Consumer protection: Driving innovation and competition in real-time payments
By Genevieve Marjoribanks, Head of Policy
- We want UK consumers to have a great choice when it comes to making payments, including access to world-leading real-time payment services. The best way to deliver them is through competition and innovation.
- We want to identify new ways of driving competition and innovation in interbank payments while ensuring that they serve the best interests of everyone who uses them.
- We are looking at what consumer protections are available now and whether they adequately protect people who use bank transfers to make payments.
- In the coming months, we will work with industry to ensure that their concerns and ideas are included in our assessment.
Innovation is at the heart of everything we do at the PSR. We want UK consumers to continue to benefit from world-leading payment services and the best way to deliver them is through competition and innovation.
There is, however, no benefit to innovation without security, and the payments sector can only move forward if it does so safely. In fact, security in payment systems can foster the conditions needed for innovation to thrive.
That, coupled with making sure everyone who uses payment systems is protected, is why we are starting a new piece of work that will see us assess whether additional protections for people making real-time payments using Faster Payments (FPS) should be introduced.
Ensuring innovation benefits everyone
The UK is home to one of the most progressive payments sectors in the world. It’s a landscape which is constantly evolving to embrace technological developments like online banking and smart phones.
In recent years, consumer behaviour has shifted considerably and payment service providers (PSPs) are now competing to offer the quickest and simplest ways to pay. This means that we have much greater choice when making payments.
In particular, demand for real-time payments with instant transfer of funds has grown significantly. The UK led the field with the launch of the FPS in May 2008. FPS was initially conceived to speed up payments between bank accounts (known as interbank payments), with transactions primarily being made online. FPS payments can be addressed to or sent from almost all consumer current accounts in the UK and can be used for a variety of purposes including sending money to a friend, paying rent or making a purchase.
Growth in FPS payments has coincided with a boom in online and mobile banking while the use of FPS for the purchase of goods and services remains relatively low. Other developments – most notably Open Banking – could change all that.
Open Banking and FPS payments
Open Banking has the potential to provide a competitive alternative to payments traditionally made using cards. This is because Open Banking allows third-party financial service providers to access banking, transaction, and other financial data so they can develop and deliver new services to consumers.
Among the innovations delivered by Open Banking are the services provided by Payment Initiation Service Providers (PISPs) which use FPS to initiate payments from a user’s bank account. PISPs perform transactions on behalf of consumers, with some accepting credit and fraud risks, while guaranteeing payment to the merchant and potentially reducing the costs associated with accepting payments. Such incentives could make retail payments over FPS an increasingly appealing prospect for both shoppers and businesses.
For retail purchases made over FPS to continue to grow and provide a competitive alternative to card payments, however, considerations relating to consumer protection must be raised and satisfactorily addressed.
Established forms of retail payments bring with them established forms of consumer protection. Direct Debits have the Direct Debit guarantee and card schemes offer chargeback functions which offer consumers a way to dispute transactions they are unhappy with.
The benefits to consumers of increased security in interbank payments are self-evident but there are also broader positives for the industry as a whole. Shoppers and merchants will naturally gravitate towards payment systems offering cheap, fast and, most importantly, safe ways to pay. This, in turn, has the potential to foster an innovative PISP ecosystem, delivered through Open Banking and capable of competing with incumbent retail payment systems.
Maintaining our focus on consumer protection
At the PSR, we have already done a significant amount of work to protect people when they make interbank payments, specifically our work helping to prevent authorised push payment (APP) scams.
APP scams, which involve people being tricked into sending money to a fraudster posing as a genuine payee, can have a devastating impact on the people who fall victim to them. In response, we have overseen the introduction of two industry-led initiatives which we expect to substantially reduce instances of APP fraud.
The first is the Contingent Reimbursement Model (CRM) Code, which in 2019 set out standards for firms and consumers intended to reduce both the occurrence and the impact of APP scams.
The second is that we directed the UK’s biggest banking groups to implement Confirmation of Payee – a service which checks that the name entered by the payer matches with the name on the account they are sending money to. The service began in 2020 and is designed to help prevent accidentally and maliciously misdirected payments.
We also want to see the interbank payment systems of the future being designed with consumer protection in mind. This priority can be seen in our work monitoring the development of the UK’s New Payments Architecture (NPA).
The outcome we want to achieve is greater protection of people when making and receiving payments. With this in mind, we are assessing what else we, and the payments industry, can do to make this happen.
We aim to address the following questions:
- What benefits could various types of protection offer consumers, from refunds and guarantees to transaction-risk analysis and improved communication between banks and their customers?
- What role do fledgling innovations like digital identity have in the identification of payers and/or authentication of payments?
- Are new measures necessary to continue to safeguard consumers, or can we be confident that the market will provide consumer protection solutions without the need for regulatory intervention?
- If additional protections are necessary, should they be introduced by individual PSPs or should FPS itself have additional protections built into it?
At this stage, we’re just sharing our thinking and proposed approach, so you do not need to do anything. As the work develops we’ll be issuing regular updates and will look to actively involve other authorities, regulators and industry at the appropriate times.
In the months ahead, we will work closely with our colleagues at other authorities, HM Treasury, the Open Banking Implementation Entity (OBIE), as well as with industry to ensure we have a cohesive approach, avoiding duplication, as we work towards achieving the best outcomes for consumers. Ultimately, we want to make sure everyone benefits from innovation in payments while being offered the highest possible level of protection.