Future of payments review

February 2024 | EXPERT BRIEFING | BANKING & FINANCE

financierworldwide.com

In July 2023, as part of his annual Mansion House speech, Jeremy Hunt, the chancellor of the exchequer, announced the launch of an independent review into the future of payments. The review was established to help deliver “world class retail payments” and was part of a package of measures designed to accelerate the modernisation of the UK’s financial services industry. The final report was published in November 2023, coinciding with the chancellor’s autumn statement speech.

Scope of the review

Led by Joe Garner, former chief executive of HSBC UK and National Building Society, the review was tasked with making recommendations for the government, the financial regulators and industry, with a focus on three consumer-oriented questions: (i) what are the most important consumer retail payment journeys both today and in the next five years?; (ii) for current journeys, how does the UK consumer experience for individuals and businesses compare with other major jurisdictions?; and (iii) how likely are the in-flight plans and initiatives across the payments landscape to deliver world leading payment journeys for UK consumers?

In responding to these questions, the review was asked to consider what changes are required to the UK’s retail payment systems and networks to: (i) speed up innovation in payment services; (ii) serve the future retail payments requirements of consumers and businesses; (iii) support interoperability with new forms of digital money; (iv) support interoperability with global payment systems; (v) ensure accessible and inclusive digital payments; and (vi) ensure resilient and secure payments. The review did not consider real-time gross settlement and CHAPS services, stablecoins or a central bank digital currency, or buy now pay later. To inform the review, a call for input, which closed in September 2023, was published to obtain the views of stakeholders.

Main conclusions

The report found that generally the UK payments landscape is well placed today and has many positive characteristics when compared with other jurisdictions, particularly its long track record of security, reliability and resilience and its approach to innovation, including in relation to real time payments and open banking. However, based on the feedback it received, it concluded that the UK payments landscape lacked a vision and a set of clear priorities. Accordingly, its primary recommendation is for the government to create a national payments vision and strategy given: (i) the essential nature of payments to both consumers and the economy; (ii) the substantial amount invested in the sector (many billions of pounds); and (iii) the highly interdependent nature of the payments space. A central aim of this strategy should be to simplify the payments landscape.

The report underscored the increasingly digital nature of payments, citing the statistic that in 2022 86 percent of payments transactions in the UK were digital, compared to 44 percent in 2012. Regarding specific payments journeys, it referred to the relative maturity of the UK’s banking, cards and digital wallets ecosystem, and its strong system of regulation, concluding that the UK held a “leading position” for the in-person and online consumer purchase experience of goods and services.

Notwithstanding, the report drew attention to two key areas in the retail arena that require further consideration. First, it described the consumer-to-consumer bank transfer process as “clunky” when compared to certain other jurisdictions such as Sweden, Brazil and India, with the entry of account numbers and sort codes needed, and called for improvements in the next few years. Secondly, it observed that several merchants and retailers were concerned with the costs of taking card payments and the absence of alternatives.

Other recommendations

To improve consumers’ shopping experience, the report recommends that as part of the Smarter Regulatory Framework’s repeal and replacement of retained EU law for payments, the resulting regulator rules and guidance are outcomes-focused, particularly in relation to secure customer authentication (SCA) requirements, which currently take the form of detailed technical standards. It also calls on HM Treasury and the Financial Conduct Authority (FCA) to assess regularly whether digital exclusion is leading to financial exclusion.

Four of the report’s recommendations seek to maximise the use of open banking. First, purchase protection or dispute resolution should be available for payments made through open banking so that consumers have the necessary trust and security to adopt it. Second, open banking should be leveraged to improve the person-to-person bank transfer payments journey. Third, an alternative open banking journey should be designed to give retailers choice beyond card schemes, and the Payments Systems Regulator (PSR) should finish its investigation of card scheme fees. Lastly, the government and the Joint Regulatory Oversight Committee (JROC) should prioritise the completion of a commercial model for open banking, to incentivise investment in infrastructure and consumer protection.

The final batch of recommendations revolve around the role of the government and regulators. The report recommends that: (i) the PSR reviews the new authorised push payment (APP) fraud rules a year after their implementation and that the government does more to clamp down on frauds and scams; (ii) the Treasury and the regulators assess whether regulations are applied to FinTechs in a “clear and appropriate” way – if smaller firms have simpler requirements, they can grow more quickly; and (iii) the Treasury and the regulators take a range of steps to align their activities more closely, including a remit letter from the Treasury to the regulators asking them to reduce industry requirements by an “aspirational” 10 percent in 2024, improving the existing memorandum of understanding between the Bank of England, the FCA and the PSR, ensuring cross-board representation across the different regulatory bodies, and strengthening senior representation on relevant bodies such as the JROC.

Big Tech

The report sets out a number of points for consideration. These principally relate to Big Tech. It draws attention to several significant issues relating to Big Tech in addition to financial services, such as national security, online harms and artificial intelligence. Rather than directing and regulating Big Tech, a more coordinated engagement by government is encouraged more akin to a “diplomatic approach to a country with an ambassador”, noting the EU’s establishment of an office in San Francisco to reinforce its “digital diplomacy”.

International dimension

The report contains an annex, which houses the main international insights that arose during the review. This included the needs of the country to shape the country’s payment industry. While success is achievable through different means, four common themes emerged – a strong objective, industry collaboration, commerciality of the proposal and trust. Examples of more sophisticated adoption strategies than the UK exist, such as Brazil’s instant payment system, PiX. There is support for ‘future focused’ methods of payments but this flows from which techniques give better value to users. The concept of interoperability has a range of different meanings. Finally, a number of features of the UK’s payments sector make it the “envy of the world”, such as work around variable recurring payments, control of its payments legislation, consumer protection for APP scams and overall consumer journeys.

Next steps

The findings of the report have been endorsed by both the chancellor and the PSR. The chancellor remarked that: “The government is committed to growing the UK’s world-leading retail payments sector.” For its part, the PSR noted that: “The review offers support for the key elements of the PSR’s Strategy: boosting competition through open banking and account-to-account payments.” It went on to say that it continues its work “To maximise those benefits, keeping the UK as a world leader in payments”. For industry, the report highlights how the UK can maintain its position as a preeminent jurisdiction for payments in the future, providing an agile regulatory environment that delivers security to customers, frictionless payments journeys, and that encourages firms to develop new products and increase their payments volume. Ultimately all of this depends on the government making some bold policy decisions – a hard ask in what seems set to be a general election year.

Charlotte Hill is a partner and Daniel Hirschfield is a senior counsel at Taylor Wessing LLP. Ms Hill can be contacted on +44 (0)20 7300 7011 or by email: c.hill@taylorwessing.com. Mr Hirschfield can be contacted on +44 (0)20 7300 4107 or by email: d.hirschfield@taylorwessing.com.

Charlotte Hill and Daniel Hirschfield

Taylor Wessing LLP