This is the text of the speech as drafted and may differ from the delivered version. This speech was delivered by our Chair, Aidene Walsh, at the Innovate Finance Global Summit on 18 April 2023.
It’s great to see so many of you here today.
I’m Aidene Walsh, Chair of the Payment Systems Regulator and I’m delighted to speak to you about innovation from a regulatory perspective – what changes and what stays the same and the integral role the PSR can play.
As the regulator of the UK’s payment systems, we always want to see better outcomes for users and for society as a whole.
Our role at the PSR is integral to the success of innovation. In fact, one of our statutory objectives is to promote the development of and innovation in payment systems. And our Strategy makes clear where we want UK payments to go.
Recognising that the world is changing, we continue to look at the wider payments horizon to understand developments and their potential impact. We’re also continuing to engage more with payment systems operators and providers across the ecosystem to ensure the UK continues to deliver a world-class payments infrastructure.
A constant flow of headlines shows the rise of AI and the interlock between data and payments, Web 3.0, Blockchain, QR codes, digital ID, smart contracts, the introduction of Open Banking and CBDC.
We see a morphing between technology, payment providers, banks and commerce to deliver multiple solutions for payment services.
The PSR welcomes innovation in the UK which is happening despite the wider geopolitical and economic challenges such as the Russia/Ukraine conflict, growing tensions in relations between China and the West and, closer to home post-covid, and high inflation. All those things could suggest that innovation isn’t front of mind, but in reality, innovation in payments, whether domestically or internationally, remains very strong.
The technology and ideas are available for transformative payment systems. But innovation has varying degrees of success both in terms of adoption and in the outcomes for the economy.
In some cases, innovation is reactive, such as with banking hubs to address the continuing need for cash as society becomes more digitalised. In other cases, it is adaptive, for example, like finding ways to access legacy card reader technology in a mobile environment. And there are some cases that show that innovation can disrupt, as we have seen with Amazon Go, which has essentially taken the payment out of the user journey altogether.
All these exciting, and conveniently designed developments in payments and technology must be seen in a wider context.
The technology needs to work, of course, but you also need the systems to be in place, and for their rules and requirements to be understood and accepted to make it function effectively.
So, let’s take a look at what stays the same in the face of innovation and then what innovation can drive in terms of regulatory change.
Now, whatever the payment system, the outcomes that the PSR is striving for are that:
- Payment systems meet people’s needs
- Users are protected
- There is effective competition in payments
- Payment systems are efficient
From a needs-based perspective, people will always need to trust that the payments they make are secure and that they are protected if things go wrong. Businesses will always need to trust that they have been paid before letting their customer walk out of the door or dispatching goods. For many retailers, this means that they need certain, reliable and instant payments. We also need things like effective dispute processes and, of course, we need protections against bad actors.
For any payment system to work for a wide set of uses, consideration needs to be given to the wider benefits such as data, a rule book to set standards around dispute resolution and protection. You need to allocate risks and liabilities, including to make sure that incentives are in place to tackle fraud and, there needs to be a commercial model that works for businesses and helps them innovate to deliver payment solutions that build a network of willing customers.
By bringing all these things together, it points to the best approach to innovation being when the PSR can work in tandem with innovators to ensure these outcomes are met.
There has been significant change and innovation in payment systems over the last few years. Some have delivered real benefits - such as the rise of contactless payments or digital wallets. But some have been harmful – like APP scams, or cyber-attacks. In some quarters, regulation needs to play catch up to address the consequences of those harms.
Where there is a gap in the outcomes the PSR expects from innovation, it will intervene. A good example of this is the work the PSR is doing in respect of APP scams.
As our lives have become increasingly digital, there has been a huge amount of innovation to address our changing needs, be that in social media or indeed with the exciting offerings that new neobanks bring to us.
With all new opportunities designed to make our lives that little bit easier, bad actors will seek out ways to take advantage. Such opportunistic behaviour across the customer journey resulted in £580m of Authorised Push Payment fraud in 2021. This clearly has a detrimental impact on society.
In this situation, it can be argued that innovation has changed the regulatory approach. In a couple of months, the PSR will publish a forward approach on managing fraud. This approach will incentivise all players in the payments ecosystem to take responsibility for addressing the issue. Crucially, the PSR is playing an influencing role recognising that, “prevention is better than cure,” and is working with various groups and organisations outside of payments to address the root cause of the scams.
Another example of needed intervention is in respect of digital payments, where despite all the excitement and benefits, this innovation also runs the risk of leaving large swathes of society behind.
Regulation has had to respond to this through protecting access to cash whether via banking hubs (under the remit of the FCA) as previously mentioned, and increasingly now through ensuring that Access to Digital does truly become an accessible choice to more members of society.
Changes from a PSR perspective
I have referred to some examples of where innovation has driven a need for regulatory action to ensure desired end user outcomes are met. This will continue to be a requirement.
As the regulator of the UK’s payment systems, we always want to see better outcomes for payment system users, and these can, in part, be achieved through innovation. Innovation is something the PSR can foster by creating a robust but proportionate, flexible and transparent regulatory framework that encourages and drives competition.
With cards now the significant method of payment, it raises the question about what the alternatives are. Its why unlocking account-to-account payments for retail transactions is a key part of our Strategy, as it is for many countries.
We’re already seeing significant growth in account-to-account payments, including those initiated within open banking.
We must make sure the right conditions are in place so that account-to-account payments can deliver new options for retail payments, providing competition to card payments and realising the potential for new ways of paying that offer consumers and businesses greater levels of control and deliver on the outcomes the PSR looks for.
While there are many open banking solutions out there today, mass adoption will happen when regulation and innovation come together to deliver the right outcomes in a consistent way.
A strong example of how innovation and regulation worked positively in a transformative way can be found in Brazil. In 2020 there was a 90% increase in new bank accounts compared to the previous year.
This happened due to the need to distribute COVID-19 relief funds, especially as 34 million people were outside the standard financial system. The enabler of this significant change was Pix which was brought to market in just over a year and deemed ubiquitous within 2 years.
For the UK to succeed with open banking, we need to deliver a central set of rules and standards. Minimum requirements that allow firms to innovate and tailor their service offering to different customers and merchants.
Similarly, for the long-term growth and development of open banking there needs to be opportunity for all parties, including account providers, to be rewarded for innovation and investment. That may mean that payment firms will increasingly see charges for value added services within open banking. This will produce a sustainable commercial model which will enable change.
For the CMA9, if open banking succeeds in payments, it addresses part of that original competition concern unlocking the path to lifting the CMA order and presenting opportunities for all firms to expand into open banking and innovate.
Just this week, the Joint Regulatory Oversight Committee, co-chaired by the PSR and FCA, published its recommendations for the next phase of open banking in the UK. It’s a pivotal point and the JROC recommendations contain a roadmap of priorities over the next two years. The JROC also set out its vision for the open banking future entity, including the next steps which need to be taken in designing it, along with the principles that will underpin a long-term regulatory framework. This will all be supported with legislation that the Government is intending. This is significant progress.
We have already seen significant benefits from opening up our major payment systems to greater levels of competition such as in the case of Wise which was the first FinTech with access to faster payments.
The renewal of Faster payments is the next opportunity to improve access, with the NPA delivering more and cheaper ways to connect through modern API standards enabling the launch of innovative new services on top of the core clearing and settlement infrastructure.
Payment systems generally act as the foundation for innovation in wider payment services and while much of the innovation is by necessity iterative, disruptive entry is also possible in the payments systems themselves. And if those disruptive ideas are coupled with early regulatory engagement, it can lead to efficient successful implementation of a new system.
A good example of this is with the Sterling Fnality DLT payment system, which became a designated payment system for the PSR in 2022. Fnality have consistently engaged with us as their business model evolved enabling them to understand what we, as a regulator, will look for when they are ready to go live.
This ongoing relationship means that when it does go live, Fnality Sterling will be coming from a place of strength, supporting the PSR’s desired outcomes. This can only be considered a good result for both parties.
In terms of new developments, we are also focused on the emergence of a digital pound.
This new technology offers an exciting new way of making payments – backed by the security of knowing that payment users are using a digital ledger at the Bank of England.
CBDC offers an exciting opportunity to improve a range of outcomes for society as well as specifically for users of payment systems.
It also has the potential to encourage greater competition, as well as promoting innovation, choice, and efficiency.
There are also benefits to be had from having another system that will enable the UK to accommodate a wider range of payments. The payment ecosystem will be more resilient and competitive if there are a number of different – overlapping – systems that can take each type of payment. This guards against cyber threats, technical failure and the risk that the system operators fail to innovate sufficiently quickly.
As the Digital Pound project moves forward, the PSR believes we have a role in ensuring development is done in a way that enhances the UK’s payment systems as a whole, providing genuine choice across payment mechanisms. It will have to consider how it meets the expectations of a payment system including appropriate fraud and consumer protections. It will also have to address expected outcomes for end users – namely trust, how the experience links to existing payment mechanisms and systems and to ensure long term sustainability.
In many countries efforts are running in parallel against these latter developments. The PSR recognises the benefit of sharing experiences with other regulators and learning from them, as well as sharing best practice. This doesn’t always need to be a formal process such as a European Commission stepping in with SEPA recommendations for instant payments. Often informal conversations are effective, for example discussions with our equivalent regulators in Australia on how they are approaching open banking payments through their Mandated Payments Service and looking at customer authorisation as an overlay.
We are conscious of the need for regulation to move in step with innovation as both the domestic and international payment system landscapes develop.
Regulation can fully support efficient innovation that is sustainable. In enabling innovation in UK Payment Systems and services, innovators should take confidence from the fact that the requirements and desirable outcomes from a regulatory perspective remain consistent.
They should also take comfort that there is a regulator that recognises the benefit of regulation and innovation working in tandem to support future developments that deliver the right outcomes for payment system users and enables sustainable future services and systems.