HM Treasury Payments Landscape Review Response - Fourdotzero

HM Treasury Payments Landscape Review response

20 October 2020

Dear Sir/Madam,

HM Treasury Payments Landscape Review: Call for Evidence

Please find attached responses to your questions in the HM Treasury Payments Landscape Review.

I am a long-standing, UK-based payments professional, having led Accenture's European payments practice for many years, and I am currently working for a Silicon Valley payments Fintech. I am providing these responses in a personal capacity, as a stakeholder with a keen interest in the success of the UK payments industry.

My responses are made entirely independent of my employer, and are attributable only to me. As such, they give a candid, neutral view of the UK payments landscape and offer suggestions for its future, free of any commercial agenda or bias.

The key theme in my responses is that development of the UK's real-time payment infrastructure, together with a competitive environment for request-to-pay services and open payment APIs are critical to the future of UK payments. These will erode the dominance of the cards industry which is holding back payments innovation with 20th century cards technology that is prone to error and fraud and unsuited to the digital age. In turn, they will take friction out of payment processes, enabling new business models and better, safer customer experiences for all end users.

There is a risk that the incumbents – major card companies, acquirers, the banks, even Pay.UK itself may slow down or stifle this competitive environment by elbowing out new entrants or lobbying for legislation that allows them to continue to dominate the new landscape with their own new services – it is vital the government is alert to this, and gives the new entrants, the Fintechs, the innovators the space and oxygen they need to build the future of UK payments for the benefit of all end users.

I trust you will find at least some of my suggestions and ideas to be interesting and insightful. Enjoy the read, it has been a rewarding process to compile them.

Should you wish to discuss any in further detail, I am at your disposal,

Yours faithfully

Jeremy Light

Question 1: To what extent do you consider that the government's objective that UK payments networks operate for the benefit of end users has been met?

I give the UK payment industry and regulators a score of 3 on a scale of 1 (government objectives failed) to 10 (government objectives achieved).

From the lens of end users – consumers, small businesses, large businesses, charities, clubs etc, the following improvements over the past 10 years are observable:

Card fees - No additional fees for using consumer credit cards over debit cards in ecommerce and the disappearance of sharp practices (mainly by airlines) to add "admin" fees on checkout
Contactless cards – the ubiquitous acceptance of contactless cards (plastic and in mobiles such as Apple Pay) in the UK is a massive convenience and benefit to society
Cheque imaging - faster cheque clearing which is good for recipients, but is a partial detriment for receivers, particularly those who have relied on using cheques for float (paying bills with cheques against paying in cheques received) and those who have become used to operating with the old 2-4-6 system
Confirmation of payee – the ability to check a recipient's name against that given when making an online/mobile payment
Faster Payments limit – increased to £250k, although the availability of this depends on the bank and the type of account and can vary by channel (mobile, online, in branch)
FX Remittance providers – the cross-border payments market is much more competitive, with good exchange rates, low fees and fast, 24/7 service available from new providers such as Transferwise, Revolut, Currencyfair, PagoFX

However, this list of end user outcomes is short and patchy, and with the exception of card fees, contactless cards and CoP, also only of benefit to small sub sets of society. Half of these are the result of industry initiatives and the rest from regulators, but the shortness of the list points to a failure of both the payments industry and regulators to put end users at the centre of what they do.

Additionally, there are end user outcomes which have deteriorated recently, in particular increased friction in payment processes due to anti-fraud measures. Some examples:

Two factor authentication requiring mobile reception with no alternatives – a 2017 uSwitch study showed that 29% of the UK population have poor or no indoor mobile reception, yet banks were allowed to roll out 2FA using just mobile reception, locking out or inconveniencing a large fraction of the population from online/mobile payment services. Although this data is three years old, I doubt much has changed since in terms of improved mobile reception.
The cards system is inherently prone to fraud, and the cards industry spends huge efforts fighting it – rather like pumping water from a permanently leaking boat, with poor end user experiences, such as:
- frequent card replacement when issuers identify cards at risk – which can be hugely inconvenient and disruptive when re-registering cards with ecommerce sites
- frequently declined transactions – sometimes at the point of transaction, sometimes later, usually requiring a phone call to fix
Anti-fraud measures adopted by banks are making it increasingly difficult to make online/mobile payments without having to go through authentication multiple times, and often banks hold payments requiring a phone call to get them released. While it is self-evident that these measures protect consumers against fraud, it is also clear that they are designed to protect the bank and manage their liabilities without proper consideration for the customer experience. For example, I often have payments held up by my bank to beneficiaries even though they have been registered on my account for years and I pay them regularly. Additionally, banks have inserted questions (about the purpose of and circumstances of the payment) and warnings into the payment flow which are clearly designed to protect the bank's liability, but add friction without much benefit to the end user.

Overall, there is a lot to be done to change UK payments for the benefit of end users, in particular to encourage new innovation and to improve the way fraud controls are implemented to remove unnecessary friction from the customer experience.

Question 2: What do you think industry, regulators and government should do in order to further ensure that UK payments networks operate for the benefit of end users?

Break out FPS from Pay.UK – FPS is the jewel in the crown of UK payments, but it has been held back by being subsumed into Pay.UK. FPS is the future of UK payments, but merging it with yesterday's payment systems - cheques and BACS has been a mistake, as has combining real-time payments in the New Payments Architecture with the baggage from these legacy payments systems.

If there is any doubt that FPS and real-time payments are the future of UK payments, the statistics say it all. Single Immediate Payments (SIPS – real-time payments) were up 23% in the 12 months to September 2020, and have been growing 15% - 25+% p.a since inception in 2008. Last month they accounted for 25% of all UK interbank payments (by volume), compared to 16% in 2018, and are running at the rate of 2bn payments per year compared to 1.4bn in 2018. Some of this growth is due to substitution (from cheques and BACS credit transfers), but the majority of the volume growth is new volume from end users making more payments more often. This growth will endure, and probably accelerate for at least another decade – real-time payments are the future.

Prior to becoming part of Pay.UK, FPS was on a roll, having implemented open access, having designed a request-to-pay service ready to implement and having initiated a tender process to replace the current VocaLink service in 2020 with a next generation real-time payments system. Three years later, request-to-pay has only just been launched, but in a form which appears to risk reducing competition by favouring incumbents such as Mastercard over new entrants; the next generation FPS system has been subsumed into the NPA programme which has failed to complete a tender process let alone deliver a FPS replacement this year; and there appears to be no new innovation initiatives coming from FPS – in short, FPS is large and growing fast, but real-time payments innovation has come to a halt.

Add more technology and commercial digital expertise to the boards of the PSR and Pay.UK – neither board has enough commercial and technical experience in digital, technology and Fintech. They have some experience, but these boards need to be dominated by technologists - without them, both organisations lack the focused technological leadership needed to position UK payments in the digital economy.

Conduct end-user analysis - engage with a range of industry segments to help them understand how they can benefit further from real-time payments, and to understand their pain points which could be addressed through payment innovation.

Architect for controlling fraud and delivering great consumer experiences (rather than allowing banks to compromise consumer experience with overly cautious risk processes resulting from inadequate fraud controls) – force banks to do this by putting in place and publishing metrics to track false positives for fraud (i.e. legitimate payments held back or requiring extra customer contact), and set targets for maximum levels of false fraud positives, together with targets for maximum levels of fraud.
Prevent manual use of card data – prevent ecommerce sites from requiring consumers to key in card data (at the point of payment and on setting up an account) and prevent businesses taking card details over the phone. This will force use of more secure forms of card payments such as in-app payments and will encourage adoption of better, new alternative account-to-account payments.
Promote competition amongst payment providers – create an environment where new entrants are encouraged and nurtured, in particular new PISPs using open banking, and ensure there is a level playing field for new PISPs to compete (with viable business models) against banks and major incumbents such as Pay.UK, Visa and Mastercard.
Facilitate a national roll out of a QR code payment acceptance scheme – one common scheme open to a competitive field of multiple players to implement. QR code payment acceptance allows micro merchants to securely accept payments at very low cost. There are hugely successful the world over such as Alipay in China, Promptpay in Thailand and Paytm in India. They are particular useful for consumer to small business payments – for example, in Thailand, there are about 750k merchants with traditional POS terminals for cards, but over 2m merchants who accept the QR code payments cleared through the real-time Promptpay system.

Question3: To what extent do you consider the government's objective for a UK payments industry that promotes and develops new and existing payments networks has been met?

This objective has yet to be met - there have been no new payment networks since FPS was created in 2008, and later Paym. However, as described in question 1, development of FPS has come to a halt, despite its size and growth; Paym is another jewel in UK payments, but is underused and under exploited by the banks. The cheque imaging system could be described as a new network, but in reality it is a substitute network for the paper clearing system, and is niche to the needs of UK payments (and it is likely to decline in relevance within a few years).

Question 4: What do you think industry, regulators and government should do in order to further promote and develop new and existing payments networks?

Open up Paym through open APIs to PISPs and let them develop innovative services using it (Paym has great potential - Swish in Sweden is similar).
Consider implementing a payments network overlay similar to UPI in India which allows account-to-account payments through a multitude of different routes – bank apps, digital wallets etc, and which has resulted in massive real-time payments volumes. There is much to be learned from UPI that could be replicated to the benefit of UK end users and the economy, in particular the combination of real-time payments with request-to-pay.
Plan for a payments network to support micropayments and machine-to-machine payments. This requires the development of an ultra-low cost real-time payments network between PSPs. This could be done using distributed ledger technology, but without using a digital asset or CBDC. In this type of network, each participant has an identical payments ledger (in addition to their own proprietary ledger of accounts), and has a nostro, or clearing account on every other participants' payments ledger. Payments between accounts at different participants are cleared atomically i.e. both the debit on the sending account and credit on receiving account occur successfully, or neither occur. Imbalances in participant nostro accounts are settled periodically (or continuously) in their settlement accounts at the Bank of England through the RTGS. Each participant sees only their own transactions, and keeps their proprietary accounting ledger in synch with their payments ledger. This distributed architecture is proven and runs at a considerably lower cost than centralised clearing systems. A UK payments network using this could be the basis for advanced digital innovations in the internet of things and streaming services.

Question 5: To what extent do you consider the government's objective to facilitate competition by permitting open access to participants or potential participants on reasonable commercial terms has been met?

Open access to FPS has been a great success, as evidenced by the large number of new participants in FPS including non-bank PSPs such as Transferwise who have settlement accounts at the Bank of England.

However, limitations on the number of maintenance windows available each year to set up new settlement accounts on the Bank's RTGS is a constraint on open access.

Question 6: Are there further barriers preventing open access to participants or potential participants on reasonable commercial terms?

None observed.

Question 7: What do you think industry, regulators and government should do in order to remove these barriers?

Expedite the delivery of the Bank's new RTGS system.

Question 8: To what extent do you consider the government's objective for UK payment systems that are stable, reliable and efficient has been met?

The UK payment systems – CHAPS, BACS, FPS, Link, Cheques, Visa and Mastercard are generally stable, reliable and efficient, but these form only part of the process from payer to payee. Frictions occur in the user experience on payment initiation and receipt, in particular due to fraud controls as described in answers to other questions, which are just as important to end users as infrastructure reliability.

Question 9: What do you think industry, regulators and government should do in order to further ensure UK payment systems that are stable, reliable and efficient?

The Wirecard insolvency has highlighted an unrecognised systemic risk in UK cards payments. Even though Wirecard was a niche player in the UK, it became clear it was systemically important to a large number of people and businesses. When its parent collapsed in June 2020, the necessary UK action to temporarily freeze the e-money accounts it operated for other PSPs and the transactions it processed for them caused widespread disruption – including consumers unable to pay for essentials, and dependent PSPs facing sudden and existential threats to their business.

There are far bigger card processors than Wirecard, such as the two merchant acquirers who account for around 90% of all UK card payments. These are clearly systemically critical to UK commerce and society, yet to what extent do regulators focus on them?

Wirecard has shown that regulators should consider requiring commercial users of PSPs to have contingency plans so that consumers and merchants are insulated from a failure of any one provider, and they should set classification criteria for systemically important card and e-money payment providers.

A UK payments equivalent of the EU Bank Recovery and Resolution Directive is probably required, in which card/ e-money providers and merchant acquirers are mandated to prepare recovery plans and living wills to overcome insolvency or operational distress.

Question 10: What is the impact of not having comprehensive scheme rules to deal with how participants should collectively act to resolve disputes and assign liability when a Faster Payment goes wrong?

Card networks have sophisticated and well-established rules for disputes and chargebacks. However, these are largely due to the fraud-prone nature of cards (where card details are shared and can be misused) and have had to be implemented for cards networks to be viable.

However, account-to-account payments for ecommerce can be made far less prone to fraud, and it would be a mistake to replicate controls designed for the failings of the card system. This is evidenced by the iDeal ecommerce payments system in the Netherlands, which has operated without a disputes or chargeback system for over 10 years, even though it accounts for 60% or more of all ecommerce payments in the country.

In card payments, around 70% of chargebacks are due to fraud, and the rest are merchant related where they fail to deliver or there are issues with the quality and nature of the goods. The Consumer Contracts Regulation already gives consumers protection against these merchant issues, so unless it is clear there is a risk of fraud using FPS for ecommerce payments, FPS chargeback rules should be unnecessary.

However, there is clearly a problem with authorised push payments fraud with FPS, but this is a failure of bank KYC on their accounts, and with addressability of accounts, rather than inherent to FPS. Perhaps rules are required to put the liability on the bank which holds the fraudster's account – these would incentive banks to have better systems for KYC and to monitor accounts for fraudulent activity.

Question 11: Are additional scheme rules needed to ensure opportunities for person-to-business payments over the system can effectively compete with major card schemes? If so, how could scheme rules achieve this?

Additional scheme rules are needed for:

A guaranteed real-time payments scheme – similar to Faster Payments SIPs, but the payment must be guaranteed to be credited, or rejected, within say, one second of initiation. Additionally, it requires a notification API available to both sending and receiving applications to provide immediate notification of finality and availability of funds. SIPs achieve this the majority of the time, but FPS rules allow the payment to take up to two hours and banks only commit (in their ts & cs) to crediting the payment by the end of the next working day (in line with current regulation). Given the nature of SIPs, if the sender's debit is successful, it is reasonable to assume the credit to the beneficiary is also successful, and banks do get a confirmation – however, this confirmation should also be made available to third party PISPs providing ecommerce payments using FPS - the certainty of immediate finality will make FPS much more useful for ecommerce payments.
QR code payment acceptance (at POS, online, mobile) – scheme rules are required for a national UK QR code payments acceptance scheme, which should be interoperable with other QR codes schemes around the world
Digital wallets - all payment scheme rules should allow for payments between digital wallets (and between bank accounts and digital wallets). Juniper forecast there to be as many digital wallets in the world within a few years as there are bank accounts today. Digital wallets are in essence e-money accounts and come in different forms – among many examples are PayPal, Paytm (India) and Bkash (Bangladesh). Prepaid cards and gift cards secured on mobile phones are also examples. Digital wallets are typically used by consumers as an alternative to bank accounts. Given their huge success globally, it makes sense to encourage their growth in the UK by making them addressable in payment schemes, and to encourage development of digital wallets independent of card networks.
In-bound cross-border payments – the FPS rules for inbound cross-border payments (payment originating overseas) should be tightened to have immediately finality and availability to the beneficiary. Currently, some banks credit the in-bound payment instantly, but prevent access to the funds for 24 hours or more to allow them to put the payment through their end-of-day sanctions screening process – they should do it real-time to give end-users the service and experience they want.

Question 12: Why are payments with a longer clearing cycle still used and what are the barriers to moving these payments to a platform with faster clearing, e.g. Faster Payments?

There is always inertia in consumers and corporates in adopting new payments methods and in letting go of old ones. Sudden mass adoption is rare – for example, it took 10 years for contactless cards to achieve UK mass adoption and around 8 years for Faster Payments to pass 1 billion annual payments.

It is inevitable that payments with longer clearing cycles are still used, but the industry can take action to nudge people and organisations away from them:

CHAPS – set a minimum value limit for CHAPS at the same level as a maximum value limit for Faster Payments, currently £250k – but raise it to £500k, or even £1m. This would reduce the large number of CHAPS payments that are sub £1m and force the migration of these lower value CHAPS payments to FPS which is more efficient and lower cost
Cheques – these are in terminal decline anyway, accelerated by the pandemic – but businesses could be discouraged from issuing cheques by requiring banks to charge them a minimum fee per cheque (say £5), and make it unlawful to pass cheque fees on to the cheque recipient unless the recipient has explicitly asked to be paid by cheque
BACS credit transfers – these are used primarily for bill payments (often set up by accounting systems to be paid on the due date) and payroll. Many of these payments are best set up in advance, so shorter clearing cycles make little difference – however, by allowing bulk payments through FPS (using DCA), the market will naturally evolve with a balance between FPS and BACS that reflects different use cases and usage patterns. BACS credit transfers should therefore be allowed to continue
BACS direct debits – the same is true with BACS direct debits which are hugely popular, growing (slowly) and are embedded throughout society. There may be a case to accelerate the clearing cycle, to make it easier to cancel payments at the last minute, and there could market demand for new entrants to introduce their own direct debit scheme with new innovations, but given the size of the installed base, there should be no attempt to migrate to BACS direct debits onto a new scheme – the cost and risk of disruption would be massive, with little potential benefit. Instead, alternatives such as request-to-pay should be encouraged to complement BACS DDs – the market will then evolve naturally with a balance between DD usage and request-to-pay usage.

Question 13: What is required to enable Payment Initiation Services to take off in the UK in a way which is safe and secure for the consumer?

The customer experience must be slick using PIS APIs – the customer authentication and payment authorisation provided by banks is optimised for their mobile and online banking, but needs to be more customer friendly when used by PISPs for ecommerce/consumer-to-business and business-to-business payments. Meanwhile, the secure customer authentication (SCA) requirements under PSD2 are confusing and likely to be problematic, and may require UK-specific simplification
A guaranteed real-time payment scheme (guaranteed immediate finality) with an immediate notification API available to both sending and receiving applications
PIS APIs must be able to rely on bank KYC – for example, if a user is presented with beneficiary details to pay through a PIS, those details must be derived from the account details held by the bank (similar to how Paym and Confirmation of Payee work), otherwise fraudsters could impersonate merchants
PIS APIs must be distinct from AIS APIs – PIS APIs require access to limited account data such as account name, unlike AIS APIs which allow access to other account data such as transactions. Users of PIS APIs must have certainty that granting access to their account to a PISP excludes access to their transaction data, unless the PISP is also an AISP and uses a separate AIS API
Allow merchants to have control over their own risk based authentication
Set an expectation that PIS payments should be priced at zero or low cost (the same as the cost for a mobile or online payment, as required by PSD2), and that the revenue model of the PISP should be based on the value they add
An open API ecosystem with common APIs for authentication/identity and other common functions will help PIS and all open banking APIs take off
Standard PIS APIs are important for their use to scale – this is achieved for the "CMA 9", but other banks can set their own standard which requires specific additional work for PISPs to integrate and maintain.
PISP funding – it is clear that adoption of open banking is a long process, as it is dependent on many factors, including consumer awareness and acceptance. The government could consider a Fintech PISP fund to help innovators develop the PIS market and avoid it becoming the domain of the large incumbents.

Question 14: How does the advent of Payment Initiation Services through Open Banking interact with your answer in the last section as to whether additional rules are needed as part of Faster Payments?

A guaranteed real-time payments scheme with immediate notification APIs would make it easier to use PIS services for ecommerce.

Question 15: Will Open Banking deliver (and go beyond) the developments in account-to-account payments seen internationally? What are the lessons from international experiences that should be adopted in the UK, and what are the costs and benefits of doing so?

Open Banking has the potential to deliver similar or better outcomes in account-to-account payments such as those seen with Swish (Sweden), Vipps (Norway), UPI (India), iDeal (Netherlands), Blik (Poland) and so on, provided the customer experience is good.

However, Open Banking APIs are limited (to PIS and AIS) and the industry must be more adventurous in providing other open APIs on a commercial basis to complement Open Banking – and see open APIs as a commercial opportunity rather than a regulatory requirement for new entrants to exploit

International lessons to be drawn on include:

Innovating away from cards, rather than trying to innovate with cards has huge potential, and avoids the error and fraud-prone nature of cards – as demonstrated by iDeal in the Netherlands. Designed as an alternative to debit cards, it has huge had adoption without providing for chargebacks, and has had very low levels of fraud. Blik is a similar success story in Poland, where account-to-account payments for ecommerce far exceed card payments
QR codes are a secure and cheap payment acceptance method when combined with real-time payments, as demonstrated by Promptpay in Thailand (among many other examples)
Linking bank accounts to mobile phone numbers in a single branded service, promoted for use peer-to-peer, in ecommerce and in shops is a secure way of using real-time account-to-account payments that is simple to use leading to mass adoption – as illustrated by Swish in Sweden (in contrast to the underused Paym which has different branding in different banks and has never been promoted by any of them)
Request-to-pay is complementary to real-time account-to-account payments as demonstrated by UPI in India, which uses the IMPS real-time payments clearing system.

The interesting aspect to these examples is that they have all been implemented quickly and cheaply on top of real-time payment systems (same day for iDeal) and have been hugely successful, with banks and the payments industry working together to make them so.

Question 16: Do you agree with the trends in new service providers and payments chains identified?

The trends identified ring true, but those described have a basis in the cards networks, which in my opinion have a limited life, despite their huge size and installed base.

Since ecommerce started in the late 90s, cards have been "shoe horned" into digital processes and continue to be so today, under the banner of innovation, whereas in reality there are better ways to innovate – as demonstrated by iDeal in the Netherlands and Blik in Poland.

Much of the payments chains identified result from using virtual prepaid cards, subject to e-money regulations. They often use complex processes such as BIN sponsorship, sometimes to avoid card interchange fees, sometimes to collect them. I challenge that this is proper innovation, it is "shoe horning", creating unnecessary complexity, leading to chains of PSPs providing services to each other, creating systemic risks as illustrated by Wirecard.

Ultimately, consumers keep their money in one place, typically a bank account. Open Banking and account-to-account payments enable bank accounts to be useable digitally – this is where true innovation lies. However, service providers who proliferate the use of stored value accounts using cards technology are in fact complicating matters for consumers who then have to manage multiple stores of value (Oyster cards, FX cards, betting accounts, store accounts and so on). It is much better to steer consumers to use a single account (or a few), either a bank account or digital wallet (based on a bank account or on an independent stored value account rather than on a card account), and allow it to be used anywhere and everywhere they need through open APIs rather than through chains of PSPs.

Pass through digital wallets are mentioned – these I assume mean the likes of Apple Pay, Samsung Pay and Google Pay. These wallets are really just dematerialised cards, or more accurately mobile containers for them. As such, it makes sense that they are outside the scope of regulation, although in fact, they make cards much more secure and consumer friendly that their plastic equivalents.

Question 17: What further trends do you expect to see in payments chains in the next 10 years?

Cards will decline, giving way to account-to-account payments
Virtual accounts and virtual IBANS will increase in usage. In essence, these use software to manage multiple virtual account balances that total up to the balance in an actual bank account. They have many uses such as for collections including internationally, for managing different pots of money without opening multiple bank accounts, or for creating hierarchies of accounts for different uses and different users with separate limits and authorisations. Expect to see greater adoption of virtual accounts and innovations, including multiple currency virtual accounts and open APIs on virtual accounts.

Question 18: What opportunities and/or risks do these trends in new service providers and payments chains pose?

Although there are of course many legitimate uses for prepaid and gift cards, they also pose money laundering, bribery and fraud risks.

They are also used for getting round card controls – for example, a credit card issuer may prevent their cards from being used for gambling, but instead the cards can be used to fund a virtual prepaid card which is then used to gamble.

Thus, service providers who build propositions using virtual prepaid card technology may require closer scrutiny than those who rely on bank accounts (through PIS and AIS) which are subject to bank-grade controls and KYC.

Question 19: What do you think industry, regulators and government should do in order to realise these opportunities and/or address these risks?

Take a closer look at how prepaid and gift cards work, how they are used and misused, to identify if there are risks that need addressing through regulation.

Also, take a closer look at virtual accounts and how they are used. Since virtual accounts are a virtual lens on a regulated bank account, additional regulation should be unnecessary, but regulators should become familiar with this fast growing sector.

As per the answer to question 9, PSPs providing services to other PSPs in chains (including banking-as-a-service providers using cards technology) should be considered as systemically important (as demonstrated by the Wirecard situation) and should be required to have contingency plans in the case where a provider's service is suddenly discontinued or unavailable.

Question 20: Do you think any changes are needed to payments regulation to ensure it keeps pace with the changing technological landscape?

Payments regulation should be redefined as a whole rather than improved incrementally. The accelerating use of technology, the proliferation of data and the expansion of access to payment services are creating new risks that need regulating, while at the same time enabling new tools for regulation – hence the growth of the "RegTech" and "SupTech" (supervisory technology) sectors.

This is a big subject and probably requires a separate initiative and consultation devoted to it. Important areas in payments to address include micropayments, machine-to-machine payments, digital addressability, and compliance as a collective responsibility using shared data and decisions.

Question 21: What further trends do you expect to see in cross-border payments in the next 10 years?

Cross-border payments over the next 10 years will follow the trend of domestic payments to operate real-time 24/7. Volumes are likely to increase ten-fold or more from today, as consumers and business pay smaller amounts, more frequently, on demand, when they need to at a time of their choosing.

The cost of cross-border payments will fall towards zero, which in turn will drive up volume and enable new business models, including micropayments (sub £1). New entrants will drive innovation, as is already in evidence, and in particular the SME sector will be much better served than it is today. Cross-border collections will be much easier for them and new business models using just-in-time ordering and shipping direct to customers (instead of from inventory) will become economically viable.

Other trends to expect are increasing use of digital wallets for cross-border payments, interoperability of domestic QR code payment acceptance systems to allow merchants to accept payments through QR codes from travellers and ecommerce shoppers from other countries, and adoption of cross-border request-to-pay services.

Question 22: What do you think industry, regulators and government should do in order to improve the functioning, speed and cost of cross-border payments for end users, taking into account the G20 work?

The industry, regulators and government should take an end-user driven view, from sender to receiver, to introduce change for cross-border payments. A focus on just the infrastructure and rules around it risks neglecting the end users and the ability for new entrants to serve them with innovative and better services.

For example, SWIFT payments in many instances are already close to real-time and SWIFT charges are low, but end users still see slow payments and high costs from banks – to illustrate, I recently sent a payment from the UK to Canada which took a week to be credited, with the beneficiary bank deducting $25 (on top of the $4 I had already paid the sending PSP); nonetheless, I am certain the Canadian bank received it over SWIFT GPI the same day I sent it, and would have paid around 12 cents to SWIFT.

Industry, regulators and governments should accept that it is unlikely that innovation and change in end user services and end user experience in cross-border payments will come from incumbent banks. Their cost structures are too high, and their revenue models are too established for them to consider alternatives. It is therefore imperative that new entrants are given a level playing field to provide cross-border payments to compete with banks, and that where they depend on banks for banking services and access to SWIFT, that alternatives are allowed to develop.

As per domestic payments, access to central bank settlement accounts for cross-border payments for non-bank new entrants would make a big difference. While the UK can consider this only for the Bank of England, the UK should use the G20 work to influence other central banks to provide settlement accounts to non-banks, thus facilitating liquidity-bridging in central bank money without dependence on commercial banks.

Compliance efficiency and efficacy are key frictions in cross-border payments, and solving them requires coordinated international actions which the UK should influence – specifically to allow compliance to be a collective responsibility for cross-border participants (sharing data and decisions) instead of an individual responsibility leading to significant duplication of compliance checks using sub-optimal data (non-shared); and interoperable KYC to facilitate identification of UBOs (ultimate beneficial owners). Failure to identify UBOs properly is a significant barrier to international trade.

Other actions the UK could take are:

Introduce rules to ensure real-time availability of funds for in-bound cross-border payments, recognising that that the final leg of an in-bound payment is a domestic payment
Facilitate cross-border payments between digital wallets and between digital wallets and bank accounts

Question 23: Are there other opportunities and risks not captured by the questions elsewhere that you wish to highlight? If so, what do you believe the role is for government, regulators, and industry in responding to them?

Other opportunities:

Behavioural biometrics have strong potential in enabling frictionless, secure customer payments experiences. In particular, they can be used in mobile phones to detect how the phone is held and data keyed to continuously authenticate the user. When combined with a step up process to escalate authentication to voice, face recognition and 2FA depending on the payment context, they could be highly effective and secure. Regulators should permit the use of behavioural biometrics as a complement, or alternative to 2FA (such as for the PSD2 SCA).
Identity is frequently cited as a pre-requisite for secure, effective digital payments. However, identity is a big subject and very difficult to solve. Instead, consider a focus on addressability as a first step – knowing where to send a payment, being certain the destination is correct, and being reachable are very important in digital payments, and for example, goes a long way to explain the huge success of the UPI payments system in India. The UK has addressability systems such as Paym, CoP and within Pay.UK's request-to-pay architecture – solving for addressability will help with the APP fraud issues and potentially take a lot of risk out of payments by introducing end user certainty.

Other risks:

The inefficiency 10 years ago in the UK payments industry and its sub-optimal structure and governance highlighted in the call for evidence still seems to be present today, but in a different form despite the achievements listed. As pointed out in question 2, Pay.UK has made slow progress on the NPA, and its every action appears to be under the scrutiny of the PSR, which itself seems to be unclear what it requires – there must be a risk of the current stasis continuing, which will be detrimental to the UK economy, consumers and businesses.
The competition objective of the PSR in particular is unclear – it seems too narrowly focused on competition in infrastructure, and the procurement of infrastructure, whereas the economy would be better served if the focus was on promoting competition between payment providers for end user transactions and business flows.
Finally, I question whether the PSR's decision to allow Mastercard to buy VocaLink, a company which processes globally around 75bn transactions per year with a market cap of $335bn was wise, and whether new entrants and innovators in the UK can compete on a level field given its dominance?

HM Treasury's payments landscape review will reveal a new and emerging digital payments landscape that is very different to that which existed, and envisaged when the PSR was set up in 2015, and when Pay.UK was subsequently formed. Consequently, some significant course corrections may be needed in the future governance in UK payments.

https://telecoms.com/485813/uk-indoor-mobile-reception-still-a-bit-rubbish-uswitch-com/