Paul Smith's speech at the Building Societies Association
Speech by Paul Smith, head of policy at the PSR, at the Building Societies Association (BSA) seminar on 7 April 2016, London.
This is the text of the speech as drafted and may differ from the delivered version.
Thank you for the opportunity to speak with you today. I have only been with the PSR for just over two months, so I am particularly keen at this time to meet with and hear from as many of our stakeholders as possible, of which the BSA and its members, are clearly an important stakeholder.
When you take a new job like I have recently your friends and family inevitably ask you what you do. I find that, with rare exceptions, they usually ignore the substantive policy or regulatory component of the role.
What does policy or regulation mean to most people? Instead they focus on the sector or industry you mention. I find that means you are often expected to be an expert on service offerings or able to solve complaints or gripes. In my last role in the Australian energy sector I was often asked about why prices were increasing, and for advice on which retailer to switch to.
Since taking the PSR role I have been pleasantly surprised by the amount of complements rather than gripes I get. “It is easier.” “Contactless is great.” “I don’t carry a purse or wallet anymore, I just take my phone.”
Perhaps the exception to that sentiment has been those who are more worried by the potential for fraud and cautious generally about change. “If it ain’t broken why fix it.”
My speech today is very much focused on the issues like access to payment systems that help deliver outcomes for consumers, but I think it is important to remember that we are here ultimately to improve outcomes for final consumers – your customers.
The contrast I made earlier between the favourable comments I hear about innovation and improvements in payment options and the caution about change illustrates the important challenge we all have. How can we deliver the PSR’s duties to promote competition and innovation and the interests of service users from this perspective, while not undermining what service users value about payment options today – particularly reliability and security.
In the remainder of my speech I am going to cover three main areas. First, I am going to reflect on the first year of the PSR. Second, I will discuss in some detail the findings of the interim report for the PSR’s Indirect Access Market Review. We are very keen to get feedback from the BSA and its members on this report, so I will try and highlight some particular areas where your input would be valued. Third, I will provide an update on the work of the Payments Strategy Forum.
We already have some great participation from BSA members in the work of the Forum, but I will further encourage you to continue to participate in this important work.
The first year of the PSR
The PSR has just turned one year old. We consider that we have achieved a lot in a relatively short period of time. In particular, we have seen, and are continuing to see, real improvements in the ability to gain direct and indirect access to the payment systems.
Our report on access and governance that was published in December 2015, showed that there are:
- clearer and fairer requirements for direct access to payment systems;
- faster times for securing access - FPS has said it is significantly reducing its ‘onboarding’ time for new direct members;
- greater transparency on how boards of payment system operators make decisions; and
- better representation of the payment systems users’ views during decision making.
Just last week, Faster Payments announced that two FinTechs had gained accreditation to supply access, with four more soon to follow. And we are aware of a number of others that are planning to start offering indirect access or expand their current services.
As I mentioned earlier the speed of innovation in the payment services sector is increasing – ApplePay, AndroidPay, Pingit, more ubiquitous Contactless. There appear to be a range of drivers of this change including consumer demand, what technology allows, which continues to change, but also Government and regulatory impetus.
We have published interim findings for two market reviews: one on the underlying infrastructure used by many payment systems, the other – which I will talk about in more detail shortly – on indirect access to payment systems.
I was not planning to talk in detail about the Infrastructure Market Review today, but as I am sure many of you will be aware, it found that there was not effective competition in the provision of the infrastructure services that underpin the payment systems, and made a number of proposals intended to improve competition in the provision of infrastructure.
I am happy to take questions at the end on this review, but I would also encourage the BSA and its members to respond to the consultation we are holding on the interim report.
So in summary, what we are seeing is that we are not the only ones taking steps. On access, the industry has upped its game.
While we consider that much has been achieved in the last year, we are also conscious that much remains to be done. This includes completing the two market reviews, but also the work of the Forum, that I will talk about shortly.
Indirect Access Market Review
We are conducting the indirect access market review to develop a deeper understanding of the supply of indirect access and to determine whether competition is working well for those who use payment systems – or whether we need to take further action to make it more effective. Our aim is that building societies and other payment providers can access payment systems without facing anti-competitive barriers or unnecessary burdens.
We published an interim report on 10th March. Although competition in the supply of indirect access is producing some good outcomes for indirect payment service providers, we have specific concerns about choice, service quality and the ability to switch indirect access providers.
We had a good response to our September survey from Building Societies. These were an important part of the evidence base for our interim report.
We identified some good outcomes through our review
Large IPSPs have a number of options to access payment systems. Our work to improve direct access to interbank payment systems means this is becoming a realistic option for larger building societies. Developments in direct technical access, and the emergence of aggregators, are also changing the access options.
There is a reasonable level of overall satisfaction with the quality of the indirect access offering that IPSPs receive. Building Societies rated their indirect access offerings highly - nearly all ratings being 4 or 5 out of 5.
While large IPSPs tend to have a wider choice of access options, and many are exercising that choice, many small non-agency IPSPs – those without a unique sort code - have a limited choice of IAPs. This limited choice constrains the ability of these smaller non-agency IPSPs to negotiate on price, or to find an alternative provider if they are not satisfied with the services they receive.
IPSPs in all categories are experiencing a number of specific quality-related issues with indirect access. Large agency and medium agency IPSPs, particularly banks and building societies, have concerns about the quality of technical access to FPS and its availability. Small non-agency IPSPs have also raised concerns about notice periods for the termination of indirect access agreements and the relationship management provided by IAPs. These issues limit some IPSPs’ ability to compete in related markets, such as retail banking.
IPSPs in all categories face barriers to switching IAPs, which reduces the competitive pressure and may prevent IPSPs from securing the best possible price and quality outcomes. It is important that IPSPs have effective and credible opportunities for switching to maintain competitive pressure on the providers. We are aware that some of you have switched indirect access provider in the past couple of years.
We would encourage BSA members to share with us their experiences of switching and the opportunities to remove regulatory and technical barriers. We want to make sure there are no unnecessary barriers.
We have already taken a number of steps to promote better choice in access services and improve service quality. For example, we’re opening up direct access to interbank payment systems so that larger PSPs such as challenger banks have a real choice between direct and indirect access. Indeed, we expect a number of them to get direct access in the coming year.
We have also made entry easier by increasing the amount of information available to PSPs and are supporting the industry Code of Conduct to improve indirect access.
Alongside our programme of work, the Payments Strategy Forum is also considering how payment systems can be developed to simplify access for PSPs.
In addition, there are a number of developments underway or anticipated across the industry that should alleviate concerns and help deliver widespread access for banks, building societies and other PSPs.
The full list of relevant industry developments is on this slide, but they include:
- Market entry and expansion: We have been working with a number of businesses that are planning to start offering indirect access or expand their current services, bringing more choice to banks, building societies and other PSPs.
- Reviews of financial crime regulation: There are at least six reviews underway or recently concluded which may affect the way financial crime regulation applies in the UK and internationally. These various reviews are aimed at improving the transparency, clarity and effectiveness of the UK’s anti-money laundering and counter terrorist financing framework.
Indirect access has been, and will remain, a priority area in the PSR’s ongoing work programme.
We consider effective competition in the provision of indirect access to be an important means of delivering good outcomes to service-users. We therefore propose to support the developments outlined above rather than take immediate regulatory action, which may affect the incentives for such developments to take place. If our concerns are not sufficiently addressed over the next 12 months we will take further action.
We encourage your feedback on our initial findings and proposed next steps. The deadline for comments is Thursday 5 May 2016. We expect to publish our final report in summer 2016.
Payments Strategy Forum
The Forum leads a process to identify, prioritise and develop strategic, collaborative initiatives to promote innovation in the interest of service-users. We consider that collaborative innovation that is sector led rather than prescribed by regulation can facilitate better outcomes for all.
The Forum is a truly multi-stakeholder initiative. It is supported by several Working Groups that informs its work and help achieve its goals, and a Payments Community that comprises more than 300 individuals.
The recent progress made by the Working Groups is encouraging. Working Groups have identified, prioritised and started to develop solutions for the various detriments to service-users that have been identified.
At the Forum meeting next week, this work will enable the Forum to start identifying and defining solutions for overarching priorities that will be included in its strategy. I would encourage the BSA and its members to remain involved in the Forum and help this important initiative to deliver successfully.
You may well ask what we might expect to see in the draft strategy?
Having carefully considered the detriments identified and allocated to the various Working Groups, they are putting forward solutions that look at reducing misdirected payments; putting in place a standardised and interoperable framework for enhanced data carriage across the payments infrastructure; request to pay; moving the UK to modern messaging standards; a simplified PSO participation model and rules; and a trusted KYC Data Sharing and Storage Repository, amongst many others.
The Forum’s draft strategy will be made public by mid-July. There will then be an opportunity to comment on the strategy and a payments community event will be held during the consultation period. The final strategy is to be published by the end of October.
To conclude. We have made a good start in the first year of the PSR. There are some positive achievements, particularly in relation to improving direct and indirect access options. The market reviews are a work in progress, and there is much to do to complete these.
As I hope I have illustrated in this presentation, input from the BSA and its members, particularly relating to your experiences of indirect access, and any remaining unnecessary barriers to switching, will be a really important part of completing the indirect access review successfully.
As I said earlier, it is important that as the payment services sector develops we continue to deliver those aspects, like reliability and security, that customers value, while harnessing the opportunities that more competition and innovation provide to improve customer outcomes. The Forum provides a real opportunity for the sector to collaborate to help deliver those benefits, while preserving what is valued.
Thank you for your time today, and happy to take questions.