The use of electronic payment systems has risen exponentially in recent years, and simultaneously, the use of cash has declined. This trend has been accelerated by the pandemic, and whilst it has brought many benefits, the greater dependency on and use of electronic payments have also introduced new challenges and risks.
Payment Services Regulator
In its Annual Strategy published in January this year, the Payment Services Regulator (PSR) has clearly set out where the payments industry is and what its priorities are in seeing it develop and evolve further.
It has set out a number of desired outcomes linked to its priorities for the coming 5 years:
- First, it wants payment systems to meet all people's needs and it wants to ensure users have continued access to payment services they rely on and to support an effective choice of alternative payment options.
- Second, it wants users to be sufficiently protected to increase their confidence in using UK payment systems – currently redress is not always available when harm such as fraud occurs.
- Third, it desires effective competition in payments so there is more choice and for users to be protected where competition is not sufficient.
- Lastly, it wants payment systems to be efficient and commercially sustainable. It wants to act to ensure the interbank systems provide the infrastructure, rules and incentives to foster innovation and competition in payments.
So how will this all happen?
Well, to promote access and choice, the PSR will:
- look to remove barriers to the development of new services that meet users' needs.
- apply appropriate and robust regulation to newly designed payment systems in line with the principle of same risk, same regulation – i.e., that regardless of provider, the same activity and risk should be governed by the same level of regulation.
- seek to understand the perspective of vulnerable consumer groups and engage with other financial services regulators to ensure decisions are aligned and the division of responsibilities is clear.
The PSR says it will also protect access to cash for those that need it.
To promote protection of users, the PSR will:
- develop governance of interbank rules, giving Pay.UK (the operator and standards body for the UK's retail interbank payment systems) a stronger role in leading the development of protections and other conduct rules; and
- look at ways to ensure reimbursement of innocent victims of APP scams.
For greater competition, the PSR will:
- develop interbank systems to provide greater competition in payment services.
- take forward looking at the basis for card scheme fees and cross border interchange fees. In June it announced two UK market reviews on each of these areas with consultation having ended on 2 August.
- It will also consider any shorter-term measures that might be appropriate in the interim until longer term measures can be implemented.
To develop bank to bank infrastructure, rules and incentives for innovation and competition, the PSR will:
- ensure there is adequate funding so Pay.UK can fulfil its objectives and funds are allocated so that innovation and competition can be supported.
- It will also develop governance of interbank rules so that operators of interbank systems can enforce the ability to comply with these rules and promote better coordination of payment system participants.
- Finally, it will work with the Treasury to ensure new systems come under the PSR's remit.
What else is happening?
The Bank of England in collaboration with Pay.UK has announced the UK payments industry is moving to a new messaging standard – ISO 20022. ISO 20022 is a standard for electronic data interchange between financial institutions. The CHAPS system is moving to ISO 20022 in April 2023. The standard is the emerging global standard, already adopted in over 70 countries. It will create a common language for payments data around the world. It is hoped this will achieve:
- greater flexibility – because ISO 20022 can adapt more easily than current messaging standards and is more responsive to changes in the economy, emerging technologies and innovation.
- greater harmonisation – because the standard is already being used in 70 countries and more uptake will mean the harmonisation of messaging around the world.
- greater resilience – because it will be used across many payments systems and allow re-routing of messages which will reduce the impact of outages on users.
- better regulation and compliance because better data will be available to target crime and fraud.
- more enriched payment data – as more data can be carried, this should ensure more detailed and better structured reference information and better analytics.
- increased flexibility to promote more competition and innovation.
- straight-through processing – so there should potentially be less delays as there will be less bank manual interventions needed.
In order to prepare for these changes – CHAPS Direct Participants, the payments industry, other central banks and other members of the payments industry will be able to consult with the Standards Advisory Panel, a panel set up by the Bank of England and Pay.UK to provide industry advice on the adoption of new standards.
These are exciting and interesting developments and, clearly, if implemented successfully across the sector, will bring significant benefits to the payments industry and the wider economy.
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