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UK payments sector - a perfect storm for new ideas and innovation

Published 07 06 2016

Speech by Paul Smith, head of policy at the PSR, at PayExpo Europe on 7 June 2016, London.

This is the text version of the speech as drafted and may differ from the delivered version.


Introduction

Good morning and thank you for the opportunity to speak to you today.

If you watch science fiction movies from 20 or 30 years ago, there’s a fair chance that you’ll see ideas for innovations that, in one form or another, have now become reality. That suggests that they were always decent ideas; they were just waiting for the right conditions to become viable.

In the payments sector in the UK, I think we may now be in a period where there is something approaching a ‘perfect storm’ for new ideas and innovations. Advances in technology, including the growth in computing power and the development of mobile devices, have created the right conditions for innovations that simply couldn’t have existed before.

Consumers are responding to the new opportunities they are being offered, and many are more open to using new ways of paying for things. The rapid uptake of contactless is a good example of this.

Without sounding immodest, the Government and Parliament’s creation of the Payment Systems Regulator – the PSR – has already helped to improve the conditions for innovation and competition to flourish in the payments sector.

The combination of these conditions means that these are exciting times for me and the PSR: there is a great opportunity for the sector to further improve the outcomes for customers.

Today I’m going to talk about some of our key projects. These include:

  • the work of the Payments Strategy Forum, which is helping to deliver collaborative innovation in the industry; and
  • our work to improve access to payment systems, which is already seeing tangible improvements that can help improve competition in retail banking

I will also briefly mention our Infrastructure Market Review, which is focused on creating a framework for competitive infrastructure provision – which, in turn, will help service-users benefit from ongoing innovation and delivery.

The role of the PSR

But before I talk about each of these projects, I am conscious that some of you may not be familiar with the PSR and our role. We’ve been operational for just over a year and have three statutory objectives: to promote competition, innovation, and the interests of service-users.

We regulate eight designated payment schemes. These are the interbank payment schemes, LINK and the two largest card schemes – Visa and MasterCard. We have powers to make directions that apply to these schemes, and we have used these powers.

We are also a concurrent competition authority for the payments sector. This means that, working with the CMA and FCA, we can address competition concerns across the whole payments sector, rather than being limited to those eight designated schemes.

The Payments Strategy Forum

I expect that many of you, and the organisations you represent, will have played a role in the work of the Payments Strategy Forum over the last seven or eight months. We created The Forum to give the payments industry an opportunity to work together and propose the way forward in those parts of the sector where innovation depends on collaboration.

The Forum is a truly multi-stakeholder initiative. It’s supported by four Working Groups that inform its activity and help achieve its goals, and a Payments Community of more than 300 individuals.

You may well ask what we might expect to from the Forum’s work.

As you’ll appreciate, I’d hesitate to pre-empt the outcomes of the Forum’s work,  but I’m happy to share my thoughts on its work to date and its emerging draft strategy.

The Forum has worked with the Payments Community to understand what service-users need from payment systems in the UK. Broadly speaking, they’ve investigated three areas:

  • end-users wanting greater control, greater assurance and the ability to send and receive more data
  • the existing structures being too complex, and whether user needs could be met through simplification
  • and whether the industry can work together to develop collaborative Financial Crime solutions

The Forum is considering various solutions.  

These include options that can be implemented relatively quickly, but should still improve the experience for service-users. These focus mainly on standardising and simplifying the way financial institutions engage with the payment system operators.

Then there are the longer term strategic options, which are more innovative in nature and focus on creating a simplified payments market that’s easier to navigate, adaptable to user needs and based on common international messaging standards – and provides a level playing field for access via open APIs.

The Forum will launch its draft strategy at the second Payments Community event on the 13th of July. I would encourage all of you with an interest to attend. 

You’ll then be able to comment on the strategy during the consultation period, which will run until the 26th of August. The Forum will publish its final strategy by the end of October.

Access

Another key focus for the PSR in our first year has been improving options for direct and indirect access to payment systems. Effective direct access options and a competitive market for the provision of indirect access allow banks, financial institutions and other businesses to offer high quality and innovative payment options for their customers. They also have an important effect on competition in related sectors, like retail banking.

We consider that we have achieved a lot in a relatively short period of time. In particular, we are seeing marked improvements in payment service providers’ ability to get direct and indirect access.

Last December we published our first report on access and governance. We found that:

  • requirements for direct access to payment systems are now clearer and fairer
  • times for securing access are getting shorter; FPS has said it’s significantly reducing its onboarding time for new direct members
  • there’s greater transparency around how the boards of the payment system operators make decisions
  • and system-users’ views are being better represented in the decision making process

In the six months since we published that report, we have seen further significant progress.  Four aggregators – FIS, PayPort, ACI and Compass Plus – have been accredited by FPS to provide direct technical access to that system, with others expected soon.  We are aware of a number of payment service providers that are looking to become direct participants in FPS (e.g. Raphael’s Bank announced in January that it is aiming to be up and running as a direct participant by this summer).

And we are aware of a number of others that are planning to start offering indirect access or expand their current services.

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.

We are conducting market review of indirect access, to develop a deeper understanding of the supply of indirect access and 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 for PSPs to be able to access payment systems without facing anti-competitive barriers or unnecessary burdens.

We published our interim report in March. Although competition in the supply of indirect access is producing some good outcomes for indirect payment service providers, we had specific concerns about choice, service quality and the ability to switch indirect access providers. But the improvements I’ve talked about today, alongside other expected future developments, led us not to propose any specific regulatory action at this stage. Instead, we will monitor developments over the next twelve months.

Some of the key developments we will be watching include the continued development of aggregator services, entry of new indirect access providers – and the PSP customers that they serve, the Bank of England’s review of its settlement account policy, and the outcomes of the Forum’s work on measures to improve switching.

Our next access and governance report early next year will cover these developments – and all the others that we have identified in the indirect access review.

Infrastructure Market Review

In February we published our interim report on ownership and competitiveness in payment systems infrastructure. Our interim findings were that:

  • competition is not effective, and
  • the ownership and control of operators and infrastructure providers has an impact on competition and innovation

We proposed some possible remedies to address these problems, including the divestment by shareholder PSPs of their interest in VocaLink. 

But these were our interim findings. Since then we’ve gathered more evidence and talked more with stakeholders, and we’ll publish our final report in the near future. We may propose remedies – and if we do we’ll consult on them separately, making sure our approach is joined up with the on-going work of the Forum.

Conclusion

I wanted to emphasise today one of the common threads that runs through much of our work – promoting a framework in the payments sector that is conducive to innovation, which can benefit customers. Our payments sector in the UK already leads the world in a number of aspects, such as the real time service provided by Faster Payments. The huge growth in the use of contactless in a relatively short period of time is perhaps an example of what I talked about at the beginning, where technology and consumer preferences have come together to make innovation a success.

I have discussed today some of the work we are leading to aid innovation. The ideas being developed by the Forum may help unlock some very exciting collaborative innovation. The progress in improving direct and indirect access in the last year is encouraging in itself and provides a platform for market participants to innovate. And the Infrastructure Market Review is an important piece of work which should establish what we can do to improve competition in this important part of the payments sector.

I look forward to working with many of you in the future to help deliver an even more innovative payments sector – with the benefits that will bring for its customers.