Speech by Hannah Nixon, managing director of the PSR, at the British Bankers' Association Future of Payments Conference on 13 October 2016 in London.
This is the text of the speech as drafted and may differ from the delivered version.
It’s a pleasure to be able to deliver this keynote speech today and I extend my thanks to the British Bankers' Association for inviting me here.
Today is the third time I’ve accepted an invitation to deliver a keynote speech at the Future of Payments conference – this is my hatrick!
I am hopeful that this speech will be less The Good, the Bad and the Ugly, and more The Three Tenors.
Now don’t panic; this won’t be a speech delivered in song and I’m certainly not going to break into Nessun Dorma! But I hope that what I say here today is in tune with your own views on the PSR's work and where the industry is heading.
Each time I’ve spoken here, I’ve been clear about what we at the Payment Systems Regulator are seeking to achieve. We want to see reliable, secure, fast and agile payment systems that work as best they can for all those that use them. And that we drive towards this by promoting competition and innovation where appropriate.
Everything we do at the PSR – and everything we have done since we first started engaging with you all in 2014 - is focused on achieving that goal.
But that does not necessarily mean being active and intervening for the sake of regulating – it’s about having a heightened level of awareness to know when to step in and ensure that the right action is taken, and when to let the market deliver on its own.
So this morning, I thought:
- I’d talk a little about ensuring innovation really benefits consumers, and delivering on collaborative initiatives.
- And then look at a couple of big issues facing payments with respect to innovation – ensuring innovation benefits consumers and delivering on collaborative initiatives.
The stock take
So where are we now and what have we achieved?
Well, as many of you will recall, when we were setting up as a regulator, one of the first things we did was to reach out to consumers, users and industry to understand their concerns and perspectives.
That led us to focus on three key themes:
- Ensuring payment systems do not get in the way of retail banking competition, and competition more widely.
- Considering the structure of the market, in particular examining whether the ownership of infrastructure in interbank systems is getting in the way of competition and/or innovation.
- Speeding up innovation at the centre of payments where collaboration is required.
And I'm pleased to say that we've made a lot of progress on each of these areas, so the time is right for a stock take.
Ensuring payment systems don’t get in the way of competition is basically about improving access: making sure those who need to access payment systems can do so in a timely and efficient manner and, to the extent possible, have choice in the way they obtain that access.
We’ve had a real focus on making direct access work more effectively – the time to connect has dropped by as much as half, the cost has come down and the new ‘aggregator’ or ‘direct technical access’ model has opened up direct access as an option for a larger number of firms.
And we are seeing the results, with three PSPs having become direct participants so far this year, and at least six or more expected by the end of next year. We have also worked closely with the Bank of England in their RTGS review, which has resulted in plans to open up settlement accounts (and therefore direct access) to non-bank PSPs.
We’ve completed an in-depth review of indirect access, which concluded that competition is producing some good outcomes. The concerns that we did find around choice, quality and switching are likely to be addressed by a number of current and recent developments in the market, and our wider work on access.
Access will always be a priority area of work for the PSR, but we have already seen significant progress. The cost and time to connect is falling, and the choice of access options is opening up. We will continue to monitor and drive progress, and work to make sure access to payment systems is not a barrier to competition.
In terms of the concerns around market structure, our market review of the ownership and competitiveness of infrastructure provision highlighted the need for intervention.
We found that there is no effective competition for the provision of UK payments infrastructure for Bacs, FPS and LINK. After analysing the effect of the ownership and control of VocaLink by the four largest providers, we also found that this impeded competition.
We have therefore proposed remedies to require competitive procurement, address the use of bespoke messaging standards and change the ownership of VocaLink. We are however, mindful that the proposed takeover of VocaLink by Mastercard could address the current ownership arrangements, and look forward to seeing some positive outcomes from the potential divestment.
Then onto our third focus – speeding up the pace of collaborative innovation. Our approach here has been to establish the Payments Strategy Forum. The Forum is specifically designed to harness the resource and expertise of industry in the widest sense – from end consumers to big banks – to drive forward innovation where collaboration is needed; putting user needs at the heart of their plans.
I think it’s fair to say that the Forum approach was innovative and something that had never been done before. Many were concerned that the only way forward was for us, as regulator, to mandate implementation of specific innovations.
But here we are. In just nine months the Forum successfully delivered an innovative draft strategy designed to place service users at the heart of what it does.
It has called for greater control over when and who to pay, greater assurance of where the payments are going, and more data about the payment being made. These are proposals that – if taken forward – will help meet the needs of users now and in the future.
The draft strategy also recognises that current payment systems in the UK are too complex and present real barriers to service users. In a bid to tackle this issue, the Forum has proposed the carving out of a Simplified Payments Architecture. The new structure would enable much greater competition & innovation in payment services.
The desire to effect change quickly is demonstrated in one of the Forum’s most immediate priorities - the proposal of a single entity comprising of the three interbank payment systems operators. This concept is intended to go some way to eradicating unnecessary processes which are overly complex and time consuming for Payment Service Providers to join.
All in all, the work of the Forum is shaping up to make some really exciting improvements that could prove game changing in the way the payments sector works and open it up to increasing competition. So I’m looking forward to seeing its final strategy, which will be published on 29 November - and then, of course, seeing the strategy become a reality, and the industry put it into practice.
Importantly, all of this work has helped lead to a mindset-change in industry. Payments are beginning to rise up the agenda, they are increasingly looked at strategically and consumer needs are coming to the forefront.
Let’s now focus on a couple of challenges for the future. The first is making sure that innovation genuinely serves consumers and service users.
We know that the world of payments is constantly evolving – moving forward with a faster pace every single day. It’s primarily driven by the pace of new technology, and Brexit, of course, adds a whole new dimension.
Times truly are a changing.
And there are certainly some innovations that are becoming increasingly popular. One of these is the move towards a cashless society, and more specifically - towards contactless payments - with one in five card payments now made using ‘wave and pay’. Many companies have also started to develop and use biometric technology such as fingerprint and facial recognition. The move away from human interaction is also being explored through the use of ‘robo-banking’, with computers or robots cashing your cheques.
The speed at which such technology has been harnessed makes me think that given time, almost anything is possible. It’s now possible to pay for your morning coffee with your FitBit and software has just reached these shores that will allow you to verify your identity with a selfie, instead of a password.
Fintech will always be advancing and attempting to push the boundaries to produce the most exciting and most inventive ways to pay. And, as I've said on a number of occasions, our role is largely to get out of the way where the market can drive innovation itself. There are, of course, a couple of caveats to that: first, as the market evolves, there may be barriers to entry that get in the way and we may have a role in removing them where appropriate; second, we need to make sure that innovation really does benefit consumers.
Various studies of service-user needs have concluded that convenience and acceptance of payments are high on the agenda. But security and the ability to pay without fear of data being compromised are also priorities.
With every new innovation comes the inevitable security risk. Because as fintech advances, so too does the sophistication of fraud. This doesn't mean that innovation is bad or that we should be stopping it, or even slowing it down. But it does mean regulators need to think hard about what it means for the consumer, whether market dynamics are working as they should, and whether additional protections are needed.
Scams more commonly known as ‘vishing’ have of course been dominating the headlines more recently, and I’m sure you are all aware, we received our first super-complaint on this very subject.
Being our first super-complaint, it again throws us into the sphere of firsts. At present we cannot say what, if any, action will be required. But what we will do is ensure that the matter is thoroughly investigated and our work right now is focused on building a clearer picture of the issue.
In particular, we’re looking at four key areas:
- What is the scale of the problem?
- What protections are currently in place?
- What relevant developments are on the horizon?
- What actions can we, or other relevant organisations, take?
We will speak to a wide range of people and organisations and – as you might expect – work particularly closely with the Financial Conduct Authority.
We have to respond to the super-complaint within 90 calendar days so that means the deadline is 22 December 2016.
In our response we will set out our initial conclusions and our thoughts on what needs to happen next.
Despite receiving the bulk of recent publicity, it’s important to note that ‘vishing’ isn’t the only type of fraud that has hit the headlines. There have already been reports of contactless customers being subject to fraudulent transactions up to eight months after reporting lost or stolen cards. Biometric technology has also encountered problems, with reports of fingerprints being lifted from devices.
Despite the future of payments heralded as one dominated by contactless and biometric technology - unless it’s secure, it will never be truly universal.
In a sense, we don’t really know what a future payments industry will look like. Certainly if you’d asked me two and half years ago, when I joined the PSR, what challenges we’d face, I’d be lying if I said that receiving a super-complaint was high on my list.
So the pace of change is one of the major challenges we face as a regulator and one we all face as the payments community.
Delivering collaborative initiatives
Not all innovation in payments can be delivered competitively at the moment. That's because there are significant network effects in the industry – in other words, different payment providers need to be able to move payments between each other; payment systems need to enable PSPs to “talk” to each other.
And, as we know, there has historically been much frustration at the industry’s seeming inability to drive innovation in the collaborative space. Faster Payments and the Current Account Switch Service are two areas where the industry did deliver collaboratively, but in both cases a major prod from government was needed.
That's why we set up the Payments Strategy Forum: to drive collaborative innovation and to move the UK to a payments system which is simpler, more agile and responsive to change. A system that will enable competition which will unleash innovation.
The PSR and collaboration
So a lot’s been going on in the last couple of years. We’ve focused our efforts on the key issues the payments community highlighted and worked with you all to make a difference.
Late last year we carried out a survey to gauge industry perceptions of how we were doing. The results, which you can find on our website, were broadly positive. In fact you’ll get another chance to give your views when we run our second perceptions survey.
One thing that stood out is that many were reserving judgement until more time had passed, understandably saying it was too early to give an opinion. Hopefully you are now seeing more evidence of the difference we are making, and that we tailor our approach to the circumstances; being interventionist where we need to be, but letting the market work where it can.
Something else that came back in the research, and also anecdotally, is that we have asked a lot of you in terms of providing us information or responding to our consultations. In many ways this was symptomatic of a busy work agenda for a start-up regulator, but I appreciate that considering and responding to consultations takes time so we will be mindful of that going forward.
It is clear that the results we have achieved in the last 12 months have been as a result of a long-running and constantly evolving conversation between us as a regulator, the industry, and other relevant bodies.
Transparency has been key to ensuring that any recommendations we have made are clear and that essentially, we are all working towards the same goal: to ensure competition is working, innovation is thriving and that needs of service users are at the centre of what we do.
So what happens next? Well, there is certainly no shortage of work.
Our focus is on implementing what we have started – particularly on access, the market reviews and the Payments Strategy Forum – as well as the super-complaint from Which?. We’re committed to ensuring we solve those big issues we identified at the start. But what we won’t do is intervene or make policy without good reason.
Of course, there will always be new challenges particularly during periods of rapid change. The payments sector is and will be forever evolving so that’s the world we are in, and we must all adapt to it.
Working together towards the same goal I have no doubt that we can be part of a payments world which is buzzing with innovation and competition and doing the very best for the people and businesses that use its systems.
Thank you for listening and I hope you have an enjoyable day.