There is no doubt that, as consumer demand for more seamless, quicker and more convenient ways to pay expands (coupled with technological developments) digital wallets have become a mainstream payment method for many people and their adoption and usage is expected to only grow. A quick survey across my friends and colleagues on who still carry their physical wallets when going out (instead of having their mobile phones only) confirms this trend, with most only carrying their phones.
This was never going to go unnoticed by regulators. Their focus on ‘big techs’ in financial services also continues to remain significant, so it’s not really surprising that the PSR and FCA have issued a joint Call for Information on ‘Big tech and digital wallets’.
The initiative sits within an ever-evolving timeline of events
This topic has been on the regulators’ radar for a while now. This Call for Information follows:
- The PSR’s report into ‘Contactless Mobile Payments’ released in 2018;
- The FCA’s discussion paper and subsequent feedback statement on ‘Potential competition impacts of Big Tech entry and expansion in retail financial services’, released in 2023;
- The FCA’s call for input and subsequent feedback statement on ‘Potential competition impacts from the data asymmetry between Big Tech firms and firms in financial service’s’, also released in 2023.
- The approval of the Financial Services and Markets Act 2023, which granted the Treasury powers to designate the so-called ‘Critical Third Parties’ providing services to firms and financial market infrastructure firms, which would then be subject to the financial regulators’ oversight.
This call for information is an interesting step, but I spent a little time reading between the lines on the many questions asked in this paper and have drawn out a few thoughts on how they interact with current regulatory objectives.
The PSR’s strategic objective to unlock the potential of account-to-account payments has been widely publicised. In considering digital wallets, not only does it comment that it considers that digital wallets could be characterised as participants in a payment system which it regulates, but also seeks information related to the use of digital wallets to facilitate account to account payments and so reduce reliance on card rails for payment transactions.
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The FCA’s principal areas of interest in the publication of this paper are: the impact of digital wallets on competition; and the impact on operational resilience and the systemic safety of the UK Financial Services sector.
So how do these particular regulatory interests, interplay with some of the questions being raised? Well, there seem to be a couple of themes that really stand out, including but not exclusively:
- Benefits and potential harm (including potential regulation) of digital wallets; and
- The role of digital wallets in the take up of account-to-account payments.
Benefits and potential harm (including potential regulation)
A number of questions genuinely seek to understand the benefits and potential harms (including potential competition limitations) of digital wallets, together with the current scale of usage and future potential developments.
Most interestingly, the consultation seeks input where there are features that might result in harm as to whether technical standards through regulation might improve outcomes.
Also, when seeking input on how digital wallets should best develop to encourage effective competition, again the point is raised regarding the prospect of technical standards through regulation.
Reflecting on the statement that the PSR considers that digital wallets could be characterised as participants in a payment system, which it regulates, and the repeated commentary regarding regulation of digital wallets, it appears that increased regulation of digital wallets may well be on the near horizon.
The role of digital wallets in the take up of account-to-account payments
There is little doubt that the PSR is, in part, seeking to understand how digital wallets can be leveraged to further its account-to-account payments agenda, with questions like:
- ‘What role could digital wallets have in increasing the take up of account-to-account payments?’; and
- ‘Are digital wallets likely to integrate existing and potential account to account payment types…..If not, what barriers exist and what do you think needs to happen for digital wallets to integrate account to account payment types in a manner that enables customer access to them?’
I am in no doubt that the PSR will utilise responses to these questions to help evolve its strategy on increasing the use of account-to-account payments to increase competition. This will be something worth looking out for, again, in the near future.
With the call for information closing on 13th September, the outputs won’t be far behind, but in the longer terms, lets keep an eye out on the progress of regulation on digital wallets and how the PSR leverages responses to further its account-to-account payments agenda.
Digital wallets in the EU – a look at the horizon
On a related note, digital wallets are also on the radar of EU regulatory bodies. For instance, the proposed EU Payment Services Regulation (EU PSR) requires operators of digital pass-through wallets that verify the elements of SCA when tokenised instruments stored in the digital wallets are used for payments to enter into outsourcing agreements with the payment service providers to allow them to continue to perform such verifications, but also requiring them to comply with key security requirements.
Further to the above, the current version of the Third Payment Services Directive (PSD3) includes a mandate for the review and report on the possibility to extend the Directive to certain services currently falling under the definition of ‘technical services providers’, which expressly included the processing and operation of digital wallets.
Conclusion
This timeline of events at both UK and EU levels only confirm that while regulators continue to favour the widespread adoption and acceptance of various payment methods by businesses (possibly diminishing the reliance on card rails), there is increased focus on associated risks and emerging concerns.
Discussing ubiquity should therefore be a top strategic priority for regulated payment service providers. Risk and compliance teams should support decision-making executives in being prepared to adapt their business models swiftly in response to evolving market trends and potential regulatory changes.
This article was co-authored by Michelle Plevey, Stuart Taylor and Andre Mendes.
