |
£0.04 |
£3,191 |
£0.100 |
£7,976 |
|
Total Cost |
£8,348 |
£3,163 |
£4,360 |
£9,146 |
|||||
|
Merchant Account 013108978 |
|||||||||
|
Interchange Cost |
(5,257 p/m) |
£5,482 |
£5,482 |
£5,482 |
|||||
|
Scheme Fees |
£4,431 |
£4,431 |
£4,431 |
||||||
|
Processing Fees |
577,932 |
£0.025 |
£14,448 |
£0.04 |
£23,117 |
£0.10 |
£57,793 |
||
|
Total Cost |
£63,084 |
£24,362 |
£33,031 |
£67,707 |
|||||
|
Grand Total |
£71,432 |
£27,525 |
£37,391 |
£76,852 |
|||||
3.7.3. The following points should be noted in respect of our comparison:
Merchant Account – 013149149
· Annual transaction volumes and costs have been estimated based on AIB invoices for December 2020, January 2021 and March 2021.
· Although interchange fees will be the same with each provider, scheme fees will differ slightly. AIB invoices do not provide detailed data on the current scheme fees charged so we have assumed they will be the same with each provider. Any differences will however be relatively small and have minimal affect on the overall contract costs.
Merchant Account – 013108978
· Annual transaction volumes and costs have been estimated based on the transaction data provided by the Council for April 2021.
· The transaction data provided by the Council did not include a detailed breakdown of tariffs and charges for each transaction type. However according to the data, the charge for April totalled £5,257 so we have estimated the annual charge at £63,084.
· Interchange and scheme fees have been estimated in our comparison assuming all transactions are secure (i.e. either chip/pin or contactless).
3.7.4. As indicated above, based on the information and data that was available for our review the current AIB charges are relatively high.
3.8. Merchant Acquiring - Way Forward
3.8.1. Our analysis confirms that although the current arrangements with Lloyds Cardnet are reasonable, savings of around £10,000 per annum would be achieved with Global Payments via the CCS framework agreement.
3.8.2. We recommend that the Council consider negotiating improved terms with Lloyds Cardnet before extending the arrangements for a further period. If the Council are comfortable with this approach, Lloyds should be asked to extend the contract but remove the currently authorisation fees which is line with the terms available from Global Payments on the CCS framework agreement.
3.8.3. If however the Council are uncomfortable with extending the arrangements, then whilst consideration can be given to using the TPA framework agreement, this is likely to result in the Council needing to pay a monthly commission to the framework provider (i.e. assuming savings are achieved). In these circumstances, it may therefore be appropriate for the Council to undertake a formal tender process.
3.8.4. Our high-level analysis of the AIB arrangements suggest that the current charges are relatively high. It is not clear however if the Council is in a position to either negotiate or move these arrangements given they are provided as part of a separate contract with Till Payments. We do however recommend that the Council investigate its options further in respect of AIB.
4. Purchasing Card Contract - Lloyds
4.1.1. The Council’s purchasing card arrangements are provided by Lloyds bank. We understand that the contract is due to expire in March 2022.
4.2.1. We were advised that the Council has around 400 cards in total with annual expenditure across the cards at around £2.1m. We understand that Lloyds do not levy ongoing charges for the arrangements and no rebates are currently paid to the Council.
4.2.2. Service providers will not normally charge for larger purchasing card contracts (i.e. other than for ad-hoc service requests or late payment etc) but they will offer a ‘rebate’ based on the annual expenditure across the cards. The level of rebate paid will depend on the ‘Settlement Terms’ agreed (i.e. how quickly the Direct Debit is taken following the statement date). A higher rebate is offered for quicker settlement.
4.2.3. Crown Commercial Service have provided a number of purchasing card framework agreements in recent years. These have been widely used by local authorities as they have always offered very competitive terms. Their current agreement (Payments Solutions – RM3828) was awarded in December 2018 and is due to expire in December 2022. Lot 1 of the framework relates to purchasing cards and has four providers – NatWest, Barclaycard, HSBC and Lloyds Bank.
4.2.4. The following table compares the rebates available from all providers on the CCS framework agreement. This assumes annual expenditure of £2.1m and 14-day settlement.
|
Service Provider |
Turnover |
Rebate % |
Rebate Amount |
|
CCS - NatWest |
£2,100,000 |
0.4660% |
£9,786 |
|
CCS - Barclaycard |
£2,100,000 |
0.4460% |
£9,366 |
|
CCS - HSBC |
£2,100,000 |
0.2700% |
£5,670 |
|
CCS - Lloyds |
£2,100,000 |
0.3840% |
£8,064 |
4.3. Purchasing Cards - Way Forward
4.3.1. We recommend that the Council look to procure a new contract using the CCS framework agreement in order to benefit from the rebates indicated above. The framework should be discussed with Lloyds as it is possible that the current arrangements can be moved to the framework without the need to re-issue cards.
5.1. The current banking arrangements are very competitive, and we recommend that the Council look to extend the contract for a further period with Lloyds. Alternatively, consideration can be given to the TPA framework agreement although this is likely to result in a relatively high cost increase.
5.2. We recommend that the Council consider negotiating/extending arrangements with Lloyds Cardnet. If the contract cannot be extended, then consideration will need to be given to undertaking a formal tender process.
5.3. Based on our high-level review, it appears that charges levied for parking transactions by AIB are relatively high. We recommend these arrangements are investigated further with a view to either negotiating improved terms or moving to an alternative provider.
5.4. We recommend that the Council consider the CCS framework agreement for the purchasing card contract which is due to expire next year.
5.5. We look forward to discussing our findings with you further.
Peter Waite
Focus on Banking September 2021