The barring of Camelot from the e-payment market has delighted PayPoint but left Payzone fuming – and contemplating legal action, says Beth Phillips

The board of directors at PayPoint must feel like ­lottery winners.

Last Friday, lottery watchdog the National Lottery Commission ­provisionally decided Camelot was not allowed to enter the e-payment market, of which PayPoint has a mighty stranglehold, due to EU and competition law issues.

Although Camelot immediately branded the decision "flawed", PayPoint CEO Dominic Taylor declared it a "victory for local shops", sending shares in the company soaring more than 80p to 350p.

However, rather than popping open the Champagne like most lottery winners, the NLC's decision has opened a can of worms for PayPoint and the payment services sector. PayPoint may be pleased, but its nearest rival Payzone was anything but.

It didn't want Camelot either, but it claims the NLC's decision calls into question the competitiveness of the payment services market. Now, reveals MD Bill Thomson to The Grocer, it is seriously considering taking legal action against PayPoint over its exclusivity agreements, which ban retailers from using any of their competitors' terminals.

"We are looking at whether those exclusivity agreements are appropriate," he says. "If a legal challenge is the right option, we will do it. We have sought legal ­advice. In the same way we have sought advice about Camelot, we have sought advice on general competition issues in the industry. There's a huge degree of support out there for a more open and ­competitive market."

The threat of a legal challenge by Payzone evokes memories of the early noughties when lengthy legal battles forced the-then Birds Eye Wall's and Coca-Cola to make way for other products in their branded in-store refrigerators and freezers.

Like Coke and Wall's, PayPoint prefers exclusivity. It has more than 22,000 terminals accounting for 550 million transactions a year, with clients ranging from British Gas to TV Licensing. In May, the company recorded full-year revenues of £196.6m and pre-tax profits of £32.6m. In contrast, Payzone recorded half-year losses of 91m last year and was taken over by ­private equity in February.

Camelot in the market would have given PayPoint formidable competition. It planned to offer services through its 28,000 lottery terminal network, adding new technology to its existing terminals.

It was understood to have been in the advanced stages of finalising the technology and had planned to pilot it with independent retailers for six to eight months before rolling it out across the estate. Retailers would have had the choice of whether to offer the ­additional services and, unlike PayPoint, would not have been tied into an exclusive contract.

PayPoint's exclusivity agreements are a real bugbear for retailers, believes Thomson. "Coming into the industry relatively fresh, when I look at it, it doesn't seem to be in the retailers' interests," he says. "It's something we would like to change sooner rather than later. We want to let retailers select or choose both or be able to get greater coverage. We think it should be a more open network because sometimes a retailer would need to offer more than one type of terminal to offer a full range of services."

'Small price to pay'
However, PayPoint insists its exclusivity agreements are "a small price to pay for the benefits of membership of a strong and ­sustainable network".

"PayPoint offers retailers much more than additional footfall, incremental sales and commission payments and has never demanded any signing-on fee, rental or ­retainer, as would normally be ­expected for a complete business ­solution of such value," explains head of corporate affairs Peter Brooker. "We expect loyalty to avoid a fragmented offer that ­confuses customers and loses the brand equity on which to build customer loyalty and retention.

"We are not investing for someone else's benefit and allowing other networks to cherrypick from our schemes undermines the ­viability of the whole proposition. It also leads to the inefficiency of duplicate terminal costs, cluttered counters and confused customers."

Furthermore, he adds, agreements such as PayPoint's are commonplace in the convenience store sector already. "When a retailer takes on an in-store bake-off franchise, the franchisor provides the equipment on loan for free and the consumables on an exclusive basis," he says. "The franchisee is not allowed to buy its dough or sandwich fillings elsewhere because a rival supplier has them on special offer and no responsible franchisee would consider doing so.

"Not only would such action be in breach of contract with the franchisor, it would also shatter the trust of the customer, who is expecting a certain quality that the franchise brand has invested in and built up over many years. The same holds true for PayPoint."

However, critics argue that consumers aren't bothered about who the operators are. "Shoppers don't care and probably don't know whether PayPoint or Payzone has been used for their payment," says one source. "All they want to do is make their payment."

And others believe PayPoint's claim that Camelot would "exploit its monopoly position" if it entered the market smacks of hypocrisy. Camelot may have a monopoly on the lottery, and lottery companies such as BingoLotto have tried to compete and failed, but PayPoint's exclusivity has, in effect, created its own monopoly. "PayPoint saying this is a 'victory for local shops' ­really sticks in my throat," admits one source. "I don't know one ­retailer that thinks that."

The Association of Convenience Stores describes the NLC's decision as "weak", while the National Federation of Retail Newsagents said it would "restrict customer choice". The National Federation of SubPostmasters goes further, with general secretary George Thomson warning that it jeopardises the ­future of the post office network because PayPoint will now be able to take more services from it.

"The most imminent threat on the horizon is to the £20m a year contract for benefits cheques, currently run through post offices, which the government has put out to tender and for which PayPoint has made clear it plans to bid."

A difficult market to enter
Whether retailers want a full-blown investigation by the OFT, however, remains to be seen. Many are still smarting from the OFT's decision last year to give the newspaper and magazine distribution sector a clean bill of health, following a long-running and time-consuming investigation.

Many fear that it will be impossible for another player to enter payment services in the wake of Camelot's failed bid. "It's difficult to get into this market you need millions of pounds to put a national network together," says Payzone's Thomson. "If you have one, you would want to be able to service that network."

A consultation on the NLC's ­provisional decision will conclude in early September. Meanwhile, Camelot has been left to "carefully consider" its options and PayPoint will be keeping its fingers crossed that it's allowed to collect on its winning ticket.