This is the text of the speech as drafted and may differ from the delivered version. This speech was delivered by our Managing Director, Chris Hemsley, at the Payments Leaders' Summit UK 2022.
Good morning. I’m Chris Hemsley, Managing Director of the UK’s Payment Systems Regulator (PSR). It is a pleasure to be addressing today’s conference.
This morning, I want to talk about some of the challenges that the PSR is focusing on – many of which are linked to the transition towards greater use of digital payments.
But, before I do, I’d like to take a moment to explain a bit more about the Payment Systems Regulator.
The PSR was set up as an independent economic regulator to focus on the payment systems that underpin our economy - the LINK cash machine network, Faster Payments, Visa, Mastercard and – as of the end of August – the Sterling Fnality system. So we now regulate payment systems from cash and cheques, through card payments and forthcoming wholesale payments based on distributed ledger technology.
We focus on protecting users interests and promoting competition and innovation. And – with our sole focus on payment systems – we bring together payments knowledge, economics and legal expertise to address the sorts of complex problems that we tend to see in payment systems. These issues include gaining access to those systems, addressing coordination problems between participants, ensuring that there is adequate consumer protection and taking steps to keep competition working well.
Our approach is set out in our new Strategy, which we set out in January of this year.
And, when asked for an overall perspective on payments in the UK, I often explain that there is a lot to celebrate. And yet, also some significant and important challenges to address.
Let me take some examples:
- You can transfer a few pounds or tens of thousands of pounds instantly using a mobile phone, to pretty much anyone in the UK with a bank account, without any direct charge.
- And you can now also access cash for free at a network of ATMs, shops that dispense cash from their tills and also at the UK’s Post Office network.
- You can also now buy and set up all of the equipment you need to start taking contactless payments within a single business day.
But, with each of these successes there are associated challenges, including:
- The UK’s Faster Payments System is used to defraud tens of thousands of people – sometimes with victims losing their life savings.
- Payments are increasingly becoming digital. But they do not yet work sufficiently well for everyone, and we risk leaving some of society’s most vulnerable behind if we do not meet this challenge.
- And, there are elements of payments where competition doesn’t obviously work well to protect people and businesses.
Today, I want to focus on three themes. Three themes that share a common link in that they are all important in order to make sure that a future with greater use of digital payments benefits everyone in society.
- How to make the transition to digital payments a success for everyone?
- How do we realise the potential of instant interbank payments, while tackling fraud and protecting people?
- How can we make sure that competition supports good outcomes for people and businesses in future?
Making the transition to digital payments a success
So let’s start with the shift from cash to digital payments.
Despite falling cash use, cash remains an important payment method for many, particularly the vulnerable. The current pressure on the cost of living serves to highlight one of the consistent themes from our and other’s research: that many people find it easier to budget in cash. Cash is also the most convenient way to make payments when you haven’t got a data connection.
This means that supporting access to cash remains important.
Our role here is broadly two-fold.
First, we have used our formal powers to protect the UK’s ATM network – placing obligations on LINK to protect the geographic coverage of free to use ATMs.
Here, LINK has been successful in managing the reduction in free to use ATMs. We focus increasingly on geographic coverage, not just numbers. And we have analysed this coverage – the most recent FCA/PSR report found 90% of the UK population live within 1km of free cash access.
But, there are issues here to be addressed. One is making sure that people know about their options to access cash – which also include the Post Office network and a growing number of retailers. The other is how to protect the network of locations where businesses and individuals can bank their cash. The Government has introduced legislation into Parliament that would, for the first time, place a requirement on larger banks to protect cash access for their customers.
This is prompting the emergence of shared banking infrastructure. Shops in convenient locations that offer access to core branch services in a single location, whoever you bank with.
The second aspect of the PSR’s role here is to take steps to make digital payments work better for more people. At one level, this is inherent to our role. We have reduced barriers to new firms connecting to our payment systems; increasing competition and choice. Our work on improving how card acquiring services work also supports this aim, helping businesses shop around and get a better deal when accepting card payments.
However, this work to improve how digital payment markets work does not necessarily do enough to address the barriers that prevent some people from adopting digital payments.
That was why we launched a Digital Payments Initiative to identify the challenges and work out how we tackle them head on.
This work highlighted a number of things. Including that the tangibility of cash matters and many simply are not yet comfortable with digital interfaces. This points towards cash playing a significant role for some time.
Another theme was the potential to make digital payments work better for many. This includes unlocking the potential of Open Banking to increase control over payments. And making the best use of products that exist today – such as pre-paid cards.
Other parts of this challenge lie outside of payments. Digital connectivity and inclusion is a wider challenge for society, but which also affects payments choice.
Realising the potential of interbank payments, while protecting people
The second area we see as a challenge is the growth of payment fraud.
Contactless fraud losses have been reasonably stable and less than general card fraud loss rates in UK and elsewhere. Anecdotally, Strong Customer Authentication appears to have had a positive effect, especially on large value transactions.
But this doesn’t help tackle fraud across our interbank systems. We are seeing a particular growth in this type of authorised fraud, driven by deception and psychological manipulation. These scams have increased by 39% between 2020 and 2021 and have now overtaken unauthorised card fraud. Last year, there were nearly 196,000 reported cases with losses totalling £580m.
And behind these statistics, of course, there are victims who have lost life-changing amounts of money.
In response, we have made this a real priority for the PSR.
And we have made some significant steps forward:
- We directed the implementation of Confirmation of Payee (CoP); bringing in a requirement to check names against account numbers. We’ve now seen more than 1 billion payment checks.
- We brought industry together to develop and sign-up to a voluntary code to reimburse blameless victims. This code has led to hundreds of millions of pounds of reimbursement to victims.
And our more recent work has included:
- Increasing the use of data and intelligence sharing, through industry-led efforts and our TechSprint which took place last week – working with the FCA, this combined industry and academia to look for new ways to use data and data sharing in the fight against fraud.
- We have also been pushing forward with efforts to increase transparency. So that customers can understand how well firms protect them from fraud and deal with victims. This transparency will also – for the first time – provide valuable information about where the transfers are going.
This is a point I would like to dwell on briefly. The UK’s response has – to date – been focused on the sending firms. This was where we could make progress and reduce harm. But now we need to broaden our responsibility to also include receiving firms. These criminals need access to and control of a payment account. More action is needed to act at this point of the payment chain.
And this is where we start to focus on the next big step forward in tackling APP fraud; enabled by an important proposed change in UK law that will allow the PSR to intervene on authorised fraud.
In anticipation of this change, last week, we set out detailed proposals for a major shift in how fraud in tackled across Faster Payments. The key elements include:
- Moving to a mandatory system – so all firms need to offer minimum levels of protection for customers. Not just those that want to do the right thing. This would be achieved by putting the minimum standards of protection into the Faster Payments rules.
- Ensuring that there is sufficient incentive for receiving firms to act – we’ve seen action from sending firms who reimburse their customers, and we want these incentives to create more action at the receiving end. So we propose to allocate half of the reimbursement cost to receiving firms.
- Simplifying the protection of victims – so that victims get their money back more quickly and reliably. We do this by requiring reimbursement – quickly – in all but a very, very limited set of circumstances.
- Focusing our protection to larger value frauds – we still need customers to maintain sensible levels of precaution when making payments, and want to give firms the flexibility to go beyond the minimum level of protection if they choose. So we have proposed that the required minimum protection should involve a minimum transaction value of £100, and an ability to retain an excess of £35.
We want to see the requirements for mandatory reimbursement in place for consumers as soon as possible.
Consumers still need to take caution when sending payments, but these proposed measures will have the added benefit that most of their larger payments will be automatically protected.
Shifts in the way industry carries out fraud prevention will also mean consumers see their account providers stepping in more regularly to prevent fraud, as is seen with card payments.
This will – over time – start to broaden out the role of the payment system operator - Pay.UK. So that the rules sitting behind our account-to-account payment systems evolve and change, to meet the new challenges, as criminals adapt. And also, on a more positive note, to realise greater opportunities for new services.
Working with Pay.UK and the industry to make sure its requirements can be implemented quickly after legislation is passed. In the meantime, banks and building societies should continue to develop their fraud detection and prevention arrangements to respond to the ongoing risk of fraud to their customers.
How can we make sure that competition supports good outcomes for people and businesses in future
Moving on to my third and final challenging area with regarding to the greater use of digital payments, which is the risk to competition.
I have spoken before about how I want there to be effective competition in the market, sufficient choice and payment systems that work well for everyone.
We are now concluding our work on card acquiring. A market that, in places, is working well. But many merchants find it too difficult to shop around and switch provider. So we have set out a package of reforms to boost competition – improving transparency and reducing contractual barriers to switching provider. Helping businesses secure a better deal when accepting digital payments.
This work also showed that scheme fees had increased significantly between 2014 and 2018. These changes, in combination with recent increases in cross-border interchange fees, raise questions about how well these markets are working and whether there are sufficient competitive constraints on card schemes – both Visa and Mastercard. We are examining the basis for these fees and considering the impact of recent changes.
As recent experience across the EU shows, this isn’t a quick or easy task. But it is one that we are committed to, in response to the price changes we are seeing.
I also see significant potential to address these competition risks at a more structural level – by unlocking account-to-account payments as a viable option for a greater range of payment types.
Pay.UK is pressing ahead with procurement of the next generation of Faster Payments. This provides an opportunity to address some of the technical barriers to account-to-account payments being used for real-time payments in a retail setting.
But, as I mentioned just now, we also need appropriate arrangements to protect customers from harm against fraud. So that customers have sufficient trust that new account-to-account payment services are safe and reliable.
There is, however, a significant opportunity here. If we can make better use of our account-to-account systems, it will provide an additional spur to competition and innovation.
Which is one reason why I was pleased to take the role as co-chair of the UK’s Joint Regulatory Oversight Committee. This group is now tasked with doing the work to transition Open Banking from its origins in the UK – as a competition remedy in banking – to be a fully-fledged and integrated part of the payments landscape.
Open Banking offers huge potential to increase choice and customer control over payments. But to realise this potential the familiar challenges of safety and trust will remain important.
I have spoken about three challenges, but – if I leave you with one further thought – it is that these three challenges are inherently linked.
The transition to digital will be a success for more people, if we can unlock the power of competition, tackle fraud and unlock the full potential of technologies such as Open Banking.
The existing account-to-account systems offer huge potential. But, the rules need to tackle underlying vulnerabilities that prevent it from being used more broadly.
And, the competition risks we see today can – in part at least – be mitigated by developing our existing interbank systems.
So, thank you for your time and I look forward to tackling these challenges and working to realise these opportunities, together.