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Market players feel leadership has been lacking on topics such as open banking and the direction of payments regulation, but are tipping the government’s National Payments Vision to turn things around.
Given the sense that decision-making has stagnated in recent years, the roadmap provides hope of a reset on the UK’s waning reputation as a leader in the payments world.
“The National Payments Vision’s significant focus on open banking and account-to-account payments is a major step toward modernising the UK’s payment infrastructure,” said Francesco Simoneschi, CEO of TrueLayer.
“Like water, roads and gas, payments are essential to the economy. Offering alternatives to outdated card systems will drive cost savings and growth for businesses, while enhancing convenience and security for consumers,” he said. “Now the Vision is published, we look forward to a period of accelerated delivery.”
Alex Reddish, head of market expansion at Tribe Payments, said that the vision provides “a strong roadmap for the future of our payments landscape. This is an opportunity to reaffirm the UK’s reputation as a leader in payments innovation. But the real challenge lies in execution, a vision is only as effective as the action that follows it.”
“It’s crucial to have the direction clearly defined by the new UK government,” said Dima Kats, CEO of Clear Junction.
Kats added that “it’s comforting to know that it sees development of the payment sector as one of the priorities for the growth of the UK economy”.
Open banking
A key element of the document is the government’s optimism that open banking will help shape the future of payments in the UK.
“Regulators clearly want open banking to be a viable alternative to card payments,” said Martin Dowdall, a partner at Taylor Wessing.
Dowdall explained that there are “good reasons” why cards are so popular.
“There is a well-developed ecosystem underpinned by a viable commercial framework. This has allowed for the development of lots of value-add services such as fraud monitoring and cardholders benefit from clearly defined refund and chargeback rights. If open banking is to become a real alternative it will need to replicate this."
The London-based lawyer told Vixio that the “focus on the need for a sustainable commercial model for open banking payments is particularly welcome”.
“I just hope the framework remains sufficiently flexible, as generating revenue from open banking has proven to be challenging. Firms need to have the right incentives to take risks and innovate,” he said.
He added that “having the FCA [Financial Conduct Authority] take the lead on open banking will likely be welcomed by the industry”, pointing out that although the Payment Systems Regulator (PSR) is effective at addressing competition failures, its counterpart “may be a better fit for driving the creation of something new".
Chris Hill, a partner at Fox Williams, agreed. “Having the FCA overseeing the central entity responsible for open banking is a very positive and necessary step, and is a natural progression for the sector.
“Having moved past its initial 'scrappy' phase, open banking has reached a point where consolidated governance is essential to support its evolution into a sustainable and ubiquitous form of payment."
Kats, meanwhile, said that the FCA’s new oversight of open banking is “perhaps the biggest surprise”.
“But given the slow pace of progress so far, it’s understandable that the government has lost patience and is giving the reins to the FCA to ensure better coordination between public and private sector initiatives,” she said.
Reddish agreed. “It’s a bold move that signals frustration with the pace of progress but also offers hope for more decisive leadership and greater collaboration between the public and private sectors.”
“The UK was a trailblazer in open banking, but progress has significantly stalled in recent years,” he said. “With the FCA at the helm, we need swift agreement on sustainable commercial models to reignite innovation and cement the UK’s status as a global leader.”
Despite the opportunities, Max Savoie, a partner at Sidley Austin, cautioned against over-optimism. “It is far less clear how the government expects the FCA to balance expanding functionality and useability of open banking with consumer protection and security.”
According to Savoie, “most people reading the report will agree that those aims are admirable but that doesn’t really tell us how the inevitable trade-offs will be made".
A sustainable model
The document also reinforces the need for a sustainable model.
At a conference earlier this year, a source sympathetic to payments firms told Vixio “you can’t just expect the banks to keep providing everything for free”, summing up what many think.
Another source said that at least if they knew what the model would look like, they could “prepare for it and move on”.
"The focus on the need for a sustainable commercial model for open banking payments is particularly welcome,” said Dowdall. “I just hope the framework remains sufficiently flexible, as generating revenue from open banking has proven to be challenging. Firms need to have the right incentives to take risks and innovate."
Meanwhile, Hill said that a sustainable model is “crucial”.
“Implementing protections requires funding, staffing and financial backing,” he said. “Care must be taken in designing this model to avoid stifling innovation.”
Hill suggested that a tiered approach could be beneficial, with smaller firms paying lower fees.
“Currently, the CMA [Competition and Markets Authority] order imposes significant costs on banks, which was necessary to get the system off the ground but is not viable long term,” he said. “A model that adequately compensates firms operating the accounts and APIs while enabling new market entrants is essential."
The future of SCA
Changes to security rules have also been a significant issue for the National Payments Vision, although what these changes look like is not yet known.
Strong customer authentication (SCA) has challenged card fraud, and has arguably been one of the success stories of the EU’s revised Payment Services Directive (PSD2).
However, some in the industry, and apparently the government as well, believe that the time has come to make the rules less prescriptive and more outcomes focused.
According to Hill, the revocation of SCA rules is a “significant issue” as it will mark the first step towards change being done via secondary legislation, as outlined in the Edinburgh Reforms.
“This shift moves away from reliance on primary legislation to a rules-based approach where regulators can revise, monitor and update rules more dynamically,” he said. “It’s a substantial benefit and something that has been discussed as a potential post-Brexit dividend.
“It will allow regulation to progress at a pace closer to innovation, addressing practical delays often seen with full legislative changes."
Hill added that the key point about SCA is not its removal but what it represents. “It’s not being scrapped but transitioned from the RTS framework into the FCA rulebook. This change allows for more adaptability and less prescriptive oversight.”
He continued that the goal is to create a more agile, outcomes-focused regulatory environment, which could give firms greater flexibility to address issues such as fraud while seizing opportunities in areas such as digital ID.
Savoie described the shift to outcomes-based regulation as “a double-edged sword”.
He pointed out that it may bring greater flexibility in certain cases. For example, if the FCA removes some of the more prescriptive existing requirements and replaces them with a general principle to have regard to fraud prevention and customer experiences in the implementation of SCA, firms may be empowered to develop risk-based mechanisms that could end up being more effective and less costly.
However, he also noted that “overly broad principles that are unaccompanied by well-tailored regulatory guidance run the risk of increasing uncertainty and leading to firms that may have similar business models adopting very different interpretations”.
“I expect some of the more perceptive market participants will draw analogies with Consumer Duty implementation and reach their own conclusions here,” he said.
Dowdall, meanwhile, said that the “devil will be in the details” when it comes to SCA reforms.
“A lot of money and time was spent getting it right,” he said. “More flexibility might be welcome but the trade-off, when compared to more prescriptive requirements, can be a lack of regulatory certainty.”
He added that SCA has undoubtedly helped reduce fraud, but that when it was introduced under PSD2, there were extensive discussions about the impact on conversion rates.
“Some e-commerce firms may have been willing to take on greater liability for fraudulent payments in order to preserve conversion rates for example.
"Firms may welcome increased flexibility on SCA, but they must be comfortable with the risks associated with payments going wrong,” he said.
