The innovation challenge
Speech by Hannah Nixon, managing director of the PSR, at the Payments Innovation Conference on 29 June 2015 in London.
This is the text of the speech as drafted and may differ from the delivered version.
Good morning and thank you for inviting me to speak here today.
Innovation is certainly a hot topic in payments right now. We know the way people are spending, moving and investing their money is changing, and the rapid advances in technology mean we are probably seeing the fastest rate of change in payments for decades.
If I was to ask you to word-associate around the term ‘regulation’ I suspect we’d hear words like ‘control’, ‘rules’, ‘ compliance’, and so forth.
I would be quite surprised if many of you said ‘innovation’. Financial regulators have traditionally not been charged with this responsibility.
Yet promoting innovation is one of the Payment System Regulator’s three core objectives. It sits alongside, and mutually reinforces, our other two: promoting competition and protecting the interests of the people and businesses that use payment systems.
Today’s event is of course all about innovation so, in my time here today, I’d like to set out:
- why we see promoting innovation as important,
- the role we play as the regulator and how we intend to deliver that role,
- and how we see industry playing its part.
And in doing so I want to get you all thinking about what innovation looks like when it works well, and how - ultimately – we can drive better outcomes for consumers.
Why innovation is important
But first, to understand why innovation is important, we must understand why it’s needed.
We don’t just want innovation for innovation’s sake. We want it because it can drive better outcomes for society.
Earlier this year Payments UK said that digital is ahead of cash when it comes to paying. And, in the same vein, the British Bankers Association recently confirmed that mobile is now the most popular way to bank.
Times are changing.
Industry must innovate to keep pace.
Well-documented IT problems just recently are a reminder about the need for continuous improvement in the technology space, and innovation is part of that.
So the industry must also innovate to maintain high standards.
But what happens if we fail to maintain these standards or we lose pace?
Rather than being part of the curve, we fall behind it. And that means lots of frustrated people finding making a payment a thankless task. Worse, in our panic to put things right, we may rush solutions that are not fit for purpose.
Innovation that delivers complex and interesting products that consumers don’t want is not what we’re looking for. Neither do we want innovation that undermines the integrity of the payments systems.
Equally, a new, innovative, way of paying may tick all the boxes, but we must be aware of the social effects of innovation. Who will get left behind? And if so, what can be done to make sure we have financial inclusion?
So what we want is innovation that can drive better outcomes for all consumers. New products, greater choice, lower prices, higher quality.
But in striving to be good, we must also know what ‘bad’ looks like. We must be alive to the risks.
Credit default swaps and interest rate swaps are both innovations that came about in tough market conditions and then grew and grew in popularity. Both were received warmly at the time but now few would be so positive. We must be wary of the laws of unintended consequences.
We need both radical and incremental innovation – but crucially, innovation that benefits consumers.
So that’s the challenge. Now how do we get there?
We’re certainly seeing lots of innovation in payments services right now. To sight just a few examples, Paypal gave people a safe way to pay for goods online, making paying as simple as sending an email. More recently Paym has done something similar, this time making paying as easy as sending a text message.
Contactless payments are making small transactions quicker and simpler. We no longer need to fumble around in pockets for change when we’re buying our morning coffees.
Apple made the headlines last month when it confirmed that Apple Pay was coming to the UK. With somewhere in the region of 470 million iPhones in the world, and a fair number of their owners wanting their phone also to be their wallet - Apple, may fill that need.
And I saw in the papers this morning that Barclaycard has launched bPay, a wristband people can use to make contactless payments.
So financial firms and communication firms are busy creating new consumer and merchant-facing propositions.
But the vast majority of innovation is all at one end of the supply chain; by and large it is consumer-facing. And it all uses the existing payments infrastructure – what we call the ‘pipes and wires’.
But to be fair, we have seen some innovation in those pipes and wires. Paul Volcker, former chairman of the US Federal Reserve, has described the humble hole in the wall as the peak of financial innovation. ATM’s literally put cash in your hand. They are easy to use – which is good for the man on the street, and they provide liquidity at a consumer level, greasing the wheels of the markets.
When it was launched in 2008, Faster Payments was the first new payments system to be introduced in the UK for more than 20 years. Now it plays an important role in our day to day lives, with almost all online banking payments processed using the system and – if it wasn’t around – people would miss the near-instant bank transfers we’ve become accustomed to.
Nevertheless, little innovation is happening around the underlying infrastructure. Few new and viable alternatives to the status quo have emerged.
Why is that?
There are high benchmarks that need to be reached - surpassed even - for security and resilience if you’re providing payment services and systems. This is as it should be, reliability is crucial. To make sure they remain fit for purpose these should be constantly tested and re-evaluated.
But two other factors – or potential factors - loom large.
First, there are significant network effects in payment systems.
And second, because the major banking brands on our high streets own both the schemes and the infrastructure of the payment systems, the current ownership and governance arrangements may be getting in the way.
The role of the Payment Systems Regulator can therefore be divided into two distinct parts:
- Where innovation can be delivered commercially, by the market, we must remove unnecessary barriers to innovation and get out of the way – and so let the market do the work.
- But if innovation cannot be delivered commercially, perhaps because of network effects or coordination issues, then we will need to intervene directly.
So elaborating on these twin roles let me first speak about removing barriers to innovation.
We are approaching this challenge through a number of channels.
With our access and governance work, we’ve issued various directions that are opening up the systems and helping a wider range of organisations gain access. In turn, this will help them devise new solutions. And to support this we must also promote innovation and the development of technical access solutions.
Our market reviews will take a deeper dive and get to the heart of two key areas we want to explore further: indirect access and infrastructure. The first is looking at how the market for sponsor banks providing indirect access to payment systems for smaller players works. The second is looking at the competitiveness and market structure of the payments pipes and wires. Depending on what we find, we may need to take action to change market dynamics and remove barriers.
But what about when removing barriers is simply not sufficient? Where there are network effects and difficulties around coordinating a coherent industry response.
Perhaps one of our most high profile solutions to this issue is the Payment Strategy Forum.
The thinking behind the Forum is that, to realise our vision of world class innovative payment systems, there needs to be an effective process for developing a long-term vision for the sector and strategic priorities for the industry. Put simply, the Forum will bring together experts from a range of backgrounds to deliver innovation where collaboration is needed.
The Forum will have representation from a wide range of interests – service users, consumers and industry – and will develop this vision and set strategic priorities.
We are leading the creation of the Forum and a working group of stakeholders has already been involved in this initial work. Soon I hope we will be able announce the appointment of an independent chair, and publish the terms of reference.
Once it’s up and running we will support the chair and take part in the discussions, but it will be your Forum and it will take forward your ideas.
And as well as examining totally new innovations, the Forum will also consider developments already underway. The Current Account Switch Service and account number portability, including the recommendations of the recent FCA report, are good examples of this existing thinking that we will take forward.
For both of the challenges I have just described, what we are trying to do is create the right conditions for innovation.
We can provide the kindling, but you must provide the spark. And this brings me to your role.
The role of the industry
I mentioned at the start of my speech that innovation is unfurrowed ground for financial regulators. This innovation challenge is new for us, but I recognise it also a shift in mind-set for you.
What we are trying to achieve through our engagement with you, via the Forum, our access work, directions and wider policy approach is an environment - fostered by us - where you have the breathing space and encouragement to create new ways of paying.
You can help us by asking yourself these questions: ‘In an ideal world, what innovations would I like to be doing? What would my customers value? What is stopping me innovate?’
Where there are barriers to innovation, we want to know about them. Some we can and have identified. Others we may only see if those pushing up against them let us know.
Where collaboration is needed, feed those ideas into the Forum. Let that be the melting pot where problems are discussed and solutions are created.
For this to really work, it must be industry driven. It’s a big ask, but it is what is needed to ensure we have the payment systems demanded by consumers and businesses. And we will support the process.
We want this to work too.
We want payment systems that are accessible, reliable, secure, and value for money.
The innovation objective, for me, is perhaps one of the harder ones to deliver. We all know what it means, what it’s asking for. But because it looks to the future it’s harder to visualise the end result.
But I’m encouraged by what I’m seeing. We’re about three months into our work and attitudes are generally in the right place, engagement is good and we are having lots of constructive conversations.
For our part, our work has only really just begun and there is a long way to go. But the policies we have already made live – such as our directions on governance arrangements addressing conflicts of interests and boosting transparency – are raising standards.
And more directions will come into force over the next month or so that will make gaining access, be it directly or indirectly, much easier and fairer. This is just one way we are creating an environment that fosters innovation.
Flicking through my old economics text books I’m reminded how the economist Joseph Schumpeter argued that innovation was vital in driving forward economic development.
Get it right and not only are we providing solutions that will make our everyday financial lives easier, but we will be helping boost the economy. This is what’s at stake.
But we’re on the right track. There are already lots of good examples of innovation to point to – Paym, Pingit, Zapp to name a few – and it would be wonderful to give this speech in a year or two’s time and be able to add lots more, including in the pipes and wires.
Thank you very much.