This is the text of Kate Fitzgerald's speech at RegTech Live on 27 February 2024 as drafted and may differ from the delivered version.
Good morning. I’m Kate Fitzgerald, Head of Policy at the Payment Systems Regulator and I’m pleased to join you today.
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 Sterling Fnality system which uses distributed ledger technology.
We protect people and businesses by promoting competition. Our role is also critical in supporting innovation in payments, which itself supports a vibrant and productive economy. We think that better competition between payment systems can lead to better outcomes for users including better prices, more innovation and better-quality solutions.
What I’m particularly keen to talk to you about today is innovation. The need for innovation is clear. We need it to improve the payments ecosystem, to drive better value and control for users and, more than ever, to make sure users are protected with a system that they can trust.
Which begs the question, how can we, the Payment Systems Regulator, make sure the industry can drive innovation, and ensure there are strong incentives for firms to invest in making payments better and safer for people and businesses? Well, there are lots of things we can, and are, doing in this space.
Let’s start with open banking.
We see significant potential in account-to-account payments, and open banking in particular, to deliver new payment services that benefit people and businesses, including by establishing new ways of paying that give them more control.
Our work on cash and digital payments tells us that open banking can provide innovative services which improve the experiences of those in vulnerable circumstances. One key example of how they could do so is through the expansion of Variable Recurring Payments or VRPs.
As many of you will know, VRPs allow customers to set clear parameters that allow authorised third-party providers to make multiple payments of differing amounts on their behalf. In doing so, it gives these customers more granular control over when and how they pay, for instance, their bills.
While these types of innovations are promising, it is clear that for them to be beneficial to the wider UK population and business community, we need these services to be adopted and driven forward by a large part of the industry. It is not enough for one or two banks to join in. We need widespread adoption, and this is where regulation can help.
We’ve been encouraged by the industry’s appetite for expanding VRPs, but as is often the case with innovative solutions which require significant investment decisions from a large part of the market, initial progress can be tricky.
Over the last couple of years, we’ve been working with the wider ecosystem through the Strategic Working Group and the VRP Working Group to understand and overcome blockers to innovation and help tackle the big problems.
It’s clear that there is broad industry consensus around the need for a way to better support consumers when open banking payments go wrong – in card schemes this is called a dispute process - and industry is also agreed that there a number of functional improvements that would make the user experience of VRPs better.
Where there is consensus and appetite, our industry is good at making things happen, so in December we announced the creation of implementation groups on these topics, and we expect OBL and Pay.UK as chairs of these groups to work with the wider ecosystem to deliver a first phase expansion of VRP later this year.
But through our work last year it also became clear that, because of the differing views held within the ecosystem, more thought would be needed on how you establish a commercial model that BOTH delivers competition with other payment methods AND encourages adoption. To achieve both competition and adoption there are some key trade offs to consider. How do you price open banking payments to offer value to merchants and so compete with card payments whilst also driving adoption with payment firms?
With that in mind we issued a call for views on expanding VRPs in December last year that explored a number of practical ways in which we can move forward on those trade-offs.
We considered a range of options for achieving these outcomes including a revenue model where payment sending firms were financially incentivised to provide access to third parties, and a cost recovery model where sending firms would be able to recover only their relevant costs. A revenue model is unlikely to provide the competition we ultimately want to see with cards schemes, while a costs recovery model is likely to require regulatory intervention, perhaps in the form of mandation of payment firms.
For the expansion of VRP into Phase 1 use cases – which are payments to utilities, financial services and government - we have consulted on a cost recovery model, and have provisionally identified a limited set of relevant costs which would be recoverable for those use cases.
In that model, only the charges sending firms levy to third parties would be centrally set – all other elements of the value chain would be open to firms to compete and set prices, including receiving firms setting pricing to businesses for receiving payments. Importantly, we think this model could allow innovation to thrive through the value chain and new VRP products to be used by people and businesses as long as we can overcome any barriers to adoption.
Let me be clear though – the commercial model that we have proposed for the initial expansion of VRP may well need to evolve. In particular where investment and build is required at sending firms. In the long term, we would expect firms to be able to recover relevant costs.
Our focus remains on ensuring that open banking initiated payments can compete with cards in the long run – to do this, costs across the value chain need to be kept in check.
We’ve made good progress so far, but there is still more to do. A lot of what I’ve spoken about so far has focused on the groundwork to deliver a product that will work and ensuring it is adopted. One key thing behind adoption of any new payment system is trust. Trust that these new services are going to work well for businesses and consumers.
People will only use open banking and account to account payments if there are minimum standards of protection, including against Authorised Push Payment (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. So let me turn to how we are tackling APP scams.
APP Scams
Instant push payments have now become commonplace for individuals, small businesses, and small charities to pay for goods and services in the UK. The infrastructure underpinning these payments – the Faster Payments System – provides for the quick and easy movement of funds between payment accounts. But as it was originally designed, FPS did not include comprehensive protection for account holders who, through fraud or dishonesty, are induced to send payments to scammers.
That is why we are delivering a major shift in how this payment system works to address the problem - to enhance consumer protections, and to help prevent fraud occurring in the first place. And this is where we are setting the ground rules for innovation to solve a very difficult problem.
We are introducing a reimbursement right for individuals, small charities, and microbusinesses who fall victim to an APP Scam. We are mandating that every payment firm sending or receiving payments over FPS is within scope of this policy. This moves us on from the current, voluntary code, to which only a small minority of payment firms are signatories. Our aim is to drive consistency, trust, and importantly incentives for firms to tackle fraud.
On consistency and trust - customers, regardless of who they hold a payment account with, will enjoy a minimum level of protection when making payments over FPS. We want consumers to be confident that FPS provides a safe environment for them to do this.
And on incentives – we are using both financial and reputational drivers. You may have seen that we recently published data on how well individual payment firms are protecting customers from fraud, and which firms are allowing fraudsters to set up accounts with them in the first place.
The first set of this data was published in October of last year and was welcomed for promoting openness and transparency. We will be publishing the second set of data later this year.
Over time, this data will give a moving picture of how individual payment firms are responding to the challenge of APP scams. From a consumer perspective, this informs them how they might expect to be treated should they fall victim to a scam, and which payment firms are doing better at preventing those frauds from happening in the first place. And from a regulatory perspective, it means we will be able to identify any trends or areas of concerns that may need further regulatory exploration.
We are also very mindful of the fact that we need to understand more about how these scams start. That’s why it’s important we explore how best to gather data from firms on the most common methods for executing a fraud, such as through online platforms.
Now, as a financial regulator, we cannot make decisions, interventions, or impose the same financial incentives to social media and telecoms firms, but we can highlight the scale of the problem to fellow policy makers in those sectors and continue the discussion and debate on ways to tackle the problem. The UK’s Online Fraud Charter takes an important step forward to raise standards of protection against fraud on social media and telecoms platforms and we can use data to demonstrate how well this is working.
But our own reimbursement requirement, alongside other elements of our fraud package like CoP and enhanced fraud data, will strongly incentivise payment firms to invest in better fraud prevention, better data sharing, and ultimately better protection for their customers. And here the incentives for innovation are aligned. We can already see many firms stepping up and harnessing new and better technology to improve their performance to better protect their customers.
These are ambitious plans, and there are steps that need to be taken in order to build the infrastructure which will support industry in operationalising the reimbursement policy. In its role as the Payment System Operator of FPS, Pay.UK is procuring a system which will allow firms in scope of the policy to communicate effectively with one another upon receiving a claim, to manage their claims and to report data to Pay.UK.
So far I’ve talked only about Faster Payments, but it doesn’t stop there. We recognise the need to protect people who use CHAPS as well, which is why we’ve been working with the Bank of England to identify solutions that can work effectively there too.
What should be evident here is that nobody can opt out. For the first time, there will be clear financial incentives to act.
This is a big change, and the UK is leading the way in taking such an ambitious step.
There is no denying that we want to see these protections for consumers to be delivered as soon as possible. And so, that means we now have to move with industry to deliver these protections in an effective and speedy fashion.
That means, quite simply, that industry needs to prioritise getting their systems, processes and people ready. It could also mean they need to assess how effective their fraud risk management systems are and that they have robust risk mitigations built in.
Until the implementation date, we will continue to work with Pay.UK and payment firms to make sure they are ready for 7 October.
Conclusion
We’ve covered a lot of ground this morning. But it is right that we are ambitious when thinking about the challenges for UK payments and the steps we need to take to address them successfully. We’re taking innovative approaches ourselves to driving change and while it isn’t always easy, the benefits will be felt for a long time to come.
Through tackling APP scams and the developments in open banking, you can see that there are a number of promising ways to enhance innovation and competition in payment systems. Some will be more straight-forward to address, while others will need important trade-offs to be made.
But delivering these changes is important. They require creative thinking and innovative solutions. With new solutions, we will see more effective competition – and that is an enabler for choice, not only in the tools we might adopt to make open banking payments, but in the essential protections and controls those services will provide.
The payments industry continues to be fast-paced and agile. As a regulator we will continue to champion the need for new ideas to address the different needs of everyone who makes and receives payments. And we will do so in a way that focuses minds to delivering better outcomes, enhanced competition and effective ways of protecting people.
2024 will be an exciting year as new requirements and solutions come to fruition, yet all the while, we’ll be keeping our eyes on what the future might bring and what, if any, steps we might need to take to further encourage competition and innovation.
Thank you.