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The UK government’s priorities following the Payments Landscape Review are welcome, but they cannot pin hopes on authorities such as Pay.UK being able to deliver them, payments insiders have cautioned.
The UK government published this month its response to the 2020 Payments Landscape Review: Call for Evidence, which received 68 responses from a broad range of respondents across the payments sector and the wider economy.
The consultation, first announced in June 2019, was developed as a way to accommodate and respond to the fast pace of change happening in the payments industry.
HM Treasury outlined four key themes in its response: equipping Faster Payments for the future; unlocking open banking enabled payments safely and securely; enhancing cross-border payments; and future-proofing the legislative and regulatory framework for payments. It will now press forward with its plans for these proposed areas of focus with the regulatory authorities, other government departments and industry.
A significant feature of the Payments Landscape Review relates to the aim to increase and promote competition between payment networks, said Michelle Plevey, payments director at KPMG.
“This aligns well with the priority focus on unlocking open banking enabled payments to help shape the future of the payments industry. And, the possibilities may only increase if this priority eventually coordinates well with an open finance framework,” she continued.
Time will tell whether the plans are ambitious enough, given the current landscape and future challenges, Plevey continued. “The gaps, risks and opportunities under discussion make sense and the response evidences coordination and synergy among domestic authorities and their respective agendas.
“Whether some or all of the priority areas will succeed depends on additional factors, such as industry engagement and customer behaviour,” she said.
The government's response is good in parts, and the four themes make sense, agreed Tony Craddock, the Payments Association’s director-general. “It is reassuring that the government has a vision for payments at the forefront of technology and innovation, not just to maintain what we have at present."
For example, the government has now committed to consulting on bringing systemically important firms in payments chains under the scope of Bank of England regulation and supervision in the first half of 2022. Payment chains are the various different activities that occur when a payment is made, which has become increasingly fragmented.
“The increasing use of digital payments and innovations in payments chains, which have resulted in payments activities no longer being conducted primarily by banks and payment systems, mean it is the government’s view that other firms have the potential to become systemically important firms in payment chains and may warrant Bank of England supervision,” the government response says. The bar, however, for designating a firm systemically important will remain high according to the government.
Criticism of Pay.UK
The increasing digital transformation in how we pay has created significant concerns around financial inclusion, particularly around access to cash for vulnerable people. To improve inclusion, some respondents called for a comprehensive transition programme to ensure as many people as possible are equipped to sign up for and use electronic payments.
The problem is that the government accepts there is a problem with our payment systems strategy but they are still pinning hope on Pay.UK, said Craddock.
This has proved itself not fit for purpose and, largely due to poor governance, is broken, he said.
Pay.UK has come under increased scrutiny from payments players in the UK, with sources having told VIXIO that it is beyond repair and one simply stating: “It is run by someone who used to run Test and Trace”, referring to the authority's chief executive, David Pitt.
The former Labour parliamentarian previously served as chief operating officer at the UK's government service to prevent the spread of COVID-19. This has drawn criticism due to costs and effectiveness.
Sources have also suggested that Pay.UK has failed to adequately engage with the market so far.
To solve these problems, the government should put Faster Payments back into a standalone commercial entity, and make it into a scheme with its own rules, charging mechanisms and governance, said Craddock, noting the UK electronic transfer service. Launched in 2008, it is currently operated by Pay.UK.
It is not just Pay.UK that has triggered some of the concerns with the government’s priorities for the payments landscape.
Retailers have not been too pleased with the government's response to the landscape review either, according to Mark Falcon, director at payment regulation consultation Zephyr.
“It does at least consider the large card schemes, but it is still too fixated on interbank payments as a way of bringing in more competition,” he continued.
The government response is also lacking in concrete commitments, he warned.
This is partly because of a high turnover of staff at the Treasury, Falcon believes. “Many experts have either left or got pulled into dealing with issues such as customs and trade due to Brexit. This lack of experience means a low knowledge base."
For Falcon, the most promising intervention for payments has come from a recent speech by Chris Hemsley, managing director at the Payment Systems Regulator (PSR).
“This highlighted the issues at stake and considered whether payments are working well for consumers and merchants,” he said, noting that it acknowledged the problems facing the payments ecosystem currently, such as the impact of Brexit on the card schemes compliance requirements.
In this speech, Hemsley weighed up whether the dual success of the international card schemes, Visa and Mastercard, has led to good competition in the market.
“In 2019, Visa provided over 95 percent of debit cards in circulation in the UK, and Mastercard provided 60 percent of credit cards. These figures are now changing, as issuers switch between the two schemes,” Hemsley said, continuing: “But, is this form of competition, attracting issuers, working well for consumers and merchants?”
“Considering how the card schemes brazenly increased fees after Brexit, such pricing behaviour poses questions about how the market is working,” said Falcon, adding that this is the first time that the PSR has started to show some understanding.
Hemsley had used the speech to argue that the absence of specific regulatory caps is not itself sufficient reason to increase certain fees, particularly if these increases are not obviously linked to costs.
He also noted that the success of these new payment models is likely to play an important part in future regulatory interventions: “A viable alternative to card schemes in retail payments would mean a more competitive market that requires less regulatory intervention in the longer term. But in the shorter term, we might still intervene, including if scheme fees and interchange fees continue to rise unchecked.”
