The primary recommendation is that the Government develops a National Payments Vision and Strategy. The Review team concluded that the current payments landscape in the UK is congested with multiple major in-flight industry initiatives and a multi-regulator environment, without a clear and agreed outcome or desired future state in the long term. The vision and strategy should dictate high level guidance on relative priorities, so regulators and the industry can become more aligned in their delivery, with an overall simplification of the current landscape.
The criticality of payments to consumers and the British economy, the billions of pounds already invested across the industry to enhance UK payments infrastructure, and the highly interdependent nature of the payments ecosystem all justify a coherent and holistic view. Such a unified strategy will ultimately drive efficiency, enable a quicker route to modernisation, drive revenue growth for participants and will continue to promote the UK as one of the leading markets for payments innovation and investment in the world.
Open Banking, fraud, digital customer experiences and alignment of regulatory change initiatives all featured prominently as key areas of focus to enable the future of payments:
Open Banking
Open Banking is considered a top priority, offering both the potential to improve the P2P experience and representing an alternative to card payments in the UK. The UK has the opportunity to build on the great foundation established by the CMA Order and Open Banking Implementation Entity to mobilise the ecosystem, with urgent focus now needed to solve the outstanding challenges that pose a barrier to scale. The current economic model is not sustainable, with open access ensuring no incentive for firms to drive, invest and support it, and no margin that could be allocated to funding consumer protection. A dispute resolution mechanism, as the minimum requirement for consumer protection in open banking, and seamless user interface that integrates ubiquitously into consumer mobile apps are two additional areas where development is required. Conclusions 4-7 from the review prioritise the activities required to make open banking a reality.
Fraud
The Review acknowledges the rising incidence of payments fraud, promoting a greater focus on prevention, rather than recourse. In an attempt to prevent fraud at the source, it calls for a wider coalition of stakeholders to collaborate, bringing big tech, telecommunications firms, sending and receiving banks, TPPS and governments together to develop solutions. Reflecting much of the sentiment in the industry, it also raises concerns about the potential adverse outcomes of new APP fraud rules – the possibility of firms increasing payments friction, first party fraud, restriction of fintech investment, potential financial exclusion and potential abuse of the rules in an open banking ecosystem that doesn’t have alternative consumer protection frameworks. Specific next steps are outlined in conclusion 8.
Digital Customer Experiences
UK consumers already experience one of the best journeys in the world when it comes to digital payments. The convenience, availability, universal acceptance, protection and product innovations that consumers experience for in-store and e-commerce payments with their debit card, credit card or digital wallet is second to none. Incremental changes to the regulations around secure customer authentication will further enhance these experiences for consumers. Nonetheless, without a ubiquitous account to account mobile app the UK is at risk of falling behind in the domain of person to person payments. The role of open banking and Big Tech platforms in this domain will continue to grow – they will increasingly deliver smooth customer experiences that in some situations may disintermediate consumers’ relationship with their bank. This shift influence in the customer journey from traditional financial institutions to merchants, fintechs and technology platforms presents significant opportunity for innovation, but must be balanced with consideration of resilience, performance and regulatory accountability. Conclusions 1-3 outline the areas of change required to maintain and enhance consumer purchasing journeys in the UK.
Alignment of Regulation and Central Initiatives
There are multiple payments industry initiatives currently underway – the New Payments Architecture, Open Banking, RTGS Renewal, Regulated Liabilities Network and the Digital Pound to name just a few. Each of these programmes are driving innovation and progress to UK payments, and, in isolation are logical investments. However, the high volume of competing priorities is causing change fatigue, stretched investment budgets and potentially contributes to operational risk. UK Finance estimate that the total cost to deliver the payments roadmap over the next 5 years is between £10-20bn, estimating that firms allocate 91% of their change budgets to regulatory projects. KPMG’s Payments Modernisation 2023 report reiterates this – having interviewed more than 50 UK financial institutions this year, 84% already have a payments modernisation programme underway, consuming significant time and resources. More than two thirds of respondents say these programmes are driven by both changing customer expectations and regulatory requirements. There is a need to clearly articulate the desired outcomes of each initiative, and better understand the dependencies and joint opportunities between initiatives.
The UK benefits from a strong regulatory framework, but efficiency and innovation in payments could be improved with greater alignment and coordination between regulators themselves. The weight and complexity of the current regulatory landscape can be a hindrance to growth and can be difficult to navigate - particularly for smaller fintechs. A more agile, engaged way of working between the different regulators (and between regulators and industry) would support an aligned, national vision. Here, the ecosystem would benefit from the different parties leveraging their respective strengths – regulators focusing on competition and stability, while industry participants can bring expertise in technology, product and commercialisation to jointly solve the pressing challenges in the market. This alignment is the core driver of a National Payments Vision & Strategy, with particulars outlined in conclusions 9-10.
The Review did not detail specifics around implementation, timelines or scope, but did provide some guiding principles. The focus of the strategy should be the industry topics where ambiguity or complexity poses a challenge today:
- The importance of resilience and safety relative to customer convenience
- The degree to which there should be competition ‘for’ the market at the infrastructure level relative to competition ‘in’ the market for the consumer experience
- The degree to which our national payments infrastructure should be open internationally, relative to domestic alternatives
- The roles of respective regulators and industry bodies
- The allocation of responsibilities for tackling fraud and financial crime, including high level principles of liability
- The resolution of questions of interoperability between initiatives
- The role to take a position regarding digital ID for payments
- Clear guiding principles for the National Payments Vision & Strategy should include safety, simplification, coordination of activities, responsiveness (to innovation), inclusivity (to build broad alignment on priorities) and accountability to drive progress.