This is the text of Chris Hemsley's speech at the Payment Leaders' Summit on 11 October 2023 as drafted and may differ from the delivered version.
Good morning, I’m Chris Hemsley, Managing Director of the Payment Systems Regulator (PSR).
As many of you will already know, the PSR is the UK’s independent economic regulator of the payment systems that underpin our economy – including the LINK cash machine network, Faster Payments, Visa, Mastercard, Bacs and, most recently, the forthcoming Sterling Fnality system. We regulate payment systems from cash and cheques, through bank and card payments, and now a forthcoming wholesale payments system based on distributed ledger technology.
We protect people and businesses by promoting competition. Our role is also critical in supporting ongoing change and innovation in payments, which itself supports a vibrant and productive economy.
I’m very pleased to join you today at an important time for UK payments. At the PSR, we are approaching the mid-point of our five-year strategy. While earlier this year the Bank of England and Government prompted a debate on the Digital Pound. And in July we saw the Future of Payments review launched, looking at how the UK’s payment journeys compare to our peers.
Next year, we will also see the UK take a huge step forward in tackling the harm of Authorised Push Payment Fraud, while a transformation in Open Banking payments is approaching fast.
Against this, I have found myself reflecting on the question of how well UK payments is doing and what we should be focusing on next.
The immediate challenges and a time to reflect
When thinking about this, it is useful to consider UK payments through a few different lenses. First, how far we have come and the known issues we need to address. Second, how we compare against other economies who are making significant strides to deploy new ways of paying. And, finally, how we are positioned in terms of embracing the future and what’s coming next.
The challenges and opportunities for the UK
So, let’s start with the first of these – looking at the UK today.
The UK has moved quickly towards digital payments, driven by the convenience that this offers to many. And for those wanting to keep using cash, the PSR – through its role regulating the LINK cash machine network – has acted to protect free access to cash for those that need it.
I welcome the significant changes that have been introduced this year that give the FCA a broader set of tools to tackle cash access in terms of both withdrawals and deposits, including through shared banking hubs.
The shift to digital payments is also presenting other challenges. A particular focus for the PSR at present is making sure that this transition happens in a way that protects people and promotes effective competition.
In some respects, the UK is in a good place. For one, there is greater access to payment systems than ever before. This makes it easier for new players to enter payments markets and bring innovative solutions to help drive UK payments forwards.
The fact that the UK moved first to Faster Payments is clearly something to be proud of and is one reason behind our pace of digital adoption.
With that in mind, we have also now reached the point where we are renewing our core payments infrastructure. RTGS renewal continues apace. And the competitive tender for the NPA has completed, with the programme currently progressing through its regulatory clearances.
As this audience will be well aware, this renewal holds out the prospect of a richer payments data, greater capacity and new and easier ways for firms to connect to the system.
We have also been looking at how well digital payments are working for retail businesses – an area where we have intervened to improve competition. Following our action, merchants will find it much easier to switch provider of the services that they need to take card payments.
We are also investigating a number of card fees, with our next publication – our interim findings on cross-border interchange fees – scheduled for the coming weeks.
At the same time, we are looking to unlock the potential of Open Banking in retail payments. This has the potential to inject more competition into UK payments, spurring more innovation.
We also have a more immediate goal in mind with Open Banking – opening up new, more flexible ways of making payments. Something I will return to later.
So, the UK has come a long way in a short time. And when we think about the initiatives that are currently in-flight, they hold out the prospect of further innovation and modernisation.
But where does that leave us internationally?
The UK vs. the World
In short, I think the UK compares pretty well – albeit that there are always new things to learn.
We have looked at how the UK compares to a number of other countries, and this shows that the convenience of many payment journeys works really well in the UK. Contactless mobile transactions offer secure and incredibly convenient payments for many of us. And while other approaches exist elsewhere, most do not rival that level of speed and convenience.
Of course, there have been some notable, big shifts in payments across the world, such as Pix in Brazil, UPI in India, the growth of WeChatPay and AliPay in China.
It is important to focus on what this means in terms of typical consumer journeys. For example, the use of QR codes. There are settings where a QR code can do a lot – such as for charitable collections. But in a retail setting, a micro-business now only needs an NFC-enabled phone to take a card payment.
The UK is also the home of a huge amount of payment innovation. That includes the systems – with the introduction of Faster Payments of course – but also our financial sector and payments firms more generally.
The UK’s history both as a financial centre, and as a centre of digital innovation means that it has a robust ecosystem to support continuing development of payment systems. It is home to 2,500 fintech firms, and London is the third largest fintech hub worldwide.
So, turning to the future perspective – what is next?
Opportunities are presenting themselves all the time. We only have to think about the developments in Central Bank Digital Currencies globally, the Digital Pound in the UK, Distributed Ledger Technologies and even the Regulated Liability Network to recognise that.
It’s easy to see that the UK’s payments are continuing to move forward at pace.
Sterling Fnality is an example of this. This is the first newly designated payment system since the PSR was set up and harnesses the opportunities offered by Distributed Ledger Technology.
Looking ahead, I expect there will be more. This is likely as technologies such as Distributed Ledger will eventually move from its current wholesale use cases to become a more mainstream payments method.
It is also no secret that big technology firms are exploring payments. We saw this with Meta and Libra in 2019 and 2020. Elon Musk has talked of his ambitions for payments within the Twitter/X platform. And, Apple and Google are also increasingly important to UK payments, given how their mobile ecosystems work and the popularity of their payment wallets.
The other reason why I expect more designated systems is something about the nature of payment systems. They are networks. They have cost structures and network effects that can easily create competition problems and risks to users. The PSR was set up to tackle these inherent, recurring problems.
Reflecting this, we are increasingly engaged in these debates about the future.
Earlier this year, we published our response to the Government and Bank of England’s consultation on digital currencies. We welcomed the potential for a Digital Pound to unlock benefits in payments – recognising that the potential benefits in wholesale applications and to support international payments are perhaps more immediately available.
We also set out that for the Digital Pound to deliver benefits in retail, it needs a framework that will address many of the challenges that we are currently grappling with, such as:
- Preventing fraud, including Authorised Push Payment fraud;
- Allowing people to consent to the use of their payments data – mirroring the benefits we see from Open Banking, open finance and beyond;
- And, of course, ensuring that appropriate consumer protection is in place.
Another area we highlighted was the potential for the Digital Pound to facilitate new ways of making offline transactions – which could be particularly useful as cash use declines. This includes providing additional resilience, and choice, as our dependence on digital payments grows.
So, we are pleased that the Bank is clear about the need to build in rules to payment systems. While it provides the core infrastructure upon which the private sector can innovate, it is critical the CBDC platform can support an ecosystem that protects users.
The importance of trust to unlock competition and innovation
Now, when it comes to rules, some people may like them, while others not so much.
But when we think about the rules in the context of regulation, they can be a helpful tool to achieve good outcomes. Indeed, rules are key to creating markets that work well.
More specifically, I see the need for central rules in our payment systems as key to establishing trust in those systems.
This takes a number of forms.
For merchants, they need to trust that the way they make and receive payments will work. It needs to be sufficiently reliable and fast to support their business needs. This is one reason why our work on Open Banking includes a new push to levelling up availability and performance to ensure a consistent and standardised approach applies across the whole ecosystem.
For new entrants, they need to trust that they will be able to compete fairly. I’ve already highlighted the PSR’s role in access. And we’ve helped to open that up through use of our formal powers and resolved a number of specific cases.
Now, it’s worth pointing out a key element of our approach to the NPA is making sure technical access works well. It also goes further than that. Innovative firms need to trust that they can use the new system without their ideas going to their competitors before they’re even launched and without artificial barriers being raised to slow them down. The NPA regulatory framework does this.
We are also developing rules for Open Banking, so that governance and the commercial models instil trust that they can invest and enter the market, where they have a good proposition.
And for people – trust is critical. People will only use Open Banking and account to account payments if there are minimum standards of protection, including against APP scams. We need to design our current and future payment ecosystems in ways that include protection from the criminals who gain and retain access to the system.
Against that background, I’d like to spend a few minutes talking about our work on APP scams and Open Banking.
APP scams have continued to be a problem for the UK over the last few years, with the value and volume of scams increasing. This prompted action.
The implementation of the name-checking service – Confirmation of Payee – has already improved outcomes. By the end of this month, over 99% of faster payments will be covered by a CoP check.
We are also preparing for a step-change in the incentives on firms to tackle APP fraud – bringing all payment firms into the arrangements and giving more consistent protection to people.
These incentives are important. They are key to preventing as much fraud as we can.
While the reimbursement mechanisms will come into effect next year, we know that our work is already making a difference. There is clear action being taken now, as firms now know that they cannot ignore this problem.
This is starting to happen across the ecosystem. But – of course – needs to particularly happen in firms that have not been looking after their customers. A particular focus here will be recipient banks, who need to stop criminals who have control of the accounts needed to commit these frauds.
So, what are we seeing?
We can see greater investment in fraud prevention controls. A proper focus on data and intelligence sharing – where our work has revealed that there are real gaps in how firms share information.
Payment firms are also intervening more in high-risk transactions. I welcome this. Of course, we need to keep this risk-based and proportionate.
Even very recently, firms share examples of frauds with me saying that they know the payment is to a fraudster but say that they feel they need to still make the payment. That is not and cannot be right.
This all combines to mean that there are more and more-targeted interventions to stop consumers from falling victim in the first place and ensuring they get their money back if they do.
That is in everyone’s interest.
Then there is our requirement on firms to publish their APP scams data. This represents a substantial improvement in transparency: highlighting the biggest senders and receivers of APP fraud. Strategically this will have two outcomes. Firstly, it will provide better information for consumers about the banks that have higher and lower fraud rates and, secondly it will put much clearer reputational incentives on PSPs to take action to tackle it.
And this is just the first step. In APP scams, criminals need to have convinced someone into making a payment by acting as someone else. They do this through targeting an individual by any number of ways, including by exploiting social media and telecoms. And on this, more needs to be done. Much more.
I am pretty confident now that if I contact my bank with a suspected fraud, I will get help.
But I am not so certain that this is the case for telecoms firms. My experience when reporting a fraudster impersonating my mobile phone operator was – to put it mildly – hugely underwhelming.
This is why we want to take the next step on transparency – to support the collection and publication of fraud origination data. Individual firms have started to share their own data, and some industry-wide figures are available. I see real benefits to using transparency about the role of both social media and telecoms firms to complete the picture. And to highlight who is not doing enough to prevent the scams from entering the system.
We know that Open Banking came about because of a competition remedy. And it matters for several reasons.
When we think back to the priorities we have set out in our Strategy, if we can unlock the full potential of Open Banking, it will drive innovation, boost competition and increase choice, protection and control over payments. These are all significant benefits and importantly, they help address some of the issues we have in UK payments today.
So, let’s think about some of those benefits.
One of the biggest opportunities in Open Banking is around Variable Recurring Payments.
I am the co-chair of the Joint Regulatory Oversight Committee (JROC). Through JROC, we have seen industry come together and contribute to working groups that are building a framework to allow greater use of Variable Recurring Payments.
We have identified utility, financial and government payments as use-cases where Open Banking can deliver tangible benefits such as flexibility and control to people and businesses.
But beyond the immediate benefits these use cases can deliver, we’re also learning wider lessons too. For example, it’s increasingly clear that a single set of central rules are likely to be needed to unleash the next phase of open banking payments.
This should not be surprising – and is a frequent theme in payments. We need to set minimum standards of protection and ensure that it is clear what happens in the event of disputes.
Although there are differing views on a number of important issues – such as pricing – it is not a challenge to shy away from.
In fact, the opportunities greatly outweigh the challenges. Think of the possibilities of making instant payments using Open Banking and how this works, hand-in-hand, with our work to unlock account-to-account payments in a retail setting using Faster Payments. Combining this with enhanced access to data which meets the highest standards of security and resilience will protect users and combat fraud.
The possibilities are clear and, it’s important to say, all within reach.
But we are realistic, and we know that as we progress, some difficult choices will need to be made. We have asked the working groups to highlight where regulatory intervention might be required. We will consider these views by the end of the year and act where we think it is. And, of course, we will continue to engage in an open and transparent debate on the options in front of us.
We know there is a choice here and we are on the cusp of unlocking significant benefits. And there are many, including offering new ways to pay; or by giving people greater control over their payments which is so important, particularly in a cost-of-living crisis; or by paving the way to the future of digital payments in the UK and driving opportunities for a growing, innovative payments platform, backed by modern infrastructure.
We must keep driving this forward. We’ve made progress and we must carry on so that we deliver the opportunities. Yes – this will require ongoing funding of OBL until we transition to a different model, but that shouldn’t be the reason to hold up progress.
And what is the alternative?
If Open Banking doesn’t work, we end up with less competition in payments. And less competition in retail banking. We are close to exiting the remedies that came from that last major review of banking competition. Do we really want to go backwards?
To bring all these thoughts together – UK payments has come a long way, and we compare well internationally. But the world does not stand still and so we need to continue to embrace the future.
An important next step for us all is to keep up the pace and deliver on the reforms we have underway.
We’ve got the chance to really get ahead and on top of APP fraud. The changes we’re driving are a world-first. There is a lot of work to do, but we can’t lose sight of the positive impact of these changes on preventing fraud and looking after people.
We also need to embrace the leap-forward presented by Open Banking. There’s more work to do to get the central rules in place to instil sufficient trust. Unlocking the Variable Recurring Payments is a important first step here.
Let’s get on with these changes. So that the UK continues to lead the way.