This is the text of the speech as drafted and may differ from the delivered version. This speech was delivered by our Managing Director, Chris Hemsley, at the Open Banking Expo 2022.
Good afternoon, I’m Chris Hemsley and I’m the Managing Director of the Payment Systems Regulator (PSR).
The PSR was set up as an independent economic regulator to focus on the payment systems that underpin our economy - the LINK cash machine network, Faster Payments, Visa, Mastercard and – as of the end of August – the Sterling Fnality system. So, we now regulate payment systems from cash and cheques, through card payments and forthcoming wholesale payments based on distributed ledger technology.
Earlier this year, we set out our five-year strategy. This strategy set out the aspects of payments that are delivering well for people and businesses making and receiving payments. And there is a lot that is going well.
But that strategy also highlighted a number of areas where more work was needed and – of course – the role that the PSR can play to improve outcomes.
And Open Banking featured prominently in our overall approach to delivering improvements. I’ll focus on three elements of our strategy.
First, with cash use declining – as more people find digital payments to meet their needs – there is a risk that we leave some people behind. Digital payments do not yet work for everyone. One aspect of this is that payment types – such as direct debit – do not offer people enough control over their payments. This makes it harder to manage your money.
Second, we highlighted the importance of supporting choice, including through innovation.
And third, we set out the risk that competition may not be sufficient to protect people and businesses going forward, due to the concentration of payments around the Visa and Mastercard schemes.
In response, we set out how we could make account-to-account payments a viable alternative for a greater range of payments. Injecting more competition into UK payments at that structural level.
Open Banking has the potential to contribute to each of these challenges. It can offer more control, support greater choice and – in doing this – bring more competition.
Open banking has achieved a great deal already. It is supporting greater access to account data. And is starting to be offered as a way of making certain payments – it can be used to pay your taxes, settle your Amex bill or make a charity donation.
But, I want Open Banking to go much further and be a realistic alternative for a wide range of payments – including in-person and online retail transactions.
Which is one reason why I was pleased to take the role as co-chair of the UK’s Joint Regulatory Oversight Committee.
This group is now tasked with doing the work to transition Open Banking from its origins in the UK – as a competition remedy in banking – to be a fully-fledged and integrated part of the payments landscape.
So, what needs to happen to make this all a reality? And, in particular, what is needed to make account-to-account payments enabled by open banking available for use in retail payments settings?
We have identified four broad issues we need to address; which I want to focus on today.
Unlocking account-to-account retail payments – functional capability
The first is functional capability.
Open banking payments allow consumers to pay by bank transfer, sending funds directly from their bank account.
Currently, people tend to use them to allow authorised and regulated firms, Payment Initiation Service Providers (PISPs), to make transfers on their behalf between their accounts (for example topping up an ISA) or to make a bill payment (for example making a self-assessment tax payment).
In many cases, this works well.
Retail transactions, however, are a more complex environment and if this type of payment is to work well, additional functionality is likely to be needed.
Retail transactions introduce a new party in this payment chain – retailers. They traditionally lead the payment process and offer particular payment options to their customers.
Retail transactions also add a number of complexities, such as a customer paying before goods or services are delivered. Sometimes many months before. This introduces a set of additional risks that need to be assessed and managed.
Many retailers will also want instant confirmation that the customer has paid, and to receive that confirmation before letting the customer walk out of the store, or before dispatching the goods for delivery.
This is something that is not supported by today’s payment infrastructure.
This means the payments industry will have to change or establish new standards and update our infrastructure, in order to operate a fully-fledged retail payment service.
As a next step towards this, we have established a Strategic working Group (SWG) to help us understand which options can be progressed quickly, and which will need additional time and work to deliver.
Examples of scenarios the SWG will explore include:
- E-commerce single transaction.
- Pre-ordered online grocery shopping, which allows for product substitutions.
- Potentially high-risk e-commerce transaction, such as paying for an expensive holiday several months in advance.
- Subscription payments.
- Physical point-of-sale transaction.
Of course, this list isn’t exhaustive. We expect the SWG and its expert panels to identify other relevant scenarios as part of its work.
But it serves to highlight the breadth of the challenges involved in unlocking greater use of Open Banking in retail, and the functionality that will be needed to support these payments.
This also serves to highlight the potential for choices to be made about relative priorities. Where might we see the greatest benefits from facilitating Open Banking in retail payments?
Unlocking account-to-account retail payments – Ensuring an effective dispute process
The second issue to address is making sure there is clarity about what happens if something goes wrong. There needs to be an effective dispute process.
Confidence is a key component of a successful payment system.
To be confident, everyone needs to understand what protection is being offered. And to be confident that PSPs will deliver against that promise. This might be different for different types of payment.
Payment system operators (PSOs) need to consider their role in setting clear rules to support the dispute process. PSPs, retailers and consumers need to work together to detect and prevent problems.
And if a problem does arise, everyone needs clarity on how they can resolve it.
This requires everyone involved in a transaction to communicate clearly, with processes that enable them to minimise harm and resolve disputes.
But do the current arrangements for account-to-account retail payments achieve all this?
The retail context introduces factors which add risk, such as the quality of goods and services sold, the delivery timeframe for those goods and services, and counterparty risk related to the retailer. What happens when the retailer doesn’t fulfil their obligations to their customers?
This highlights the importance of getting the allocation of risks – and the incentives it brings – in the right place. If liability is concentrated with the sending bank, even though other parties can play a role in managing the risk, it is unlikely to lead to the most effective outcomes.
This is something we have highlighted in the context of APP scams – where we need all parties, including receiving PSPs, to have the right incentives to act against risk.
In Open Banking payments, the misalignment of incentives can reduce the likelihood that the payment will be successful, as the sending bank could try to compensate by adding more security checks which add friction to the customer journey.
We have asked the SWG to explore a number of retail scenarios to see if improvements could be made to system rules to minimise risk and resolve disputes effectively. Page Break
These scenarios take into account what might happen when you buy goods or services.
They are the following.
- Managing risks before things go wrong. This involves making sure that all parties have the right information to assess risks and make effective decisions to prevent harm.
While the sending bank will have access to information to assess the consumer’s authenticity (as it is their banking customer), they are likely to have less data on the retailer.
This all points to the need to share information and having the payment systems that can support this information flow. The delivery of the New Payments Architecture provides a key opportunity here. - Handling an uncontested refund When a retailer agrees that the consumer should be reimbursed, we will need to consider whether the right processes are in place to do this effectively.
- Dealing with Contested refunds If the retailer disagrees that a refund is warranted what happens?
For these cases a clear process will be needed to ensure disputes can be resolved fairly and efficiently.
- How do we manage risks such as when there is no longer money available to refund the consumer.
This could be because the retailer was acting fraudulently or because they have filed for bankruptcy.
For these complex scenarios, we want to explore whether additional protections may be needed and how liability rules can be assigned to incentivise all parties to minimise the risk of harm.
Unlocking account-to-account retail payments – Access and reliability
The third issue is around access and reliability.
Customers and retailers must be confident that they easily understand how any payment service they use works and have confidence that it will work reliably.
Retailers need to know their customers want the service and be reassured that they’ll be paid.
Without these assurances, people simply won’t use the service. It is no good operating a 24/7 business, if your payment solution doesn’t operate in a similar 24/7 fashion.
So, it’s critical that these transactions meet people’s expectations: it must work, be simple to use, and be widely available.
We expect that account-to-account retail payments will initially be based on existing open banking and payment infrastructures. The SWG will assess what additional developments are needed to better suit the needs of consumers and retailers.
One area we want to investigate more closely is the payment infrastructure that we expect account-to-account payments to use: Faster Payments, and its successor based on the UK’s New Payments Architecture (NPA).
Today, the way Faster Payments has been implemented varies widely.
Many ASPSPs1 operate on a reliable 24/7 basis. However, in other cases, large regular maintenance windows interrupt the service – which can affect the connections between some clearing and agency banks.
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We have asked SWG to consider where access and reliability could be improved by posing four key questions:
- Where might account-to-account retail transactions fail?
- How can PSPs ensure that the payment journey minimises user dropout?
- How can retailers be confident the payment will happen?
- Is there sufficient capacity, now and in the future, to support the uptake of account-to-account retail payments?
In 2021, consumers made around 29 billion spontaneous payments, mostly to retailers.
If account-to-account retail payments prove popular, Faster Payments (and by extension the NPA) will need to be able to cope. The SWG will need to think through what it would take to mitigate the risk to the overall service’s growth and performance.
Unlocking Account to Account Retail Payments – Competitive Pricing
And finally, the fourth issue to address is competitive pricing.
All parties involved with an account-to-account retail payment need to be able to recover their associated costs.
This includes the banks, PISPs2, the provider of the central infrastructure and the payment system operator. It may also include any intermediary parties such as payment facilitators.
Parties that could offer account-to-account payments need incentives to drive competition both within the account-to-account ecosystem, and between service providers.
For this to happen, retailers will need to have a reason to adopt account-to-account payments and the ability to encourage customers to use them. One element of this is making sure that Open Banking is cost competitive when compared to other types of payments; notably cards and cash.
A successful pricing model should also provide commercial opportunities to participate and invest in the continued operation, and development of account-to-account retail transactions.
The SWG will look at different commercial and regulatory models for retail payments.
Here, replicating the current card interchange fee for account-to-account payments may not deliver better outcomes, for either the retailer or the consumer.
And there could be the need for regulatory intervention to support good outcomes. For example, we could set specific charges, or even back up service provision using our regulatory powers.
As you would expect, such decisions will ultimately fall to the regulatory agencies. And the PSR would only do so after consultation.
Making it work for businesses and consumers
Even these four themes serve to highlight how much thinking is needed to unlock the potential of account-to-account retail transactions.
But the opportunity it presents makes it worth that effort.
We have an opportunity to build something that doesn’t inherit the assumptions of the past - a commercial model that encourages the adoption of account-to-account and provides a sustainable alternative to other forms of payment.
This could inject additional competition into the UK’s payments landscape – offering more choice to merchants, putting pressure to keep prices low, and acting as a spur to innovation.
However, while there is a lot of detail and complexity for industry, regulators and other stakeholders to work through. We must not pass this complexity on to businesses. And certainly not pass it on to consumers.
Open Banking and account-to-account payment services need to be simple to use if they are to succeed.
They need to be simple to operate for businesses.
And simple for consumers to understand.
This is the only way to build the trust and confidence needed for a payment system to be widely adopted.
So, thank you for your time and I look forward to working with you to meet these challenges and to support the significant opportunity Open Banking presents for payments.