On 22 November 2023, the UK government published the Future of Payments Review report. The Future of Payments Review was initiated in July 2023 by HM Treasury (HMT) and chaired by Joe Garner (former CEO of Nationwide Building Society). The report provides an overview of the digital payments landscape today, the direction it appears to be heading in, and the issues the UK is likely to face going forwards and what it can do to mitigate these. The report also makes a number of recommendations. Most significantly, it calls on the government to develop a National Payments Vision and Strategy, in order to simplify the complex payments landscape over time.
The UK payments landscape: achievements, challenges, opportunities
The questions the review asked were:
- What are the most important consumer retail payment journeys both today and in the next 5 years?
- How does the UK consumer experience for individuals and businesses compare vs other leading countries in respect of payment journeys?
- How likely are the in-flight plans and initiatives across the payments landscape to deliver world leading payment journeys for UK consumers?
In general, the review was positive about the UK payments landscape, highlighting its reputation for innovation, security, reliability and resilience. It noted that the UK has been a leader in innovation in areas such as real time payments and Open Banking. However, while the various in-flight initiatives may make sense in isolation, there is a widely held concern that the UK payments landscape lacks vision and clarity of priorities and may therefore not achieve a coherent outcome in the coming years. Accordingly, the primary recommendation of the review is for the government to develop a National Payments Vision and Strategy, to clarify its goals for UK payments.
With regard to payments journeys, the conclusions were again mixed. The review found the banking, cards and digital wallets environment in the UK to be mature and the regulatory environment well developed. The UK holds a leading position for the purchase experience of goods and services, both in person and online. However, the report makes some recommendations with regard to Strong Customer Authentication (SCA) requirements, in order to make the consumer experience smoother at the point of purchase. The report also notes that it is supportive of the work to preserve access to cash, and it highlights digital exclusion as another issue that warrants monitoring.
On the negative side, the review identified two significant issues with retail payments. First, the UK’s consumer-to-consumer bank transfer process is clunky compared to other countries, most notably Sweden, Brazil and India among others, which have developed real time payments systems and a better customer interface with no need to enter account details and sort codes. In addition, many merchants and retailers are frustrated by the lack of viable alternatives to card payments, whereas most other countries have established a digital alternative to cards for taking payments from consumers.
The review proposes that Open Banking, with some adjustments, could fix both of these issues, by improving the consumer-to-consumer process and giving retailers an alternative to card schemes. However, the report notes that the lack of a consumer dispute resolution process could be a barrier to adoption, and it says that costs and benefits need to be better aligned in order for Open Banking to thrive.
The review also points out that while the UK payments environment is well developed, it is very complex with multiple industry and regulatory bodies. Fraud is also an issue, but the new Authorised Push Payment (APP) fraud reimbursement rules have resulted in additional friction in making payments, among other things. Finally, the report says Big Tech, exemplified by the rapid adoption of digital wallets, is as much an opportunity as a threat, and it calls on the government to take a more coordinated approach with a view to building a mutually beneficial relationship.
Recommendations for future success
In order to address these issues, the report makes a number of recommendations, in addition to its call for a National Payments Vision and Strategy. The recommendations are divided into three main categories: (1) consumer experience, (2) Open Banking, and (3) improving regulatory oversight and alignment.
Recommendations 1 and 2 suggest improvements to the consumer shopping experience by moving SCA and other requirements away from detailed technical standards to a more outcomes-based approach.
Recommendation 3: HMT and the FCA should regularly assess whether digital exclusion is leading to financial exclusion and should closely monitor the situation, which is evolving rapidly.
Recommendation 4: consumer protection on payments made via Open Banking should be enhanced with a minimum form of dispute resolution.
Recommendation 5: Open Banking should be leveraged to improve the person-to-person bank transfer payments journey.
Recommendation 6: an Open Banking alternative payment journey should be developed to give retailers choice beyond card schemes. In addition, the Payment Systems Regulator (PSR) should complete its work on interchange and card scheme fees.
Recommendation 7: the government and the Joint Regulatory Oversight Committee (JROC) (a committee consisting of representatives from the FCA, PSR, CMA and HMT to, amongst other things, consider the vision and strategic roadmap for further developing open banking) should prioritise agreement of a commercial model for Open Banking so that there is scope to invest in both infrastructure and consumer protection.
Improving regulatory oversight and alignment
Recommendation 8: the PSR should conduct a review of the new APP fraud rules after 12 months of implementation, and the government should set a more ambitious fraud crime reduction target beyond 2024 with an emphasis on preventing the crime in the first place.
Recommendation 9: HMT and the regulators should review whether the way some current regulatory requirements are applied to fintechs is clear and appropriate, and reduce the complexity for smaller firms to enable growth.
Recommendation 10: HMT and the regulators should take a variety of actions to drive closer alignment of regulatory activity, including through updated remit letters, enhancing the regulators’ existing Memorandum of Understanding, ensuring cross-pollination at board level and working to reduce the regulatory initiatives impacting firms by an aspirational ambition of 10%, with the goal of freeing up more capacity for innovation.
Alongside these recommendations, the review provides additional thoughts for consideration, mostly aimed at finding a way for the government and existing regulatory and payments systems to coexist with Big Tech as it becomes an increasingly significant player in the payments landscape. The report notes that attempts to strictly direct and regulate Big Tech may result in deteriorating relations, which could push Big Tech away from the UK. Instead, the government should work with digital wallet providers to explore opportunities that could ultimately be in the best interests of consumers.
In summary, the Future of Payments Review found much to praise about the UK payments landscape, but also significant room for improvement. Open Banking and Big Tech could hold the key to better consumer outcomes, but the government needs to create an environment where they can thrive. Above all, the government needs to develop a strategy with a clear-eyed vision for the future.
In its Autumn Statement, the government said it supports the review and will take steps to implement its recommendations, including by repealing prescriptive payments authentication rules that the UK inherited from the EU. According to the government, the FCA plans to review the rules with the intention of adopting an outcomes-based approach. In particular, it will consider the contactless limits.
The government also plans to legislate in 2024 to create a new regulatory framework that would extend Open Banking beyond the largest banks and establish a sustainable commercial model through which technology and consumer protections can be developed, with appropriate regulatory backstops.
Finally, the government plans to publish a National Payments Vision in 2024, which will include consideration of priorities for UK payments and, working with the PSR and Bank of England, consider the role of the New Payments Architecture.
The Future of Payments Review report provides much food for thought. Whether its suggestions are a recipe for success remains to be seen.