When market incentives fail consumers, the PSR must lead the way


by Sian Williams, Director of Policy and Innovation, Toynbee Hall

Being able to pay for goods and services safely and easily directly affects our ability to thrive. During the COVID-19 pandemic, having access to payment options that allow us to shop online securely and efficiently for food and other essentials has helped many of us keep us safe and well.

On the other hand, over 10 million people have experienced a drop in income through furlough or redundancy and, for many of those affected, worrying whether a Direct Debit bill payment will bounce will have added to the stress at this challenging time. For people who prefer the control that cash gives, the pandemic has affected their payment experience too; cash acceptance has declined in shops as retailers request contactless payments, and lockdown has made it difficult to shop in person. In payments, as in other aspects of our society, the pandemic shines a light on existing issues of access and inclusion.

Good payments systems matter to us all, and I want to recognise the important step the UK took in establishing the world’s first economic regulator for payment systems. The PSR is unique in being responsible for ensuring good outcomes for payments users. 

Influencing for good outcomes is challenging; the PSR must try to ensure providers meet current needs, and anticipate where our needs will change in the future. Regulatory tools which allow the market to adjust can, in theory, manage these twin demands efficiently. In the UK our current economic framework views competition as the most nuanced and responsive tool, best suited to delivering good consumer outcomes. The theory is that, as needs change, providers adapt to develop new products because – putting it at its simplest – there’s a new market to sell to and money to be made. So the primary way the PSR tries to ensure we get the payments we need is by creating a competitive market in which firms are incentivised to innovate. 

But this approach of market incentives doesn’t always work.   

In our work at Toynbee Hall over more than a decade we’ve heard a consistent message about payments from people with experience of living on a low wage or working in insecure employment. They’ve told us again and again that Direct Debits don’t meet their needs for flexibility and control over outgoing payments. If they set up a Direct Debit to access discounted prices, they often end up paying fees and charges when their income fluctuates unexpectedly and a payment bounces. In the worst cases, multiple returned payment fees led to people having to abandon their bank accounts as they simply couldn’t afford the resulting debt. So many people were affected that in 2014 HM Treasury reached an agreement with the main high street banks that customers using the new Basic Bank Account intended for people on the lowest incomes would no longer be charged for returned payments. 

The same people also tell us what they need instead; flexible payments that allow them to move their payment date, or pay in varying instalments, without increasing the overall cost. And of course service providers like utilities want to mitigate the cost of recovering missed payments too. 

So why didn’t the market create an alternative to Direct Debits? While it’s great talking about incentives, in reality there were too many incentives not to innovate. 

Firstly, the market share represented by these consumers was simply too small to be a priority amongst competing demands for costly innovation. Secondly, creating an alternative to Direct Debits was too complex and expensive for individual firms. And finally, Direct Debits are cheap, and easy for corporates to administer, so were mostly willing to absorb the pain of missed payments. We’d hoped that the decision by HM Treasury to stop banks charging for returned payments on Basic Bank accounts would help drive demand for a flexible payments solution, but that didn’t materialise.  So consumers with insecure incomes were left without a payment solution that met their needs for flexibility, and service providers continued to have to implement processes to recover missed payments. 
It was clear that market incentives alone wouldn’t solve this problem.  



Instead we needed the PSR to take the lead. Change happened when, in the form of the Payments Strategy Forum, the PSR created a collaborative space for the sector to work together to tackle issues which competition alone couldn’t solve. 

And with this permission to collaborate, the sector has indeed delivered; a new service, Request to Pay, which will enable flexible payments and improved communication between customer and provider, has just been launched in May 2020. Utility companies are already excited about the benefits it will bring them and their customers in managing their bills better. It will significantly reduce recovery costs for firms when customers miss a payment, and it will give consumers greater control and flexibility over when and how much they pay. Now we just need the main high street banks to sign up and offer it to those customers who’d benefit from a more flexible payment method. 

We can see then from this one example that market incentives alone won’t always drive the best outcomes, particularly for marginalised users and niche needs. The PSR’s first statutory objective is “to ensure that payment systems are operated and developed in a way that considers and promotes the interests of all the businesses and consumers that use them”, not just those where there’s a business case at the firm level to do so. Through the Payments Strategy Forum’s work, the PSR directly created the conditions to resolve a multitude of longstanding barriers to innovation and inclusion, including through enabling the development and delivery of Request to Pay. But there is much more to be done, and many needs now and in the future that market incentives alone are unlikely to address. 

So my challenge for the PSR’s new strategy is to lead the way when market forces fail to meet the needs of the marginalised minority. Pay close attention to the detail of people’s experience; who is missing out, what isn’t working for them, and what do they need instead? What is the market saying about this unmet need and its willingness or capacity to respond? How is end user affected, and who is experiencing the greatest impact

Then think big; consider how you can use your convening power to create the collaborative conditions for sector-level innovation, fostering inclusive solutions that the whole sector can implement. And finally, see it through to success; for Request to Pay to solve the real problem of higher costs associated with payments on insecure incomes, bank account providers must adopt it and make it available for customers on the lowest incomes. For that to happen, banks and other payment account providers will have to invest in more change amidst a climate of significant infrastructure renewal. The PSR must show leadership in ensuring the whole payments ecosystem recognises and meets the needs of all users.  

At Toynbee Hall we firmly believe in the positive role of payments in increasing financial inclusion and wellbeing. And so our offer to you, together with our partners at Fair by Design, is to create the opportunities for those people not yet served by the market, to tell you directly what they need so you have the evidence you need to act. Come and meet the Experts by Experience of London’s East End, who are ready to share their experiences with you and work with you to design even better, more inclusive payments. 

Together we can ensure that UK payments leave no one behind.

We want to hear your thoughts on the topics raised here, so please do send us an email at psrstrategy@psr.org.uk or join the discussion here.