This is the text of Chris Hemsley's speech at PAY360 on 20 March 2024 as drafted and may differ from the delivered version.
Good morning. I’m Chris Hemsley, Managing Director of the Payment Systems Regulator and I’m pleased to join you today, for the largest Pay360 conference to date.
I’m here to talk about our work for 2024 and the future, but first, to quote Einstein, “If you want to know the future, look at the past”. There’s very good reason for doing this in the context of payments, because we want UK payments to continue to innovate and change, to make sure they can support businesses, people and the economy. And we will set ourselves up for success if we learn the lessons from the past.
Cast your minds back 15 years or so, cash was a common means of payment, and the only way to make an FPS payment was via internet banking or over the phone.
The speed at which payments have developed to where they are today is unprecedented and perhaps somewhat unpredicted. We continue to see payments evolving and adapting to different needs.
On this comparison, much has been achieved.
When judged internationally, UK payment systems also perform well on a number of criteria. They operate to a high level of security, processing large volumes and values of payments and they do so quickly and conveniently.
So where do we stand? It is instructive to look at recent reports into payments to see what we need to work on. For example, consider this finding:
“The governance of UK payment schemes restricts their ability to innovate in a number of ways. First, schemes controlled by existing players have little incentive to change their infrastructure purely to benefit customers or new entrants.
“Second, mutual governance means that many schemes move at the pace of the slowest member. It is hard to innovate in the face of vested interests, especially when members’ interests diverge. The need to achieve consensus on all decisions exacerbates this tendency and all too often leads to inertia”.
I should clarify – when I said ‘recent’ I meant the last 25 years. These conclusions are from the Cruikshank Report, a year 2000 review of the banking sector.
Certainly a lot has changed since then. The PSR was set up. The central account-to-account payment systems moved from being owned by the large banks to being owned independently.
These systems have also been opened up, with new firms like Wise, Ebury, Monzo, Starling and Clearbank among many others offering new payment and banking services.
But have we completed the journey? Are Cruikshanks’ concerns no longer relevant?
Have we managed to move to a model where we can readily support innovation? Are we able to quickly deploy new technology and adapt rules for the benefit of stakeholders overall, even if it acts against the interest of some participants?
In short – no. We can look at what happened with attempts to change the rules to protect people from APP fraud. Changes to the rules required unanimous agreement that could not be secured. Instead, the law needed to be changed so the PSR could act.
We also see some of these challenges in the delivery of Confirmation of Payee – despite widespread support from participants, regulatory action was needed to secure timely change.
And today, we are still seeking a way to move open banking forward in payments.
So how then should we support innovation and effect change in UK payments?
How to innovate and drive change
It is imperative that our payment systems continue to modernise and change, and that the markets that they support continue to develop, promote competition and drive innovation.
This is important for consumers, businesses and the economy. Payments, after all, sit behind pretty much everything we do.
So, as a country are we set up well for driving change in the future and where can that change come from?
On the one hand, UK consumers able to use digital payments benefit from convenience. However, there are no price signals which are pushing them to change. And yet, they ultimately pick up the cost of payments faced by merchants. They do not see this cost, of course, as it is buried in the price of goods and services.
As such, while consumers are likely to adopt better functionality (when this is available), they can’t respond to the sort of price signals that lead to competition in other markets.
On the other hand, the ability of retailers to take payments is critical. And the reality is that for most this means accepting both Visa and Mastercard as a minimum. We have set out our view that these schemes are ‘must take’ for most retailers. This limits merchants’ negotiating power.
We see this playing out in pricing. For example, we have set out our analysis on the increase in card scheme fees and we’re investigating these, along with other fees. But that points to the fact that there is a need for greater choice.
This is of particular importance in the UK, as we differ from many other countries who have their own domestic payment mechanism for retail payments – a third scheme.
The other stimulus for change can come from industry participants themselves – in two broad ways.
First, it can be driven by competition. This is particularly effective in many payment markets. Look at how new firms have improved the ability of the smallest merchants to take digital payments – this has been transformed, to such an extent that micro businesses can readily take payments using just a mobile phone.
But does this dynamic work as well for payment systems? With understandable barriers to providing national critical infrastructure and the need to build networks with customers and merchants, this market is one characterised by limits to effective competition.
The alternative – the model Cruikshank refers critically to – is to rely on collective action by industry participants. The core problem here is that the collective interest may not align with the interests of potential new entrants, consumers, businesses and the wider economy and society.
History points to the risk of moving at the pace of the slowest or the need to only move forward if the future does not threaten anyone’s returns.
This is where a Payment System Operator, PSO, can bring multiple benefits – they can provide a vital co-ordinating capability, changing rules to reflect risks and to unlock benefits. It can also unlock investment in new technology.
Just look at the role that the PSO plays in driving both Visa and Mastercard systems forward. Rules are updated. New technology is deployed. The network does not proceed at the pace of the slowest.
The same cannot yet be said about Pay.UK. Its ability to change its rules is – in practice – constrained. Prompting the PSR to use its powers to require changes to its rules.
Pay.UK is changing – improving its capability, taking forward new initiatives on fraud and broadening its role to more actively manage its rule book.
So, here is the first choice going forward. Should we complete this transition and build on the model of an independent PSO for our interbank systems?
We think so.
We set out in our Strategy the importance of improving the governance of our central account-to-account systems, to unlock progress, competition, and innovation. Working alongside – and indeed supporting – competition to drive good outcomes.
Reinforcing this PSO role also reflects experience elsewhere. Wherever you look globally, large transformative change in payment systems has a strong central coordinating body somewhere. UPI in India. Pix in Brazil. The upgrading of RTGS by the Bank of England.
Creating Markets
We need to get the delivery of the payment systems right. These central systems can make a vital contribution to competition and innovation elsewhere in the ecosystem.
The openness that is built into our interbank systems is a real strength. It has helped new firms grow.
This is an important part of supporting the UK’s thriving payments Fintech sector - 10% of FinTech's globally reside in the UK (outstripping the whole of Europe combined) and the payments subsector currently accounts for the largest share of fintech funding. Payments FinTech's are busy developing ideas, competing for customers and delivering innovative new payment services that users value.
Markets and competition are powerful forces that we rely on to deliver innovation.
But markets are institutions – they depend on agreeing rules of the game. Effective rules are needed to provide fair competition and unlock market investment and innovation.
To agree rules, there needs to be co-ordination between market participants. And to ensure fair and effective rules – particularly where there are powerful incumbents and where the rules need to take account of the interests of future participants – there is an important role for regulatory oversight.
Payment markets need regulation to make them work well.
Open Banking
This is what we are seeking to do in open banking – to help to create new payment markets.
We’ve been discussing how best to do this through both the Strategic Working Group and through the more-recent VRP Working Group. That last group concluded that while there is widespread appetite within the ecosystem to expand VRP, there were a number of important areas where targeted regulatory action might improve the prospects for success.
We consulted on initial proposals earlier this year, and following this process, we have heard loud and clear feedback from some that they feel we are proposing to intervene too much – notably on requiring participation and on controlling some prices.
On this, I want to stress three things.
First – Where there is clear consensus in industry, we’ve asked industry - led by Pay.UK and OBL - to get on with it, developing the rules and functionality that will enable the expansion of VRP use cases. This includes establishing core dispute resolution rules.
Second – we are exploring the need for targeted regulatory intervention to make this work, like mandating the participation of sending firms.
Third – we are looking for a way to create a commercially sustainable market for open banking payments. And for this to provide a credible alternative to a wide range of current digital payments, including cards.
For it to be commercially sustainable, participants need to be able to cover their costs, and where there is competition, make a profit if they are good at what they do. This rewards them for investment and innovations that bring benefits to end users.
The costs of providing the central directory and of processing the underlying payments also need to be recovered. We think the best way to do this is from PISPs or receiving banks, with prices to merchants set by competition between PISPs and between providers of business banking.
We also set out proposals to both remove the FPS charges faced by banks processing payments initiated by others. Limiting costs to ASPSPs.
And we set out our view that there the fees charged by ASPSPs did not look likely to be subject to effective competitive constraints.
Views from our consultation on these points are varied.
The proposal to initially set the fees charged by ASPSPs to zero – with costs offset by removing the FPS charge – has attracted significant concern.
Here, I would like to put our approach into context – by looking at a useful parallel from another sector. Telecoms.
In telecoms, the proactive and deliberate regulation of key industry prices has helped support competition. Call termination and number portability charges are set by the regulator to help mobile competition work effectively.
I wouldn’t describe mobile telephony as a price-controlled market. Instead, it is a competitive market, unlocked by targeted regulation.
That is – essentially – my starting point when approaching open banking payments.
Summary and conclusion
So, in summary, there are many points to consider about how to unlock change and innovation in ways that deliver good outcomes including, open banking, scaling up the use of VRPs and having effective rules in place.
But, unlocking competition often requires some central coordination.
And creating new markets sometimes required targeted regulation to support rule-making and control pockets of market power.
Making these changes isn’t easy, and requires creative thinking and innovative solutions.
But they bring long term benefits for businesses and consumers. And they can ensure that we definitely consign Don Cruickshank’s concerns to the history books.