Eye on the horizon: UK sets National Payments Vision
The UK’s payments landscape is congested and would benefit from a clear overall strategy. That was the verdict of an independent review on the future of payments which was released last year. Now, as part of its latest Mansion House reforms, the UK Government has responded by setting a National Payments Vision for the first time. The Vision aims to provide a “North Star” for UK payments, indicating the long-term strategic direction for the sector.
Key developments in the Vision include:
- creating a Payments Vision Delivery Committee to reimagine retail infrastructure upgrades
- making the FCA responsible for Open Banking and reducing overlaps with the PSR
- encouraging the FCA to replace authentication rules with a less prescriptive regime
Direction of travel
The Government’s overall vision for the UK payments sector is “a trusted, world-leading payments ecosystem delivered on next generation technology, where consumers and businesses have a choice of payment methods to meet their needs”.
To achieve this, the Government says the regulatory framework for payments must be clear, predictable and proportionate, and payments infrastructure must be resilient and support innovation. These are the foundations on which the payments ecosystem can build innovation, competition and security.
- The industry will welcome many messages in the Vision, most notably the move to reduce the regulatory burden on firms caused by multiple overlapping regulatory initiatives.
Traffic control
Payments is a busy sector. There are several ongoing initiatives led by the Government, different regulators and the industry bidding to improve how payments are made. Individually these have their merits but collectively the Government recognises that they hamper capacity for innovation and growth.
To address this congestion the Government aims to use the Vision to prioritise initiatives and improve coordination between the regulators. In a new payments remit letter to the Financial Conduct Authority and Payment Systems Regulator, the Government asks the regulators to outline how they will improve coordination between themselves. The FCA will lead work on enhancing the management of overlaps between the FCA and PSR, particularly in relation to fraud policy.
- Although no structural reform of the regulators is on the table, the industry will hope that the revised expectation on regulators to consider their collective impact on regulated firms will translate into tangible benefits.
Digging up the foundations
The importance of high-quality payment rails cannot be underestimated. They are the foundations on which payments firms build their products. As the Government looks to international success stories, such as the development of Brazil’s instant payments scheme, PIX, it is evident that resilient, low-cost and real-time payment systems are going to be crucial for the UK payments sector to grow.
The Vision acknowledges the difficulties in making progress with plans to upgrade UK retail payments infrastructure, specifically the New Payments Architecture programme. It also recognises that the governance and funding arrangements for the body which is tasked with delivering the NPA, Pay.UK, have proved to be obstacles.
The Government has concluded that it needs to have greater involvement in future decisions relating to payments infrastructure than it has had in the past. It has “reservations” about overhauling today’s infrastructure “at the current juncture” and instead envisages a “pragmatic” approach to developing infrastructure in a way that is better placed to take advantage of opportunities posed by future technologies. This aligns with the PSR’s April 2024 request for Pay.UK to explore further investment in its current infrastructure arrangements.
To move things forward, the Government is creating a Payments Vision Delivery Committee. The Committee will task the Bank of England and the PSR to:
- provide clarity on the upgrades required to the UK’s Faster Payments System
- assess future requirements for the UK’s retail payments infrastructure
- determine governance arrangements to deliver the above, including proposals to reform Pay.UK
The Bank of England and PSR will engage stakeholders and set out an approach in the first half of 2025.
- The industry will be keen to see that a pragmatic approach does not mean losing further momentum. Much will turn on the ability of the newly established Payments Vision Delivery Committee, Bank of England and PSR to refresh the requirements for the UK’s retail infrastructure, and how a strong and effective payment systems operator can be enabled to implement change.
Banking on smart data
Open Banking provides merchants with a low-cost payment method that they can offer their customers. It can be applied to many use cases from utilities through to retail payments. It can be used for both “push” and “pull” payments, and some providers are using account information services and AI modelling to reduce the risk that a payment is rejected due to insufficient funds.
The Government believes that unlocking Open Banking enabled payments for e-commerce is a strategic short to medium term priority. The ambition is for account-to-account payments to become “a ubiquitous payment method”. The Vision proposes two key changes:
- The FCA will become the sole regulator of the Open Banking Smart Data Scheme. The Joint Regulatory Oversight Committee (JROC), which has been working to develop Open Banking beyond the scope of the CMA Order, will be wound down.
- Establishing a sustainable commercial model for Open Banking. According to the Vision, “the provision of any additional or ‘premium’ services beyond the scope of the CMA Order should be subject to a commercial model whereby data holders are incentivised to innovate and invest”. In particular, the Government would like the FCA to commence work on determining the commercial model for e-commerce use cases. The FCA is also expected to take forward work on variable recurring payments.
The Government is aware that there is a balancing act to be managed and that a sustainable funding model needs to take into account that many smaller fintechs rely on access to free APIs and associated services to start and grow their businesses. In the Vision the Government commits to protecting existing fintech business models.
- Putting the FCA at the helm and making it clear that Open Banking is a priority will be welcomed by players in this space and will likely drive competition between providers of payment methods used in e-commerce which has traditionally been dominated by cards.
Protecting against fraud
Fraud continues to be a thorn in the side of the payments industry. The UK has put in place regulations to protect consumers against fraud, most notably the reimbursement requirements for authorised push payment fraud. The PSR will commission an independent post-implementation review of that regime next year. The Government will also release an expanded fraud strategy in 2025.
The Government is of the view that regulation should support firms to adopt new solutions to protect consumers from fraud. It commits to revoking the legislation on strong customer authentication. The FCA will replace the regime with more agile, outcomes-based SCA rules.
The reduction of fraud associated with the use of a payment method or product is key from a commercial perspective for payments firms. This commercial incentive is a driver for firms to build innovative solutions to reduce fraud. The move to an outcomes-based set of requirements may prove to be an opportunity for firms who have built proprietary fraud prevention products to monetize these products.
- It is well known that implementing the SCA requirements proved challenging for the industry, and many will, in principle, welcome an outcomes-based approach. However, given the sunk compliance cost associated with implementing the original SCA requirements, some firms may prefer to continue to use their current solutions.
