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The UK’s Payment Systems Regulator (PSR) and the Financial Conduct Authority (FCA) are evaluating the benefits and risks of digital wallets for consumers and businesses, which may lead to new incentives for account-to-account (A2A) payments.
The regulators are seeking feedback by September 13 on the benefits, operational features and competition aspects of digital wallets, including their impact on account-to-account transactions.
There are questions around the motivations and potential outcomes of the review.
The UK has been less focused on payment sovereignty than the EU, although FCA CEO Nikhil Rathi has said that big tech is a priority this year.
Matt Jones, consultant and advisor at Payments Culture, said that the call for information has been prompted by various factors, with one being payment choice, including A2A payments, which the PSR has long been keen to promote.
“The UK is a very card-centric market. Industry data shows that open banking payments lag significantly behind card payments,” Jones pointed out. “In other countries such as India, China and Poland, A2A payments play a much more prominent role than in the UK.”
Currently, consumers in the UK can only use card payments — A2A payments cannot be put into Apple Wallet, for example.
James Sherwin-Smith, managing partner at Sortcode Capital, agrees.
“In theory, the digital wallets of the future could be payment rail agnostic, including stablecoins and others,” he said. “However, as it stands, there are no clear incentives for big tech to participate in non-card payment transactions."
Sherwin-Smith added that whereas there is money to be divided up when using card systems, A2A payments have no fees, so there is nothing to gain financially for Apple and Google. This may be why they have not yet allowed A2A on their systems.
"A2A payments are highly relevant in the UK,” he said. “Open banking exists in the UK not because of PSD2, but as an explicit remedy from the CMA retail banking investigation, requiring the provision of open banking APIs free of charge.
Here, he is referring to the compliance requirements introduced by the Competition and Markets Authority (CMA), which have ultimately meant the UK’s nine largest retail banks have had to enable open banking and open up their data to third-party providers for competition purposes.
“This intervention was truly the catalyst for the open banking industry in the UK, coupled with a regulatory regime that allows open banking institutions to exist without having to be licensed as banks,” he continued.
Sherwin-Smith said that without the retail banking investigation, “this A2A wallet question probably wouldn't even be on the regulator's lips. This has definitely shaped the PSR's thinking."
Although the study seeks feedback on whether digital wallets can help drive open banking and other non-card payment schemes to greater prominence and encourage competition, there is no easy path forward.
“One challenge at this time is that organisations that provide some of the most popular digital wallets, such as Apple Pay and Google Pay, also have an incentive to continue to work with payment card rails due to the partnership with issuing banks,” said Jones.
Falling behind?
Another issue for the UK, in part linked with A2A payments, is that it appears to be falling behind innovators elsewhere.
"Some markets in the world have taken what the UK has done with Faster Payments and leapfrogged us in real-time payments innovation, such as India with UPI and Brazil with Pix,” said Sherwin-Smith. “These countries have left the UK behind in the adoption and usage of A2A payments.”
He said that the UK has the infrastructure and opportunity, yet these two BRICS nations have been able to overtake. “People are wondering why. The UK is predominantly a card market, while Brazil and India were able to create ubiquitous, cost-effective solutions that have a bigger reach than cards in those markets."
The UK regulators’ intervention follows the European Commission's decision to accept Apple’s commitments to open up its near field communication (NFC) software to third parties, after accusing the tech giant of anti-competitive behaviours.
“This ruling only affects markets in the European Economic Area, so it does not apply to the UK. In initiating this review, the PSR and the FCA may have looked at the ruling in Brussels last week and are now seeking to push for the same level of competition to be introduced into the UK market,” Jones said.
He explained that considering that the UK now sits outside the EU's regulatory orbit, industry bodies want to ensure that the UK is not left behind when it comes to innovation in payments.
At the same time, UK regulators will want to assess any potential changes based on evidence from local market participants.
Operational resilience
It may also be that the UK has launched this consultation due to concerns about operational resiliency, which was good timing, considering the global IT outage on Friday, July 19.
“I think that outages are somewhat aligned with the FCA and PSR’s call for evidence,” said Alex Reddish, managing director at Tribe Payments.
“We are utilising big tech to access our payment infrastructure through the likes of a digital wallet for example,’ he said.
And yet big tech companies are currently sitting outside the regulation of payments. “It’s a good step to proactively govern all stakeholders. The PSR has acknowledged that payments are not just a financial game, they are now a financial and technology game.”
According to Reddish, there is a concentration risk with the role of big tech in payments. “Look at Apple Pay. If it has a security risk, that is an incredibly large swathe of data in jeopardy. How do we democratise access to that data and provide oversight that there is a security standard to be maintained for the benefit of the end user?”
Reddish hopes the review will lead to an extension of oversight. “It will be interesting to see whether it forces an expedited call to action rather than a call for evidence based on the current landscape of technology outage, which could directly impact timelines based on the nature of current critical infrastructure.”
“We could see a faster regulator, which would be a nice change,” he said.
