by Fod Barnes, Senior Adviser to the PSR
Apart from the recent (re)invention of the sourdough loaf, what has been the best thing since sliced bread?*
One of the PSR’s statutory objectives is to encourage innovation in payments:
“…..to promote the development of, and innovation in, payment systems in the interests of those who use, or are likely to use, services provided by payment systems, with a view to improving the quality, efficiency and economy of payment systems.” (Section 51 of the Financial Service (Banking Reform) Act 2013)
As innovation plays a central part in economic progress, a regulator with an objective to discourage innovation wouldn’t make a lot of sense. So, we can all agree that innovation is a “good thing” then...
Well, perhaps not so fast. At least with hindsight, it looks like the invention of CDO2 securities was not such a good thing, or the Southsea Bubble Company, or tulip mania, or the dot.com boom/bust (or putting arsenic in watered down milk to make it look whiter and give it some bulk). History is littered with innovations that have really not been the best thing since sliced bread. Which probably doesn’t matter if they die a quiet death and the world moves on, but if the collateral damage is more than a decade of a depressed economy, serious political consequences, etc. perhaps trying to work out which innovations are dangerous before they strike would be a good thing? (See, for example: https://hbr.org/2018/09/the-social-and-political-costs-of-the-financial-crisis-10-years-later)
If the answer is yes, it would make the caveat in the PSR’s service-user objective “the interests of those who use, or are likely to use, services provided by payment systems” rather important. Which is why the PSR has a committee called the Approval of Innovations Committee. It meets weekly. Sounds like something out of Harry Potter, doesn’t it? And it’s about as real as that, but imagine if there was such a thing. That Committee would have its work cut out – there is a long history of underestimating the impact of innovation and of inventing something to do one thing that then gets used to do another, more useful thing. The range of these types of innovation goes from bubble wrap – invented as a wallpaper, used to wrap fragile goods - to artificial dyes – trying to produce artificial quinine – through to post-it notes. And prior to 2008, many (although not all) of those who should have known thought CDO2s and the like were really helping those with poor access to credit get on the housing ladder (which was seen as a thoroughly good thing.)
So predicting what will be useful and not harmful turns out, in itself, to be a hard task. What is needed is an innovation that can predict the future (crystal ball, time machine, etc.) so that the Committee can act with complete certainty when opining on whether or not the latest innovation is in the interests of users and should be encouraged. This would undoubtably be known in the Committee as the “sliced bread test”. But unanimity would be very hard to achieve, so the risk that decisions are never made would be high. And even if decisions were made, there is a long history of predictions about the success or otherwise of innovations being wrong.
In a parallel universe where the PSR did not have an innovation statutory objective, life would be a lot simpler. It turns out that discouraging innovation is really easy. All you need to do is to define what the PSR wants to achieve in terms of how it is provided now. Then when someone comes along and claims that they have a better way of making payments, but the impact is all a bit unknown (and unknowable) and, therefore, risky, the PSR can just say no. Thus avoiding the risk of someone, somewhere being harmed and blaming the PSR for allowing this wicked innovation.
In this parallel universe, nobody would really mind that one of the main sources of employment in the economy is the creation (and destruction) of tally sticks to keep track of who owes what to whom (See: https://www.coinbooks.org/v20/esylum_v20n29a26.html). Online purchasing is a bit more difficult, but then the computer wouldn’t have gotten through the relevant innovation test, so no one really complains about that either.
Back in the real world, there are some innovations in payments that are better than sliced bread. The ATM (invented in 1967 by Barclays) did fill a need (getting cash from a bank outside banking hours – 9.00-3.30 Monday to Friday only). The first machines only gave you one amount of cash (£10.00 – worth about £150.00 in today’s money) and you needed to get a single-use punched card (the same size as a cheque) in advance. But at least you could get cash. And it’s easy to see how this has improved over the years – near universal access to all cash machines (the LINK system and internationally), ability to get out variable amounts, check balances and do other transactions. But there was also another innovative solution to the same problem which, after some success, has disappeared – the cheque guarantee card. This removed the credit risk from a retailer in selling goods if you paid by cheque and also allowed the merchant to sell you cash. And it worked internationally in Europe, for a while.
On the horizon are potentially innovative services built on the innovation of a new (technical) payments architecture – going under the natty title of the NPA. The potential for innovative services is high as the new architecture has been designed from the start with this in mind. But it does raise some tricky issues which will require the right regulatory response to really make the most of this potential.
- What is the right trade-off between the potential benefits of the new against the risk that it also creates new harms to users? The recent history of the introduction of Faster Payments (FP) and the more recent introduction of the code of practice on authorised push payment fraud and the confirmation of payee (CoP) service suggest that, at least with the benefit of hindsight, it would have been better to introduce both FP and CoP at the same time.
- If it becomes possible to directly pay a merchant at the point of sale from a current account should that be like a cash transaction (the payment system just does the payment) or like current card payments (where the payment system offers some consumer protection from fraud etc as well as providing the simple payment service)?
- And if things that do the same job of making payments, but are not classic payment systems – for example, this might apply to Libra, or Amazon eGift Vouchers – should they be treated in the same way as other payment systems?
All in a day’s work for a world class regulator – just need to get the Approval of Innovations Committee to sign off. Just in case the Committee is out of the office again, are there any innovations that you think might become better than sliced bread?
Oh, and do you think cash back – i.e. the retailer selling you cash – is the sourdough loaf of payments?
Fod Barnes is a Senior Advisor at the Payment Systems Regulator. The views, thoughts and opinions expressed in this blog are his own and do not necessarily represent those of the Payment Systems Regulator.