.svg)
The new strategy for the UK's Payment Systems Regulator (PSR) is right to focus on good outcomes for consumers and businesses, but there are questions about whether it will have the teeth to achieve its targets.
The new PSR Strategy, which was published on January 13, sets out four outcomes that the regulator wants to see and will work toward within the next five years.
These include setting key outcomes, such as payment systems that meet people’s needs, a landscape where users are protected, effective competition in payments and efficient payment systems.
The PSR has, at times, failed to impress the payments market that it oversees.
“It is predictably bland, saying all the right things but without much punch,” said one source. “As with all strategies, it is all about the execution, and that is where I believe the PSR has to raise its game.”
Yet, in spite of the PSR’s occasionally turbulent relationship with the market, the strategy has garnered some optimistic reviews.
"I am positive about the potential of the strategy, and the fact that they have a visible framework in place,” said Ed Adshead-Grant, payments director at Bottomline Technologies.
The PSR needs to modernise, he pointed out. “I like the outcome-orientated approach that they've taken. However, execution is everything, and the question is whether the PSR follows up, will they have teeth if the strategy isn't followed or supported by the companies that they supervise."
Whether the PSR is willing to show its teeth in its regulatory approach is often what triggers frustration among the market’s sceptics.
It has been accused of not being tough enough on the large card schemes, as well as with authorised push payment (APP) fraud — one of the biggest issues facing the UK’s retail banking institutions.
APP fraud has grown to be a huge concern of regulators lately. In the first half of 2021, the number of APP scams reached record levels, with the PSR noting a 71 percent increase in this type of scam, causing consumers £355m in losses, and overtaking card fraud losses for the first time.
"APP fraud is a good example of where execution is everything. A total of £1bn in 2021 is likely, which is a scary number as everything has moved digital,” said Adshead-Grant.
Considering the numbers, and the lack of trust, the UK is at a place where the PSR needs to mandate the use of Confirmation of Payee (CoP), he argued. “There is no logical reason why it isn't yet."
CoP is seen as one of the most effective methods of fighting payments fraud. As a mechanism, it alerts consumers in case the recipient's account name does not match the name of the intended beneficiary, and has been implemented by a consortium of financial institutions: Barclays; HSBC including First Direct; Lloyds Banking Group; Nationwide Building Society; Royal Bank of Scotland Group; and Santander UK.
This accounts for 90 percent of transfers in the UK, and yet APP fraud continues to persist as an issue. Even politicians have intervened to call for CoP to be mandatory.
New Payments Architecture
Another issue that the PSR is confronting is usage of alternative payments, such as account-to-account. These payments move money directly from one account to another, in some cases removing the need for additional intermediaries or providing an alternative to cards.
As part of this strategic priority, the PSR aims to ensure “the interbank systems provide infrastructure, rules and incentives that foster innovation and competition”.
With this, the New Payments Architecture (NPA), which the PSR released in its regulatory framework for in December, is intended to modernise and future-proof the UK’s retail payments infrastructure by replacing the current Bacs and Faster Payment systems.
For Adshead-Grant, this is the most significant commitment within the strategy. “Given digitalisation, there needs to be a big push to actual, existent account to account payments, which hasn't happened yet,” he said.
This could even go some way to solving the issue of cross-border payments, which have been frustrated by Brexit’s impact on interchange fee caps.
"Access and competition put together should be able to solve the issues that the card market currently has,” he speculated. “This could also be sorted out if account to account begins to gain market share, and would mean more competition and real-time payments."
Nevertheless, with the potential of innovative new payments technologies such as crypto and central bank digital currencies, some have even questioned the need for the NPA.
Addressing this issue, Genevieve Marjoribanks, the PSR’s policy chief, said at a recent webinar that there is likely to be a need for an infrastructure that supports the transfer of funds between bank accounts for some time to come.
“I think that the programme should address some of the limitations that we currently observe in FPS and BACS,” she added. “Those older systems are increasingly being asked to do things that they were not designed to do, and the entire ecosystem of payments needs to work to be fit for the future.”
The PSR did, however, acknowledge that some of the incentives to use account-to-account payments currently do not exist.
“We definitely heard from the strategy that we hadn’t made the most out of open banking payments,” said Chris Hemsley, the PSR chief executive, on the same webinar.
“It presents an opportunity for unlocking more competition, and more innovation, in this space,” he said.
One of the things that will support open banking to transition to and realise the opportunity of being a proper, business as usual part of the payments ecosystem is that it also has effective regulatory oversight, Hemsley argued.
“The rules that are in place for payment systems operators are really critical to support, move and reduce barriers to competition in payments,” he said. “One of the themes that run through the strategy document is that central schemes, like Pay.UK and the future Open Banking entity, need to support appropriate coordination and stimulating compliance.”
Incentives to drive good outcomes for consumers and businesses is a central concept in the strategy, said the PSR’s Natalie Timan, acknowledging that the current incentives for account-to-account payments may not be well aligned. “Retail banks, in particular, have more reason to support innovation in card systems than in other systems,” she admitted.
“We have observed that card systems can often bring about new agreements, arrangements and functions to the market quicker than other payment systems,” she said.
Account-to-account work currently being undertaken is investigating what blockers may exist, she said. “If you like, the incentives in banks to block or to promote account to account, more generally. These are being considered as part of this work, so there is more to come.”
For Adshead-Grant, the incentive to businesses and consumers should principally be one of familiarity and convenience. “The user knows and trusts their banking routines. So, the extension of payments through open banking, becomes a natural journey to follow without them even knowing that the world of account-to-account payments has been securely embedded in the day-to-day transactions by the industry, without using the technical language of Open Banking acronyms.”
In its webinar, the regulator also confirmed that the annual plan for the regulator will be published in March. “It goes without saying that every annual plan should be a building block that goes towards achieving our strategy,” said Louise Buckley, head of strategy at the PSR.
“We’re finalising our work programme for next year at the moment and, within that, we are trying to make it very clear what the linkages are from what we are doing to how it helps us achieve the objectives in the strategy,” Buckley continued, stressing the importance of alignment in its year-to-year work.
