Key takeaways

• The Report's leading recommendation is for the Government to develop a National Payments Vision and Strategy.

• There are two recommendations encouraging HM Treasury to rapidly move strong customer authentication (SCA) and other requirements (eg in relation to contactless limits) away from detailed technical standards and into FCA regulatory rules and/or guidance based on outcomes.

• It is recommended that Open Banking should be leveraged to improve the person-to-person bank transfer payments journey.

• The Report also stresses the need to prioritise a basic level of consumer protection and clarity on liability for payments made via Open Banking, to avoid the risk that the new APP fraud rules will be misused and invoked to cover a much wider range of claims than intended.

• There is also a recommendation that HM Treasury and the regulators should review whether the way some current regulatory requirements are applied to Fintechs is clear and appropriate, with a view to reducing complexity for smaller firms to facilitate their more rapid growth.

What do firms need to be thinking about?

• Many firms in the payments space responded to the Review's July 2023 Call for Input, so they and others in the sector will be keen to examine the recommendations and other thoughts for consideration contained in the Report in light of their feedback.

• With the Government committing to revisit SCA and other requirements in the context of the Smarter Regulatory Framework (see 'What's next?'), firms should be ready for more changes ahead as FCA rules based on outcomes look set to replace the current detailed technical requirements.

• It also appears to be "full steam ahead" on legislating for Open Banking-enabled payments, but one area of continuing uncertainty for firms here is whether a viable commercial model will be found to secure Open Banking's long-term future (another one of the Report's recommendations). Fintechs should be glad to see that the Report flags the need for this to be done without impairing their ability to develop successful business models.

• Given the above plans, the Report's recommendation that HM Treasury and the regulators should work to reduce the regulatory initiatives impacting firms by 10% - described as an 'aspirational ambition' – does seem unlikely to be anything more than that for the foreseeable future.

What's next?

In response to the Report's recommendations, the government announced in the Autumn Statement that it:

• will publish a National Payments Vision in 2024;

• is looking to repeal 'prescriptive EU-derived payments authentication rules' to improve fraud prevention and the customer payments experience, and the FCA will review the rules with a view to adopting an outcomes-based approach, with particular consideration of the contactless limits; and

• is planning to legislate to unlock the full potential of Open Banking-enabled payments next year.

Read on for a more detailed look at the Report's findings and recommendations.

Background to the Review: the Mansion House Reforms

The Future of Payments Review 2023 was launched as part of the Chancellor's Mansion House Reforms announcements in July 2023. The aim of the Review was to consider how payments are likely to be made in the future and make recommendations for government, financial services regulators and industry on the steps needed to successfully deliver world leading retail payments, in a further boost to UK fintech competitiveness. A Call for Input was published to inform the Review, which was chaired by Joe Garner. The scope of the Review was set out in more detail in its Terms of Reference, and the Report clarifies that it does not focus on other hot topics which are already under consideration as part of other initiatives. This includes access to cash, cryptoassets, large corporate payments, Buy Now Pay Later (BNPL) and international payments.

Work on the Review included a number of actions to gain insight into the global payments landscape. The learnings from this work for the future of UK payments are set out in the Annex to the Report (see further 'What was learnt from looking at international payments?' below).

The Review recommendations

The Review found that while the UK is in a relatively good position today, it needs to make progress in order to stay ahead. The Report sets out 10 recommendations for the government and regulators:

National Payments Vision and Strategy

• The primary recommendation is for the Government (led by HM Treasury) to develop a National Payments Vision and Strategy to bring clarity to its future desired outcomes for UK payments, with a key aim of simplifying the current plans and landscape. There should be clear guiding principles such as safety, simplification, coordination of initiatives, responsiveness (to innovation), inclusivity (to build broad alignment on priorities) and accountability to drive progress. Sitting below these, a National Strategy can resolve and guide on key ambiguous areas such as the roles of respective regulators and industry bodies and taking a position regarding Digital ID for payments.

Consumer experience

• There are two recommendations encouraging HM Treasury to take advantage of the Smarter Regulatory Framework to rapidly move strong customer authentication (SCA) and other requirements (eg in relation to contactless limits) away from detailed technical standards and into FCA regulatory rules and/or guidance based on outcomes. The idea is that this will enable firms to innovate to achieve the outcome rather than be constrained by narrow rules that introduce friction to the consumer journey (and lead to issues such as increased online shopping cart abandonment rates). The objective is to improve the customer shopping experience by reducing that friction while still preventing fraud risk.

• Also on consumer experience, HM Treasury and the FCA should regularly assess whether digital exclusion is leading to financial exclusion more broadly and market developments in this area. This could form part of the FCA’s financial lives survey. The risk of financial exclusion through digital exclusion is increasing as the smartphone becomes increasingly central to payments. There is also evidence of a 'Poverty Premium' for people on lower incomes who face higher costs for services, including the way they pay (eg on receipt of a bill rather than by direct debit).

Open Banking

• To address the need to establish consumers' trust and security in order to increase adoption of Open Banking solutions, consumer protection on payments made via Open Banking should be enhanced with a minimum form of dispute resolution. The Report identifies a need to simplify and clarify the consumer protection landscape. Without this, it emphasises the risk that the new APP fraud rules will be misused and invoked to cover a much wider range of claims than intended. The Report calls on HM Treasury, JROC and industry participants to prioritise addressing the need for a basic level of consumer protection and clarity on liability for payments made via Open Banking, eg a basic dispute resolution service that deals with purchase protection, potentially shared at the industry level (an industry ‘chargeback lite’ service).

• Open Banking should be leveraged to improve the person-to-person bank transfer payments journey. The UK is beginning to fall behind in terms of person-to-person payments made by bank account transfer. The key reason for this is that other countries have built newer real time payments systems and simplified the consumer experience via the use of either: a) national identifiers such as national ID numbers or b) the use of an alias/proxy such as mobile phone number or email address. Open Banking is starting to enable much improved bank transfer journeys, in some cases using QR codes or unique URLs, so it should be used as the route to improve the UK consumer account-to-account payment journey. This is preferable to the time and cost that would be involved in trying to rebuild a 'Pay-M' like alias/proxy system (an unsuccessful system that enabled mobile number to mobile number payments launched in 2014 and closed in March 2023). However, the Report stresses that the need for enhanced consumer protection and sustainable commercial arrangements (see other related recommendations) should be prioritised ahead of opening a wider range of application programming interfaces (APIs).

• An Open Banking alternative payment journey should be developed to give retailers choice beyond card schemes. The Payment Systems Regulator (PSR) should also complete its review of card scheme fees. A major driver of merchant dissatisfaction may be partly due to the lack of a digital alternative to the card schemes, so creating choice should help to reduce that dissatisfaction.

• The Government and the Joint Regulatory Oversight Committee (JROC) should prioritise agreement of a commercial model for Open Banking so that there is scope to invest in both infrastructure and consumer protection with a view to long-term financial sustainability and therefore also long-term success for Open Banking. The Report points out that feedback is consistent that new payments approaches can only succeed when they have both a sustainable commercial model and adequate consumer protection. If there is no sustainable commercial model, there is no money to fund adequate consumer protection and infrastructure investment. However, this needs to be done without impairing Fintechs' ability to develop successful business models. To this end, any charging structures will need to be simple, transparent, fair and predictable. It is also recommended that all Open Banking APIs should be considered – not just VRPs and other premium APIs (bearing in mind any potential impact on existing Fintech businesses).

Improving regulatory oversight and alignment

• The PSR should conduct a review of the costs and benefits of the new APP fraud rules 12 months after implementation and the Government should set a more ambitious fraud crime reduction target beyond 2024. The importance of tackling the crime at source grows as more and more ‘non-bank money’ is flowing on ‘non-bank rails’. In particular, the Report cites the use of crypto currency (with crypto increasingly integrated into the mainstream payments space), the increasing trend to convert bank money into some form of credit within a virtual world (eg TikTok Coins), and the rise of stablecoins. The new APP rules on fraud reimbursement will help increase refunds to customers, but broader-based actions are needed to tackle the underlying crime. The Report highlights that, according to Government data for 2021/22, fraud now constitutes 41% of all crime in the UK. It states that the PSR's review should pay particular attention to understanding the additional friction placed in the payments process and how it compares internationally. First party fraud rates and abuse of the new rules more generally should be looked at, as well as any impact on the overall fraud crime rate. The Report points out that, under the Financial Services and Markets Act 2023, HM Treasury now has the power to compel the review if necessary. An additional point for consideration is that, while it's good to see that the new Government Fraud Strategy is looking across departments, a higher level of ambition for cutting fraud crime should be set for the coming period. Consideration should also be given to a strong public/private partnership with the opportunity to reinvest savings from tackling crime together.

• HM Treasury and the regulators should review whether the way some current regulatory requirements are applied to Fintechs is clear and appropriate, with a view to reducing complexity for smaller firms to facilitate their more rapid growth. Actions from the Kalifa review should also continue to be prioritised. The Report suggests that the recommendation could be achieved by HM Treasury and the regulators publishing a streamlined version of the Regulatory Initiatives Grid, highlighting only those initiatives that are of critical importance to Fintechs, and guides on relative priorities. It adds that it might be helpful to have a more filtered set of priorities for smaller and newer firms.

• HM Treasury and the regulators should take a variety of actions to drive closer alignment of regulatory activity, including through updated remit letters, enhancing the regulators’ existing Memorandum of Understanding, ensuring cross-pollination at Board level (in particular to have Bank of England representation on the PSR Board and vice versa) and working to reduce the regulatory initiatives impacting firms by an aspirational ambition of 10%. That way, at a operational level there would be more capacity for innovation. At the strategic level, the key recommendation is the creation of a National Payments Vision and Strategy (see above). Examples from both other areas in the UK and payments initiatives in other jurisdictions have demonstrated the need for both a clear definition of outcome and a better level of industry-regulator cooperation. The Report asks whether it is therefore now time to explore a more collaborative approach.

Other thoughts for consideration

As well as the recommendations, the Report highlights other thoughts for consideration. The nature of Government engagement with Big Tech has emerged as the main theme in this regard. Given that Big Tech raises a number of high priority issues – namely national security, online harms, artificial intelligence as well as financial services – the Report finds that Government engagement with Big Tech could be better coordinated. By way of example, it points to what it describes as the 'Silicon Valley embassy' that the EU set up in the U.S. in 2022 to strengthen its digital diplomacy.

Other areas include:

• On consumer experience:

  • Opening the point of sale infrastructure to payment rails other than cards to help Open Banking options to fully compete with the contactless experience at point of sale;

  • In relation to digital wallets, with the big global tech players such as MasterCard, Visa and Google now having such a strong position in UK payments the Government could consider developing a point of view on having so much of the UK payments landscape open internationally (given other jurisdictions such as Switzerland and the U.S. are developing domestic alternatives to the global tech players);

  • Using the National Payments Strategy to encourage wider adoption of Request to Pay which was launched in 2020 but is not widely available;

  • Building on the recommendation relating to assessing digital exclusion, eg by updating the Government's digital inclusion strategy (last refreshed in 2014) with a specific focus on digital payments and by considering the recommendation of the Natalie Ceeney Access to Cash review that enabling digital payments should be a priority for Government and regulators (in particular the review’s suggestion that the Government could set innovation challenges to encourage industry to develop inclusive payment options).

• On Open Banking:

  • Progressing some form of digital ID was an issue that was raised in 31% of responses. The Report notes that progress has often been made more rapidly in the payments space in countries where there is a national identifier or digital ID (eg India, Scandinavia and The Netherlands). There is therefore a suggestion that it makes sense for the industry and Government to continue to look at the opportunities from new technology. Big Tech also have the potential to play a key role in the future of digital identity or verification. One ‘pan-Government’ stream of exploratory work in this area would be preferable to avoid the risk of failure if a fragmented approach is taken;

  • In relation to the evolution of digital wallets as part of the payments landscape, Big Tech could well look to build out their consumer proposition, possibly using Open Banking. The Report recommends that HM Treasury and the regulators aim to keep up an 'open and constructive dialogue' with the digital wallet providers as there are significant opportunities to collaborate in the interests of UK consumers as innovation takes place at a rapid rate;

  • Regarding major initiatives implementation in general, and Open Banking in particular, outcomes would be improved if there was a more supportive and collaborative relationship between regulators and industry.

What was learnt from looking at international payments?

The Annex to the Report sets out a number of conclusions from the Review's work to gather learnings from other countries' payments landscapes:

• Every country’s payment industry is shaped by the need of the country: While the decline in use of cash and cheques and the move to digital payments is a global trend, consumer preferences at both point of sale and for ecommerce vary dramatically.

• Success can be achieved in multiple different ways, but there are 4 key factors for a successful mechanism – a strong vision, industry collaboration, that the proposal stacks up commercially and trust.

• There are international examples that are demonstrating a more sophisticated adoption strategy than the UK. The Report cites Brazil's PiX as a good example of adoption approaches being matched to their core objectives (for i) an innovative mechanism for instant payments and ii) financial inclusion).

• Users are relatively ‘future focused’ but this stems from mechanisms that provide better value to users.

• ‘Interoperability’ gives food for thought. The key takeaway is that this term is used to mean multiple different things, and the Report sets out some examples (cross-border, across journeys, for merchant and customer acceptance, in access and development and at a system level). It recommends that any future vision of UK payments includes consideration of these options.

• There is much that the UK has and is doing that is the envy of the world. Particular points where the UK is considered to have major advantages are:

  • VRPs;

  • Having destiny over its own payments legislation;

  • Awareness of the importance of staying on top of fraud; and

  • Consumer journeys.

Next steps

In the Autumn Statement 2023, the government states its commitment to 'growing the UK’s world-leading retail payments sector':

• In response to the Report's leading recommendation, the government has announced its intention to publish a National Payments Vision in 2024. Building on the review’s findings, this will include consideration of priorities for UK payments and, working with the Payment Systems Regulator and the Bank of England, will consider the role of the New Payments Architecture.

• In relation to other core recommendations, the government is looking to repeal 'prescriptive EU-derived payments authentication rules' to improve fraud prevention and the customer payments experience. The FCA will review the rules with a view to adopting an outcomes-based approach, with particular consideration of the contactless limits.

• Next year, the government is also planning to legislate to unlock the full potential of Open Banking-enabled payments. According to the summary in the Autumn Statement, the government’s intention is for the new regulatory framework to require firms beyond the largest banks to participate in a 'sustainable and equitable commercial model through which the technology and necessary consumer protections will be developed, and with appropriate regulatory backstops'.

If you would like to discuss any of the points raised by the Future of Payments Review 2023 Report, please get in touch with one of the people listed above or your usual Hogan Lovells contact.

Authored by Virginia Montgomery.