Payments Review – Winter 2023/24 by Payments_Review

ISSUE 5: WINTER 2023

UK Big Bang 2.0 Will there be a major breakthrough in the fintech and digital payments world in 2024?

Financing a sustainable future A reshaped approach to borrowing and lending

Tackling APP fraud

The need for preventative measures

Become a member of The Payments Association “The Payments Association brings together a broad range of industry participants to identify and address prevailing risks and issues. It plays a leading role in looking around corners for the sector and provides an important forum for interaction with regulators.” Max Savoie, Partner, Sidley Austin

Scan here to enquire about membership

Contents

CEO’s Word

Ben Agnew, CEO

P7 Could the process of de-dollarisation help ease payment friction?

P12 Atomic settlements have huge potential to shape the industry

elcome to the Winter edition of Payments Review. In this issue we take a look at what 2024 has in store for the payments sector: with the rapid pace technology is developing and AI being used in people’s day-to-day lives, could it be the year of Big Bang 2.0? Our cover feature explores this idea and looks at some of the changes in store for this industry. We take a look at the possibility of moving away from the US dollar being the global currency reserve and if that is feasible, what does this mean for payment firms and financial services. There are a number of countries exploring this, including China and India, with the view that it could help ease payment friction. This edition also has all the latest updates from FC360 – check out our picture spread on page 30. We hope you enjoy reading the last edition of 2023. If you wish to contribute to next year’s editions, or share your ideas, please do not hesitate to get in touch.

P33 Rise in consumer demand for climate conscious payment technology

P5 How the UK is shooting itself in the foot over crypto

P26 Tackling APP fraud: An industry at a crossroads

P7 Could BRICS countries introduce their own currency for international trade?

P28 Spotlight: Form3’s Cheyenne Datuin speaks about how she got into the payments industry

P10 Ethical credit: Financing a sustainable future

P30 Financial Crime 360: How the industry came together to combat fraud

P12 What an atomic settlements boom could mean for the payments industry P17 News in brief: The latest member updates and news P18 2024: A pivotal year for the global economy and finance industry P20 UK Big Bang 2.0: Will it happen in 2024?

Winter 2023

P33 How fintechs can supercharge sustainability and gain consumer trust P36 How augmented reality is shaking up e-commerce P38 PSD1, PSD2, PSD3: 15 years of EU legislation in a nutshell P40 What is unified commerce?

FOREWORD

The team

Payments regulation in 2024: A year of evolution

Anjana Haines Editorial director Anjana.haines@thepaymentsassociation.org George Iddenden Reporter george.iddenden@thepaymentsassociation.org Tony Craddock Founder and director general

Brett Carr, associate, Latham & Watkins

Ben Agnew CEO Mark Bethell CFO Emma Banymandhub Events director Maria Stavrou Operations director Tom McCormick Sales director Tom Brewin Head of projects Riccardo Tordera Head of policy Sophie Bossier Head of membership engagement Gavin Alexander Content marketer Tyler Smith Projects and content co-ordinator Jay Bennett Projects assistant

Market Intelligence Board Paul Adams Head of strategic alliances Trust Payments Andrew Doukanaris CEO Flotta Consulting Martyn Fagg COO Tillo Manish Garg Founder & CEO Banksly Joe Hurley CCO Crown Agents Bank Sarah Jordan Project financial crime member Deloitte Miranda Mclean Chief marketing officer LHV Bank Mark McMurtrie Director Payments Consultancy Mark O’Keefe CEO Optima-Consultancy Anant Patel President, supply chain payments Monavate Kit Yarker Direct, product and propositions EML Payments

Brett Carr reflects on regulatory change in the UK and EU payments sectors and explains why the pace is not expected to slow as we head into 2024.

he UK and EU payments sectors continued to draw increasing regulatory scrutiny throughout 2023. The need to deliver compliance with new regimes required a great deal of attention and resources throughout the year. Whilst waiting for the release of anticipated EU proposals, the UK remained in information-gathering mode with the launch of various new work programmes, which will feed into the UK’s ongoing assessment of whether divergence might make sense for the UK market. In the EU, the focus was firmly on the third Payment Services Directive (PSD3) announcement, with many characterising the proposals as an ‘evolution’ and not a ‘revolution’. The proposals will repeal and replace PSD2 and second Electronic Money Directive (EMD2) to become PSD3 Payment Services Regulation will move much of PSD2 and EMD2 into a directly applicable regulation. Pathway to implementation The first proposals for PSD2 published in 2013 and (mostly) came into application in 2018. During 2024 we can expect to see ongoing negotiations of the text between various EU institutions and potentially significant changes. The pathway might take shape as follows: •

Now: Review by the European Parliament and the Council of the EU. Final versions of the legislative texts of PSD3 and the PSR could be agreed

•

as early as late 2024 or early 2025. However, European Parliament elections in Q2 2024 may delay this work. Potentially 2024/2025: The proposed PSD3 and PSR will enter into force on the 20th day after publication of the final texts in the Official Journal. Member states will then need to start work to transpose PSD3 into national law. Meanwhile, the European Banking Authority will focus on producing the various guidelines and technical standards. Potentially 2026: 18 months after entry into force, the proposed PSR will start to apply. Before this point, member states must have transposed PSD3 into national law which will also start to apply and PSD2/EMD2 authorised firms must have made their reauthorisation applications. Firms will have an additional six months (24 months after the PSD/ PSR comes into force) to comply with the new payee verification (confirmation of payee style) requirements.

For further insight and analysis watch the Latham & Watkins PSD3 webcast here. Continuing UK reform agenda The pace is not expected to slow and the UK sector can expect a busy transition from 2023 to 2024 with some significant changes on the horizon. Firms must continue to meet the pace of complex regulatory and technological change, whilst keeping one eye on the horizon for what is yet to come in 2024 and beyond.

Payments Review is published by The Payments Association. Payments Review and The Payments Association does not necessarily agree with, nor guarantee the accuracy of the statements made by contributors or accept any responsibility for any statements, which are expressed in the publication. The content and materials featured or linked to are for your information and education only. They are not intended to address personal requirements and not does it constitute as financial or legal advice or recommendation. All rights reserved. Payments Review (and any part thereof) may not be reproduced, transmitted, or stored in print, electronic form (including, but not limited, to any online service, any database or any part of the internet), or in any other format without the prior written permission of The Payments Association. The Payments Association, its directors and employees have no contractual liability to any reader in respect of goods or services provided by a third-party supplier. The Payments Association, Runway East, 20 St. Thomas Street, London SE1 9RS, Tel: 020 7378 9890

NEWS ANALYSIS

How the UK is shooting itself in the foot over crypto By George Iddenden

n recent years, the UK has been keen on positioning itself as a global crypto asset hub, however it’s currently facing critical obstacles which are hindering its effort. While the industry has worked hard to make early gains in the crypto space, it’s encountered a dual challenge linked to the legacy banking sector which is preventing progress being made according to insiders. One of the major issues is currently revolving around retail customers’ ability to access crypto products, with large banks, including Chase Bank, blocking

Winter 2023

transactions with crypto exchanges. Perhaps the primary reason for this is the new app reporting requirements introduced by the Payment Systems Regulator (PSR), making banks increasingly risk-averse. While risk management is crucial, the new stringent measures have implications for crypto businesses, creating a scenario where potential customers are denied access to essential financial services. The second challenge being put in the way of progress in the sector is related to the difficulties companies are

now facing when trying to open and maintain banking accounts in the UK. Many businesses involved in blockchain, crypto, web3, fintech, and payments are forced to rely on secondtier banks or operate offshore due to their inability to secure accounts with major banks. This is inadvertently pouring water on the crypto flame, hindering companies from scaling and expanding their operations within the UK. NorthPoint Strategy, a leading emerging tech lobbying firm, managing director Simon Jennings believes the UK

NEWS ANALYSIS

should urgently address these issues as they are preventing the UK from fulfilling its ambitions to become a ‘global cryptoasset hub’. He tells Payments Review: “Firms within the UK’s digital asset and Web3 ecosystems have long struggled to establish and maintain banking relationships. “Even with significant progress in providing legal and regulatory certainty, these firms still face obstacles that continue to undermine the sector’s growth potential. “Even some firms that are registered and supervised by the FCA have difficulty obtaining banking services from major providers”. “This situation has led to reduced innovation and scalability, hindering these businesses from introducing new products and services on a global scale.” Jennings pointed out that the issue has forced many UK-based cryptoassets and blockchain companies to seek expensive alternatives.

“These include setting up accounts in countries like Estonia, Poland, and Bulgaria. Some are even considering relocating core functions to jurisdictions where banking services are more accessible. “In the absence of adequate banking services, these firms are pushed to seek riskier financing options, potentially creating concentrated risks within the sector.” The challenge extends beyond the issue of risk appetite as, in some cases, large institutions are offering investment banking services but deny essential banking services, Jennings claims. This issue gained prominence, in part, thanks to Nigel Farage’s involvement in the banking saga with Coutts. After initiating an enquiry on the issue, the Financial Conduct Authority (FCA) concluded that there wasn’t enough action to support regulatory action. In response to the findings, a number of credible industry bodies are in the process of collaborating to gather

webinar The future of payments for US daily fantasy sports and sports betting

Thursday 19 January 14:00 – 15:00 GMT Sponsored by

evidence on the issue by demonstrating the extent of the issues faced by firms seeking access to essential banking services. The challenges faced by the UK crypto industry regarding banking issues are currently in a complex position. Jennings believes the UK can take a leaf out of others’ books. He says: “International examples from places like Hong Kong and France show that banks can support crypto-related businesses while ensuring compliance with regulations. “These jurisdictions have put in place measures to prevent discrimination against regulated cryptoasset service providers. A similar approach in the UK could bolster confidence in banks and enhance transparency.” The issues at hand have the potential to influence the country’s ability to establish itself as a global crypto asset hub, as well as hinder the growth of businesses across multiple industries relating to emerging technologies.

DE-DOLLARISATION

Could BRICS countries introduce their own currency for international trade? While there are efforts by the BRICS countries to reduce their dependency on the US dollar as the global reserve, experts cast doubt whether the process of de-dollarisation could actually help ease payment friction. Chris Menon

here has been much speculation recently regarding efforts by the BRICS countries (Brazil, Russia, India, China and South Africa), to reduce their dependence on the US dollar, the global reserve currency, a process known as de-dollarisation. Much of the speculation was fuelled by utterances from leaders of two of the countries themselves at the BRICS summit in August. Notably Brazil’s president, Luiz Inancio Lula da Silva called for the BRICS to create a common currency for trade and investment. While Russia’s president, Vladimir Putin, said: “The objective, irreversible process of de-dollarisation of our economic ties is gaining momentum.” But how serious a threat do their efforts pose to the dominance of the US dollar? Indeed, what is the real intention of the BRICS in the short and long-term? Are they planning to develop a new currency that will seek to end dollar dominance? What about developing an alternative payments system to rival Swift? Moreover, what might be the effects of de-dollarisation on payment friction? Would it really be a negative? Certainly, the BRICS are slowly becoming a force to be reckoned with, led

Winter 2023

by China. As the UNCTAD document, the BRICS Investment Report points out: “The changing absolute and relative economic weights of the BRICS economies over the past decade have transformed the shape of the global economy. “According to the World Bank, the share of BRICS in global GDP [Gross Domestic Product] grew from 18% in 2010 to 26% in 2021, with increases in all years during the period.” Of course, the stand-out performer among the BRICS is China which, as the report stresses, accounted for 70% of BRICS GDP in 2021.

There is no natural or smooth progression to another payments architecture in which there isn’t a lot of churn and damage.”

DE-DOLLARISATION

Reducing dollar dependence Costas Lapavitsas, professor of economics at the School of Oriental and African Studies (SOAS) believes that the BRICS desire for a way to reduce their dependence on the US dollar is perfectly logical. That’s because the reserve status of the US dollar places an enormous restraint on their domestic monetary policies, given the need to stabilise their foreign exchange rates by targeting inflation and also hold dollars in reserve. “It’s in this context that the BRICS development has to be understood,” argues Lapavitsas. “It has been a longstanding demand of developing countries that the global financial architecture should be reformed. “That’s how you can think of it in terms of policy, it creates policy space for a finance minister. If you give yourself policy space domestically, then you can follow develop strategies far more openly, domestically. That doesn’t mean, however, that it is going to work or that they are going down the right path or that they will succeed, and the world will de-dollarise. It doesn’t mean that at all,” he cautions. While the BRICS appear to be focused on trading more between each other using national currencies, this is a long way from developing a common international currency. This position was acknowledged by India’s foreign secretary Vinay Mohan Kwatra in August, just prior to the BRICS summit. He said: “The substantive part of trade and economic exchanges and discussions that have been a part of BRICS discussions, have so far, in a major way, focused on how to increase trade in respective national currencies which […] is considerably different from a common currency concept.” However, from these limited efforts has grown speculation that they are planning to introduce a currency that will threaten the global dominance of the US dollar. Notably, economist George Magnus gave this aim credibility in an essay entitled. This fear was also fuelled by comments from Jim Rickards, an American lawyer, investment banker, media commentator, and author on matters of finance and precious metals. He suggested prior to the BRICS summit that it was likely they would announce the launch of a goldlinked international currency, although he did stress in an interview that it wouldn’t threaten the reserve currency status of the US dollar.

No evidence of BRICS currency Nevertheless, others argue that there is scant evidence that the BRICS are actively planning any such move in the near future. Lapavitsas explains: “I think it is an expression of desire and possibly a longer term plan, but they would have to do a lot of very concrete institutional things before it becomes serious and I’ve seen nothing so far – all I’ve seen are just words. “And the institutional things [to consider, such as]: co-ordination of domestic policies, fiscal and monetary and developmental policies, [and a] method of controlling capital flows at least within the group. When they show me that I will begin to think seriously about whether that can be a realistic option.” For his part Michael Hudson, professor of economics at the University of Missouri–Kansas City, disputes the very notion that the BRICS are planning to develop a new euro-like currency and argues that all that those countries are trying to do, is use their own national currencies as a means of settlement for trade and investment among themselves, which he views as a positive. Still, concerns persist in some quarters that the future development of any BRICS currency combined with an attempt to move away from Swift as a payment system could produce trade and payment

While the BRICS appear to be focused on trading more between each other using national currencies, this is a long way from developing a common international currency.”

frictions. The extent to which it might theoretically increase payment friction would depend on the following. •

Liquidity: The availability and liquidity of the currency. • Exchange rate risk: Fluctuation in the value of a BRICS currency could lead to additional costs for businesses engaged in international trade. • International acceptance: How likely would it be to be accepted or trusted internationally? • Banking infrastructure: International payments rely heavily on the banking infrastructure that supports the US dollar, including correspondent banking relationships, clearing systems, and international payment networks. Shifting away from the dollar would require the development of a similar infrastructure. Magnus points out that despite Chinese efforts to diversify from the Swift international payments system by developing its own platform – CrossBorder Interbank Payments System (CIPS) – the latter still relies on Swift. He says: “De-dollarisation rolls off the tongue easily enough, but its supporters and advocates do not really know that they are playing with fire. “We are part of the USD system and it suits us. America’s exorbitant burden is something we don’t have to carry. But disorder and chaos in the global financial system and architecture, such as you allude to, would be chaotic for us too. There is no natural or smooth progression to another payments architecture in which there isn’t a lot of churn and damage.” Existing payments friction Arguably, from the BRICS perspective, payments friction already exists under the dominance of the US dollar. In his latest book, ‘The State of Capitalism’, Lapavitsas explains that the US has “repeatedly used access to the dollar as world money for strategic political purposes, for instance by freezing the reserves of several countries, including Iran, Venezuela and Afghanistan”. “Most conspicuously, the USA froze a large part of the enormous reserves of Russia during the Russo-Ukrainian War in 2022. The actions of the US government left no doubt that the dollar as world money is a cardinal instrument of imperial power for the USA,” he adds.

DE-DOLLARISATION

While many countries outside of the West would like to have the economic autonomy that the dominance of the dollar arguably prevents, there is scant evidence to suggest the BRICS have any plans, much less the ability, to usurp the dollars role as global reserve currency in the foreseeable future. Furthermore, Lapavitsas argues that the institutional mechanisms of Swift are controlled by the US. “Through Swift, the US controls the banking ‘language’ required for international clearing and settlement and is able to monitor all the relevant transactions. The imperial use of Swift was demonstrated in 2022, when Russian banks were excluded from its facilities, as Iranian banks had been in 2018.” In a statement on its website, Swift claims it is “neutral” adding that while “sanctions are imposed independently in different jurisdictions around the world, Swift cannot arbitrarily choose which jurisdiction’s sanction regime to follow”. “Being incorporated under Belgian law it must instead comply with related EU regulation, as confirmed by the Belgian government,” it went on to state. This could be a reason enough for the BRICS to wish to be a little less

Winter 2023

reliant on the US dollar and Swift. But, even if there is a long-term desire to do this, how likely is it in the foreseeable future? While many countries outside of the West would like to have the economic autonomy that the dominance of the dollar arguably prevents, there is scant evidence to suggest the BRICS have any plans, much less the ability, to usurp the dollars role as global reserve currency in the foreseeable future. Thus, Hudson claims: “Magnus doesn’t understand what the BRICS are doing. […] They are not talking of a new euro-like BRICS currency.” For his part, Magnus freely acknowledges that “the US, because of its reserve currency status, can and does weaponise its currency and financial structure to penalise others” deliberately causing disruption. Yet, he doubts the BRICS ability to bypass the current system.

No viable alternative Indeed, Magnus doesn’t even believe there is any viable alternative, as long as the current global balance of payments structure is what it is. “As long as [countries such as] China, Germany, Japan [and] Korea run up large surpluses, they simply have to invest them [dollar denominated assets such as US treasury bonds] in capital markets that are deep, broad, law-bound and transparent. That’s the simple beginning and end,” Magnus says. “That is why I think the US itself has to be part of the solution to a world in which the USD loses part of its global status.” While Lapavitsas isn’t enamoured of US dollar dominance, he similarly doesn’t see any chance that the BRICS are likely to usher in an end to it soon. “It is not going to happen for a long time and for it to happen they have got to take institutional steps which would be very serious,” he says. “Without telling us they are going to take these institutional steps no one can take it seriously. “When they come close to the institutional steps that they have got to take, they will realise the difficulties. Then they will have to compromise politically, I’d love to see that. I would love to see India and China agree on how to manage the currency. But if you want my opinion it is never going to happen.” From a long-term perspective, Lapavitsas adds: “This indicates the decline of US hegemony and the weakening ability of the United States to impose its will on others. “In terms of manufacturing [and] commerce, the US is no number two. In terms of finance, however, it is very much number one. And for common money, that is what matters. The US will not easily be shifted from that.” Thus, it appears that the growing intra-BRIC trade in local currencies poses no immediate threat to the existing system. Nor, can the blame for the payment frictions that currently exist in international trade be placed at its door.

MEMBER PERSPECTIVE

Ethical credit: Financing a sustainable future Christien Ackroyd explains how the ethical grade concept works, covering best practices, benefits, and which banks are getting it right.

n today’s ever-evolving financial landscape, the concept of ethical credit has gained significant traction, reshaping the way individuals and businesses approach borrowing and lending. Ethical credit goes beyond traditional metrics and assessments, incorporating social, environmental, and sustainability factors to guide loan and credit decisions. Ethical credit practices transcend the narrow confines of profit, embracing a broader perspective that considers the greater good. By evaluating borrowers’ ethical practices and their impact on society and the environment, ethical credit creates a powerful bond between finance and society. Some examples that illustrate ethical credit best practices that aim to promote sustainability, social justice, and a positive impact are: • Green loans direct financial resources towards environmentally friendly projects, such as renewable energy initiatives, energy-efficient building upgrades, sustainable agriculture practices, and environmentally responsible businesses. • Microfinancing empowers individuals and small businesses in disadvantaged communities or developing countries, providing them with access to financial resources that were once beyond their reach. • Social impact investing supports projects and businesses that have a positive social impact, financing affordable housing, education programmes, healthcare initiatives, and community development projects.

•

Fair trade financing uplifts businesses that uphold fair trade standards, promoting fair wages, safe working conditions, and sustainable production methods. Impact assessments shed light on the social and environmental outcomes of lending activities, ensuring that credit is channelled towards endeavours that create positive change.

MEMBER PERSPECTIVE

Benefits of ethical credit The benefits of ethical credit extend far beyond the reach of finance. While the positive impact on society and the environment is evident, ethical credit also holds immense potential for institutions. By focusing on a customer base that’s often less wealthy, institutions may initially question the revenue incentives. This market represents untapped potential, with fewer competing companies. Ethical credit practices have the power to enhance a company’s reputation and brand value, setting them apart from their competitors. Ethical credit can help providers build trust with stakeholders and avoid risks from unethical practices. Ethical credit controversies The lack of objective and standardised criteria for evaluating ethical practices leads to differing opinions among ethical credit providers. Different providers might have different opinions on what is ethical, which can lead to accusations of bias or greenwashing.

Exclusions based on ethical criteria may deny credit to businesses that need financial support or have the potential to transform their practices in a positive manner. Critics argue that such exclusions hinder economic growth and limit opportunities for businesses to improve their ethical standards. Balancing the need for positive impact with financial viability poses a risk-return trade off, as ethical credit providers must ensure repayment and financial sustainability. Assessing the ethical practices of borrowers requires diligence and resources, potentially resulting in higher administrative costs. These concerns highlight the importance of keeping the conversation going and working on refining ethical credit practices. Standardisation, transparency, affordability considerations, and impact reporting help to ensure that ethical credit truly aligns with its intended objectives.

Ethical credit can help providers build trust with stakeholders and avoid risks from unethical practices.”

Ethical credit done right Triodos Bank, based in the Netherlands, operates on the principle of financing projects that have a positive social, environmental, and cultural impact. Triodos Bank conducts rigorous assessments of borrowers and projects to ensure they meet its strict ethical criteria. It provides loans to a wide range of sectors, including renewable energy, sustainable agriculture, organic farming, social housing, and fair-trade initiatives. Triodos Bank’s transparency, impact reporting, and commitment to sustainable finance have earned it recognition as a pioneer in the field of ethical banking. Grameen Bank is a notable example of an ethical credit provider focused on microfinance. It was founded by Nobel laureate Muhammad Yunus and aims to alleviate poverty by providing microcredits to low-income individuals who lack access to traditional banking services. Grameen Bank primarily serves borrowers in rural areas of Bangladesh, offering them credit to start or expand small businesses. It follows a unique lending model based on trust, group accountability, and social collateral, enabling individuals to improve their livelihoods and contribute to local economic development. BRAC Bank Limited is a private commercial bank based in Bangladesh, founded in 2001. It is a subsidiary of BRAC, a leading development organisation in the country. The bank focuses on providing financial services to small and medium enterprises (SMEs) in Bangladesh, with a mission to contribute to the overall economic development of the country. In addition to its operations in Bangladesh, BRAC Bank also has a presence in Uganda, where it provides inclusive financial services for lowincome communities to build their livelihoods.

Christien Ackroyd is product director – core and modules at Paymentology

Winter 2023

ATOMIC SETTLEMENT

What an atomic settlements boom could mean for the payments industry George Iddenden

s the UK continues to try and place itself as a leader in the payments industry and fintech, maintaining a degree of pace, security and efficiency must remain a priority. With the growth of blockchain technology and fasterpayment solutions, the concept of atomic settlements is promising to usher in a new era for secure, digital payments. Touted as the next move in the financial sector’s faster payments revolution, atomic payments have the opportunity to reduce settlement risks, increase efficiency meanwhile slashing costs. However, like most new concepts, there are currently some significant barriers to widespread adoption across the industry. The concept of atomic settlements relies on all parts of a transaction being completed, or none of it occurs. This process is mainly used to maintain the integrity and security of financial systems while new technology such as Faster Payments and blockchain becomes more influential. Businessfinancing.co.uk managing director Ian Wright likens the technology to making an in-person transaction with cash. He tells Payments Review: “Atomic settlements happen instantaneously, you could compare it to the act of paying for goods in person; in cash, the transaction happens simultaneously and reduces risk as both parties have to have their side of the trade available.” Why is it important that the UK gets atomic settlements right? The UK has done well to position itself as a dynamic centre of finance for the globe so far, with London fostering a new level of innovation in the fintech and cryptospace over the past decade. Among the many groundbreaking concepts that have gained momentum in recent years, atomic settlements have quietly and persistently been reshaping the financial landscape in the UK. Despite its tentative introduction to the UK sector paying dividends, the technology hasn’t yet exploded across the sector. The importance in the UK leveraging the power of atomic settlements is pivotal to maintaining its reputation as a global financial hub. Its role as an innovation centre and a hub for research in the financial industry benefits businesses worldwide.

For the majority of financial institutions, the appeal of the industry adopting atomic settlements is fairly black and white; increased financial security benefits all.”

With any new, positive unharnessed technology impacting the financial sector, the UK should be at the forefront of adoption. Atomic settlements have the potential to transform the global financial sector by offering banks, fintech firms and other financial services institutions exchanges that are faster, more cost-effective, accessible and trustworthy. “For instance, there have been major partnerships between firms such as Swift and Wise, and Visa and Currencycloud, all teaming up to enhance cross-border money movement and respond to demand by speeding up these payments processes. These trends highlight why digitisation is so vital to turn atomic settlements into more than just a pipe dream.” The need for intermediaries diminishes with atomic settlements; this can help reduce transaction costs, enhance transparency and improve security in the long term. While there is no doubt that there are challenges in the way in the forms of regulation and issues surrounding scalability, an atomic settlements boom in the UK would go a long way in building a more efficient, secure and inclusive financial system for all.

ATOMIC SETTLEMENT

What’s the appeal? For the majority of financial institutions, the appeal of the industry adopting atomic settlements is fairly black and white; increased financial security benefits all. A rise in digital commerce, online banking, and a decrease in the usage of cash during the pandemic means that the demand for transactional integrity has never been higher. Historically, inconsistent or unreliable exchanges have plagued the reputation of the financial industry, but atomic settlements offer an agreeable solution. The technological underpinnings of the concept mean that the idea that all parts of a transaction are completed or none are at all, greatly reduces the opportunity of an unreliable transaction. For payment companies operating in the cross-border sector, atomic settlements can help to bridge different ecosystems and increase interoperability. The technology can also help to facilitate cross-border transactions given that they are not subject to the restrictions of traditional banking operating hours nor currency exchange rates.

Winter 2023

A lack of a need for an intermediary will help the payments sector streamline its processes and a potential for errors moving forward. Extra costs, delays and other inefficiencies can all be removed with a wider adoption of the technology across the global payments system. The speed of transactions can also be increased greatly, outpacing traditional financial settlements which are often held back by banking hours and cross-border difficulties. An adaptation towards a more atomic-heavy system will mean an expansion to the possibilities of real-time global commerce. The role of blockchain technology While blockchain technology is primarily associated with the cryptospace and digital currencies, its potential extends way beyond both. There are three main pillars of blockchain tech that make it perfect breeding ground for atomic swaps; decentralisation, unalterableness and transparency. When it comes to the first, blockchain operates through

ATOMIC SETTLEMENT

a network of ‘nodes’, making it difficult for the system to be manipulated by one single entity, increasing its security. The fact the tech cannot be altered means that once an exchange has been recorded on the blockchain ledger, it cannot be deleted, this means that all participants are able to view the transactions, helping with transparency. As it stands, traditional financial systems cannot compete with similar degrees of transparency and security. An uptick in the usage of blockchain technology is likely to provide the solid foundations needed to progress to a more atomic-reliant system for UK payment providers. AutoRek’s global payments manager Nick Botha says: “We’re seeing more financial services firms harness distributed ledger technology (DLTs) to make it easier to facilitate atomic settlements. “DLT is a digital system that supports the end-to-end trade lifecycle, offering speedier processes are more accurate outcomes. “There has been a flurry of investment in new technologies to help facilitate atomic settlements, with disruptive technologies such as blockchain, central bank digital currencies (CBDCs), and smart contracts becoming increasingly integrated into post-trade activities – helping to pave the way for real-time settlements.” Botha believes that the uptick in partnerships between both legacy organisations and the fintech sector can help with fulfilling the potential.

He tells Payments Review: “There have been major partnerships between firms such as Swift and Wise, and Visa and Currencycloud, all teaming up to enhance cross-border money movement and respond to demand by speeding up these payments processes. These trends highlight why digitisation is so vital to turn atomic settlements into more than just a pipe dream.” What needs to happen for growth? In order for atomic settlements growth to reach its potential in the UK, regulatory challenges must be overcome. Industry lawmakers are likely to push back against the idea of atomic payments becoming more widespread out of fear of fraud. Wright adds: “There are clear benefits such as improving efficiency, removing intermediaries, and in some cases reducing costs. “However, the technology to make instant settlements is not new, but historically financial institutions have favoured having delays to transactions for good reason, including to help manage fraud and money laundering.” Adoption would currently still have to contend with regulations including Anti-Money Laundering (AML) and Know Your Customer (KYC) requirements, holding back a rise in usage. The UK government will need to ponder its domestic regulation of the technology before looking at any potential overlap with cross-border obligations in order to avoid any compliancy shortfalls in the future.

How cross-border payments could become more cost-effective Sponsored by 14

ATOMIC SETTLEMENT

There are clear benefits such as improving efficiency, removing intermediaries, and in some cases reducing costs. ” Paul Horlock, chief payments officer of Santander UK told a Payments Lab session hosted by The Payments Association that the nation will need to ensure that “everything works together to create a harmonious solution for the UK market”. Wright believes that despite the current regulatory landscape, “a boom in atomic settlements is likely on the horizon for the UK”. The challenge, he claims, is just “how well regulation can keep up with innovation”. He says: “Regulatory bodies need to strike a fine balance between creating effective legislation to prevent abuse of changes in the system, be flexible enough to adapt as atomic settlements become embedded, while also being careful not to build in unintended consequences to new regulations.” “There needs to be regulatory guidance provided at government level, and they need to work closely with industry to identify the best approach and clarify how new regulations will interact with existing legislation both domestically and internationally.” When are we likely to see the boom? The timing of a potential atomic settlements boom in the UK is likely to be influenced by a variety of factors, meanwhile several conditions need to align for such a boom to happen. Botha believes atomic settlements are the next step from T+1 settlements, referring to the process whereby a transaction is completed the day after trade. “The wheels of T+1 settlements are already in motion, and many believe that atomic settlements are the next logical step in the T+1 story. “We are seeing more adoption by established markets with instant payment infrastructure and rails. For instance, FedNow in the United States, Faster Payments in the UK, the Single Euro Payments Area (SEPA) across Europe, and the Unified Payments Interface (UPI) in India.”

Winter 2023

One of the obstacles that the payments sector must vault is making cross-border payments more efficient to pave the way for the atomic settlement push, according to Botha. “While atomic settlements are becoming more accepted, there is still a way to go for cross-border atomic settlements to become the benchmark. All the instant payment rails listed above are typically only focused on domestic transactions. Cross-border transactions are still on their journey to become more ‘instant’, which is holding atomic settlements back from becoming more mainstream. “Yet the nature of settlements for cross-border transactions does not always allow for instant settlements, and traditional financial service businesses rely on processes and settlements of different schemes to help facilitate trades cross border. “It is therefore not always possible to have instant settlement through traditional financial service companies.” The growing popularity of atomic settlements in the UK marks more than just a technological, it’s reflective of a collective determination to enhance the reliability and security of financial transactions in the UK. As a concept, it has huge potential to shape the future of the sector and ensure that the UK continues to place itself as a leader in reliable, secure payments for the foreseeable future.

19th - 20th March 2024 ExCeL, London

NEW VENUE

Headline sponsor:

PAY360’s top themes Come and join the experts at the UK’s leading payment-focused event, with three tracks you can hand pick your activities for the day! Select from:

Building an open future

Innovating customer journeys

Get your tickets now and join the leaders

The evolving ecosystem

Headline sponsor:

Transformative technologies

Strategic partner:

www.pay360event.com

Deep dives Embedded finance, CBDCs, ESG, CrossBorder Payments

Digital assets partner:

Host Bank Partner:

HEADER NEWSSECTION IN BRIEF Foto Bummel / Shutterstock.com

George Iddenden

Rapid intervention needed to avoid AI-driven financial crisis, SEC chair warns Gary Gensler, chairman of the Securities and Exchange Commission has warned regulators that a “nearly unavoidable” financial crisis will occur within the decade if AI technology is left to evolve without legislation. In an interview with the Financial Times, Gensler admitted that forming a regulatory framework for AI would be a “tough test” for

lawmakers due to the potential risks which encompass different financial markets. This comes from business models created by tech firms which do not fall under the jurisdiction of Wall Street regulators. The powerful “economics of AI networks” mean that the industry could be in crisis as soon as the end of the decade.

Merchants continue to favour cards over new payment methods

Mercedes-Benz introduces in-car fuel payments

utomotive giant Mercedes-Benz has announced a new feature that will allow drivers based in its native Germany to pay for fuel directly in their car. In collaboration with Mastercard, users of selected models will be able to use their debit of credit card to complete the transaction by scanning their fingerprint through Mercedes’ Pay+ payment facility. Pay+ technology will be able to calculate the required amount and the cost of the fuel before the transaction has been completed due to its connection to the Mercedes Fuel and Pay function. Mastercard chief digital officer, Jorn Lambert, claims the digital payments space is “coming of age” and that the public are actively seeking new forms of payment that are “infused” into everyday life experiences. It comes after research conducted by GfK, commissioned by Mastercard, found that 60% of 18 to 39-year-olds would prefer to pay the fuel bill directly from inside their vehicle with the infotainment system. Mercedes-Benz chairman of Mobility AG, Franz Reiner, has also confirmed that the company is already looking forward and working on the further integration of new services.

Winter 2023

Almost three-quarters (72%) of European merchants prefer cards over new methods of payment, according to research by Payments Europe. Merchants admit the safety and security of payments are still the main priorities when conducting transactions. Other priorities were based upon customer preference, convenience, reach and cost.

Alongside these, 67% of merchants believe the cost of cards has either dropped or stayed the same over the last few years. The value of using cards also outweighs the cost, according to 87% of respondents. The research was based on a survey of 1,560 merchants who worked across physical and online retail in Europe.

Mastercard announces interoperable stablecoin for trusted Web3 commerce Banking giant Mastercard recently announced a new solution that allows for stablecoins to be tokenised onto different blockchains. The move, which will start in Australia, will give consumers a new option to involve themselves across multiple different blockchains with more security and agility. Mastercard, with the help of Cuscal and Mintable, developed the project to explore the potential use case for a CBDC in Australia, which includes the ability to ensure the pilot coin can only

be used by users who have been KYC verified and risk assessed. The firm’s Australasia division president, Richard Wormald, claimed that demand from consumers to make use of multiple blockchains when shopping online is growing. He believes that this technology “has the potential” to increase customer choice while also “unlocking new opportunities for collaboration between private and public networks” to drive impact in digital currencies.

ES PAYMENT VOIC

2024:

A pivotal year for the global I economy and finance industry

By Matthew Lynn, Financial columnist for The Telegraph and The Spectator

n Britain, 13 years of Conservative government will come to an end. The US will face its most divisive, and potentially destabilising presidential election in decades. Markets will find out whether central banks have managed to control inflation and normalise interest rates, or whether a replay of the monetary turmoil of the 1970s and 1980s is on the horizon. Every new year is significant for the global economy, yet 2024 promises to be far more momentous than most years and it will have a huge impact on finance and the payments industry. Well before it has started, we already have a fair idea of the big events that will shape the next 12 months. The UK faces a general election at some point before December 2024, and there can surely no longer be any doubt that the Labour Party will win that contest. Britain has been through five prime ministers over the last 13 years, but this will be the first change of the party in power since 2010. On the other side of the Atlantic, Americans will face a rerun of the 2020 contest between Joe Biden and Donald Trump. Whoever wins, it will be a bitterly divisive contest, and a Trump second term with tariffs, trade wars and disengagement from policing the world could be a trigger for a full-blown crash. Meanwhile, we will discover whether the central banks, and the Federal Reserve in particular, are still able to control prices. By the summer of 2024, if all goes according to plan, inflation should be back on target and interest rates on a downward slope. If this doesn’t happen we will be right back with 1970s style monetary turmoil. Add in the wars in Ukraine and the Middle East and 2024 promises to be a significant year.

For the finance and payments industry this has three major implications. First, expect plenty of volatility, especially in the currency markets. Sterling took a battering during the short-lived Truss administration and, while a new Labour government will do its best to look fiscally responsible, the markets are already worried about the solvency of the British state and the pound may well become under fresh assault. Meanwhile it is hard to believe the investors will like either the wild spending of a Biden second term or the protectionism of Trump II. Selling the dollar on scale will be the only rational response. Next, brace for the possibility of much higher interest rates. All we have seen so far is the normalisation of rates, returning to the roughly 5% levels that were standard before the 2008 crash. And yet if that is not enough to bring prices back under control, we may well see rates climbing to levels last seen in the 1970s and 1980s. The Federal Reserve rate hit an eye-watering 19% in 1980, and money was just as expensive around the rest of the world. Whether the world can cope with that without a major recession is open to debate. One point is certain, however. It would put huge strain on the banking system, and cause massive financial stress for borrowers. Finally, expect more regulation and less competition. Sir Keir Starmer may have significantly reformed his party, but an incoming Labour government in the UK will be the most interventionist since the 1960s. We can expect far more regulation, and state targets, and that will include the City as well as industry. Indeed, the party is already planning to tell pension funds where they should put their money.

Winter 2023

Likewise, either a Biden or Trump second term in the US will be far more protectionist and interventionist than American governments have been since the 1930s. Finance can expect to be far more tightly controlled than it has been before. It will also be far less competitive. Why? Because with higher interest rates venture capital funding has collapsed, and there won’t be any more fintech challengers with plenty of cash in the bank trying to disrupt the market. The major players in finance will be far more

regulated, but also far more secure. The industry will be duller, with less innovation, but it will at least be secure. Every year is unpredictable. No one expected the collapse of the bond market in the last 12 months, or the failure of Credit Suisse or the regional banks in the US. There are always events that catch everyone by surprise and 2024 won’t be any different. But the political outlook will change significantly over the next year, and so will monetary policy. That much is certain — and that will impact every major industry.

There are always events that catch everyone by surprise and 2024 won’t be any different. But the political outlook will change significantly over the next year, and so will monetary policy.”

UK BIG BANG 2.0

UK Big Bang 2.0: Will it happen in 2024? The UK holds a strong position in the rapidly developing fintech and digital payments world, but experts are divided over whether this will lead to a major breakthrough next year. Jon Yarker

To create a Big Bang and ensure banks are able to bring the best-of-breed technologies to customers and continue this digital momentum, the financial services industry must embrace collaboration”

UK BIG BANG 2.0

n British economic history, 27 October, 1986 is a seminal date. Dubbed the ‘Big Bang’, a cold Monday morning heralded a significant surge in British capital markets activity and marked the start of the country’s new era of financial services prosperity. It was the culmination of several policy decisions by then-Prime Minister Margaret Thatcher to re-establish the UK’s economy as it pivoted away from relying on outdated industrial sectors. As the 37th anniversary approaches, there are reasons to think a ‘Big Bang 2.0’ is nearing. British policymakers have been manoeuvring to re-establish the UK’s premier position in global financial markets, this time as a pioneer of fintech and digital payments. Led by Prime Minister Rishi Sunak, these efforts

Winter 2023

are being made against a backdrop of growing competition from other jurisdictions. The global economy has changed hugely in 36 years, which is forcing the UK to adapt. Riccardo Tordera, head of policy at The Payments Association, sees potential for a breakthrough. “Is the UK able to capitalise on other jurisdiction’s mistakes? I think there is room for that,” he says pointing out the initiative would require new branding to move it away from associations with Thatcherism, as “they will not want to call it Big Bang 2.0”. “In the beginning, support for fintech was about building back after Brexit, but that has changed. Look at what Sunak has been saying about AI – he is good at putting flags in the ground and saying we are excellent at something. This is the

right approach as the world is changed, [the future] has to be about fintech and crypto.” Others are less confident, and many professionals working in the UK payments industry and fintech sectors are not expecting the breakthrough to occur as soon as next year. Sara Pediredla, CEO of tech consultancy Hedgehog Lab, suggests numerous areas require change to make this a realistic possibility. “While technological developments advance at speed, regulatory changes often move at a snail’s pace,” she says. “Throw in the unknown variables of consumer adoption rates and potential economic or global crises, and the timings are even more unpredictable. “While some elements of Big Bang 2.0 are already emerging, a full-on

transformation by 2024 would require a perfect storm of tech innovation, regulatory support and market readiness. It’s possible, but I wouldn’t bet on it.” Opinions are clearly split. So how realistic is it for Big Bang 2.0 to happen in 2024? And, if it is not to be, what needs to happen to create a breakout moment? Big Bang 2.0: The case for 2024 The Big Bang of 1986 was the product of significant economic and cultural change in the UK, as the British economy transitioned from revolving around industries such as steel, coal and shipbuilding. British society is again going through a seismic change, this time in how the population interacts with both money and technology. James Allum, head of Europe for online payment processing platform Payoneer, defines today’s transformation as society undergoing a “technological revolution”. To give context to the change, he points to how expensive and poor-quality international calls were a decade ago. “Now, we can make instant video calls abroad for free and we take it for granted. The same will happen with payments,” says Allum. “Money movement will eventually be completely instant and free, and before long people will forget it was ever any different. “The internet boomed overnight after smartphones were introduced. All it takes is for a similar enabler to come through that payments can thrive off.”

UK BIG BANG 2.0

Covid-19 was a significant catalyst for digital services, and specifically financial digital services integration in the UK. National lockdowns forced the population to engage digitally with financial services. According to the Banking Industry Architecture Network (BIAN), 24% of Brits now have a digital-only bank account compared to only 9% in 2019. “With more people using digital-only banks, more people will look to use digitalonly payment methods, including contactless or direct-to-bank transfers,” says BIAN executive director Hans Tesselaar. “As this happens, the natural reaction from financial services institutions will be – and should be – to meet their customers where they are.” The UK population may be more tech-savvy than most, but this trend is not unique to the country. What is unique to the UK, however, is the breadth of fintech brands based in the country – with 3,200 fintech firms headquartered in the UK. Major digital challenger brands such as Starling Bank, Monzo and Revolut have broken into the mainstream in the UK and are now targeting international expansion. Some experts hail the UK as the leader of this new era of fintech growth, while expecting the country to continue building on its successes in traditional financial services. “The UK is leading the way on the fintech journey,” says Nick Botha, global payments manager for regtech provider AutoRek.

“Traditional retail banks such as Lloyds and NatWest are accelerating the shift to a cashless society by making it easier to move money through smartphones, rather than requiring customers to go to a physical bank branch. It is exciting to see how the UK’s fintech market will continue to innovate and grow over the next few years.” One of the reasons for the excitement around 2024 has been the breakthroughs made in AI this year. The sudden success of ChatGPT has caused widespread discussion about what technology will mean to both business and everyday life, with fintech no exception. Ivo Gueorguiev, cofounder of payment service provider Paynetics, says Big Bang 2.0 is “around the corner” as AI “promises to rewrite the rulebook for financial services”.

“As more sophisticated chatbots, data usage, query handling and product recommendations emerge, financial services will improve overall product design and coding. Take mortgage or life insurance eligibility assessments, for example,” he explains. “AI can streamline entire service operations to speed up consumers’ applications.” Further technological developments could support fintech solutions to become a more reliable and seamless part of people’s everyday lives. This is already being worked on at YouLend, which provides white label financing and accounting solutions for fintechs providers. The company has developed a deep neural network architecture that is trained on all available merchant data, learning industry-specific insights

The UK is leading the way on the fintech journey.” from the SMEs it works with. Widespread use of technology, however, still requires further development, according to YouLend coCEO Mikkel Velin. “We see improvements in these technologies every day, and 2024 will be a critical year in making them scalable while remaining flexible enough to respond to changing macroeconomic trends,” he says. “Successful machine learning requires very large datasets. Many start-ups and established firms struggle to reach the scale needed to meaningfully apply machine learning.”

UK BIG BANG 2.0

A bang or a whimper? Despite widespread optimism, there are still many in the industry who do not expect the Big Bang 2.0 to happen in 2024. Highlighting areas where further work is needed, the government recently published an All-Party Parliamentary Group (AAPG) report on how feasible it would be for the UK to become a global hub for cryptocurrency and fintech innovation. This was headed up by APPG chair and MP Dr Lisa Cameron who – while optimistic – says more work is needed to spark a second Big Bang. “I’ve been told that in France the regulator streamlines everything and ensures authorisations happen in months,” says Cameron. “We need to be competitive and have extra support for the FCA to become a super systems regulator, they need extra resources.

Winter 2023

“It is crucial because it underpins the prime minister’s vision of the UK being a cryptocurrency hub. How can we be a hub when we have only registered 42 companies?” While the AAPG looked at many areas of the UK fintech industry, the role of the regulation attracted particular attention. In her research, Cameron found many fintech firms complained of cumbersome and lengthy processes when dealing with the FCA, often with little communication. For this reason, she believes a new approach is required: “We need a streamlined regulatory system. [It has taken] some companies… 18 months to two years to get set up, others don’t get any answer. These companies are global, so they will go elsewhere.” The FCA is tasked with protecting consumers while simultaneously allowing firms to thrive. Balancing the two tasks is not easy, and The Payments Association’s Tordera is sympathetic to its plight as innovation can lead to disruption, with potentially leading to highprofile scandals. However, he warns that this overly cautious approach has resulted in the wrong tactics being deployed. “When you are a regulator, you know it is your responsibility for things to go smoothly and this is why the FCA has been extremely cautious,” explains Tordera. “The problem was they applied models that are not suitable for this industry.”

The policy expert picks out the FCA’s treatment of cryptocurrencies as an example of this and, though he commends a change in approach, he warns the same mistakes must not be repeated. “The crypto industry has suffered from a massive misconception by the regulators, because they did not understand it and it took them time to do so,” says Tordera. “The FCA has realised it must change and has started to hire crypto experts and tailor requests to the nature of the industry. I know the industry still complains about the regulator and will likely continue to do so. The FCA should be faster at understanding the nature of the businesses they are regulating.” The prospects for cryptos divides opinion and invites fear from some within British authorities. The high-profile collapse of FTX in 2022, alongside other widelyreported scams and scandals, has tarnished the reputation of cryptocurrencies and their role in mainstream finance. Central bank digital currencies (CBDCs) have emerged as a route to legitimacy for cryptocurrencies, allowing digital assets to be used in society with far greater oversight by central banks and regulators. So far, 130 countries are exploring CBDCs as a route towards fully digital economies according to Payabl UK CEO Sean Forward. He says the UK already has some traction in this field, but this needs to

be accelerated to avoid the risk of missing out. “The UK government is currently working hard to accelerate the development and launch of a CBDC – they have set up a taskforce to explore the issue, and they have also launched a consultation on the potential benefits and risks of a CBDC,” adds Forward. “However, we’re still behind when compared to the work some other countries have done on this front. Focusing on developing a robust CBDC project could be a game changer in the UK financial services sector.” Pursuing the cryptocurrency route Having investigated the issue in her APPG report, Cameron also wants to see cryptocurrencies receive more attention from policymakers. Cryptocurrencies have already enjoyed significant pickup in the UK, with the FCA estimating 5.29 million UK adults own a cryptoasset. Pointing out a CBDC could give the Bank of England greater insight to movements of digital currencies in the UK, the MP says a lack of knowledge around digital assets means many are fearful of a CBDC being introduced. “A few years ago, one of my constituents lost money in a crypto rug-pull scam and they asked me who was looking at the issue in parliament,” recalls Cameron. “There hadn’t been any debates on the issue, so I asked my researcher to look into it and there was no APPG on it.

UK BIG BANG 2.0

“Millions of people in the UK have some engagement with digital assets but we [in parliament] were not talking about it at all. We are still playing catch up and we need to make this a priority.” Regulatory and governmental support will play a big role in enabling a Big Bang 2.0, but many experts argue this effort needs to be matched by the private sector. The UK already hosts a thriving fintech industry and the theme of collaboration frequently came up in conversations. For BIAN’s Tesselaar, this is key for the UK to have the right ‘ecosystem’ from which a Big Bang 2.0 can emerge. “To create a Big Bang and ensure banks are able to bring the best-of-breed technologies to customers and continue this digital momentum, the financial services industry must embrace collaboration,” says Tesselaar. “An ecosystem alongside fintechs, service providers, industry bodies and aggregators would help banks when it comes to the speed they can introduce new products – and enable the latest in finance technology, including open banking.” This is crucial to meeting consumers’ higher demands for greater choice in products and services, and the interconnectivity they are able to enjoy between different brands. The success of

Apple Pay has come from its integration through a vast range of different providers, giving users the seamless experience which they have now come to expect. For Angel Blanco, head of platform solutions at supply chain finance platform Demica, this is what a Big Bang 2.0 revolution will look like. “We’re now witnessing swift and dynamic collaborations forming among diverse organisations, as digitally-savvy businesses and consumers alike increasingly seek greater choice in products and services,” says Blanco. “These changes won’t be confined to narrow transactional banking services alone. Expect to see synergies across a broad spectrum of financial domains, including personal credit, business lending, supply chain finance, mortgages, insurance, financial advisory, investment management, forex, and even telecommunications and utilities.”

the next few months and years could hold. However, the prospects of a Big Bang 2.0 will ultimately be influenced by the UK population’s relationship with money. Campaigners have regularly criticised the lack of financial education in British schools and, combined with the fact money is a taboo subject in many British households, there are claims this has led to poor financial understanding in society. For instance, a recent survey of 2,000 British adults by Shepherds Friendly, found only 27% passed a financial literacy test. Cameron says that supporting fintech and crypto

All together now… Whether or not a Big Bang 2.0 happens in 2024, critics and optimists agree on one thing: it is an exciting time to be in the UK fintech and digital payments world. Greater regulatory support, more cross-industry collaboration and underlying tech developments have experts excited about what

The crypto industry has suffered from a massive misconception by the regulators, because they did not understand it.”

needs to go beyond simply educating policymakers, towards educating the population about finance in general. “This is fundamental,” she says. “We need to be inclusive and reach classrooms across the UK. When I was at school, I was taught how to be an employee, not an employer. [Conversations about money] is a postcode lottery right now, and I’d like to see it standardised on the curriculum. “This isn’t just an issue for the Treasury, it sits in the education system, science and innovation department, and in business. There needs to be a cross-governmental approach to make this happen.”

King for a Day: Charting the future of cross border payments Get ready to unlock fresh insights into the future of cross-border payment

Download cross border payments report by scanning the QR code.

Supported by

PROJECT FINANCIAL CRIME

Tackling APP fraud: An industry at a crossroads By Nick Fleetwood, head of data services, Form3

uthorised push payment (APP) fraud has been steadily climbing the charts of global payment frauds with nearly £240m lost to UK consumers and businesses in the first six months of 2023. The Payment Systems Regulator’s (PSR) announcement in June 2023 highlighted the urgency to counter this issue by proposing a new reimbursement framework. The Payment Association’s survey, published in collaboration with Form3, offers insights into the industry’s preparedness and concerns as we edge closer to the regulatory deadline. Unravelling the institutional landscape Among the respondents, a significant 68.8% operate as selling participants directly connected to the Faster Payments Service (FPS). At the same time, 18.8% navigate their financial transactions using a Nostro account with a different entity. Another 6.2% favour agency banking. The diversity in institutional operation modes suggests that the PSR’s proposed obligations might be perceived and implemented differently across the spectrum. With varying operational frameworks, the capacity to counter APP fraud and align with the PSR’s requirements might differ significantly. Final legal instruments will be published in December 2023, finalising the mechanism for refunding victims and the definition of gross negligence and customer vulnerability, which further adds to the complexity of ensuring uniform understanding and implementation across various institutional types. Ticking clock: Anticipated readiness for new PSR obligations The 7 October 2024 deadline stands as a significant marker for the industry. However, there’s a pronounced call for clarity. A dominating 81.2% believe that the PSR must provide more explicit guidance, revealing an industry that’s

looking for direction. Moreover, only 12.5% of banks responded positively about being prepared for the PSR’s obligations by October 2024. This implies that the majority of banks need clarity in order to expedite their efforts to align with the regulations. Drawing a parallel with the survey’s primary objectives, we aimed to gauge institutional readiness for the impending APP rules. The substantial uncertainty reflected in the 81.2% underlines the necessity for enhanced communication from regulatory bodies. A significant 36% or respondents are concerned about their ability to fund reimbursements, especially among the smaller participants of the faster payments network. “Will mandating the cost of fraud to institutions reduce the overall fraud cost to the UK economy? The rules will have a much larger impact on institutions which do not currently have comprehensive financial crime solutions from others. As well as mandating the cost aspect, more needs to be done to create national solutions for better fraud identification, investigation, and prevention, requiring banking and tech industry collaboration,” says Nick Fleetwood, head of data services, Form3.

A dominating 81.2% believe that the PSR must provide more explicit guidance, revealing an industry that’s looking for direction. Moreover, only 12.5% of banks responded positively about being prepared for the PSR’s obligations by October 2024.”

The challenge spectrum The survey sheds light on multiple challenges. The complexity of processing reimbursements stands out for 64.3% of the respondents, driven by the lack of clarity around this instrument before the final publication from the PSR. Half the institutions highlight concerns related to internal resource constraints and tooling, indicating potential scalability and efficiency issues as the rules come into play. Nearly 30% of those surveyed emphasised challenges around screening inbound transactions for fraud risk. Furthermore, a substantial 50% underscore the challenge of meeting new reporting requirements to Pay.UK. This sentiment echoes the survey’s

PROJECT FINANCIAL CRIME

objective to understand what tools or resources are necessary for institutions to be ready by April 2024. Clear, streamlined reporting processes are evidently high on the industry’s wish list. However, there’s a shared concern that manual processes might be introduced to facilitate the rules, while many respondents favour comprehensive industry-wide technical solutions, which should ideally be tested before October 2024. A call for clarity One can’t help but notice the recurring theme of ‘clarity’ resonating through the survey. Institutions seem particularly keen on gaining insights into the ‘gross negligence’ definition (81.2%), liability positions (68.8%), and the intricacies of vulnerability (62.5%). These figures might suggest that while institutions are not against the spirit of the PSR’s legislation, they find its current form somewhat nebulous. Given the backdrop, this theme aligns with the open questions the PSR or Pay.UK have yet to clarify or finalise. The evergreen debate on defining ‘gross negligence’, discerning ‘prompt reporting’, and understanding ‘vulnerability’ are evident pain points, potentially acting as stumbling blocks to seamless implementation. The transitioning phase: A split vote Our survey participants seemed divided on the preferred transition period post the rules’ clarification. It’s intriguing that while 50% advocate for a minimum of a 12-month period, 31.2% feel that half that time should suffice. The variance here possibly hints at a split in institutional confidence or perhaps operational agility. “The PSR’s proposals overlook the support needed by small innovative payment firms facing heavy regulatory burdens. This could drive some out of business, missing an opportunity for regulator-encouraged collaboration in preventing financial crime, rather than making it a competitive issue,” says Jane Jee, lead of project financial crime at The Payments Association.

Winter 2023

Post-implementation landscape Post the rule’s potential enactment, concerns seem to revolve around first-party fraud, the survival of smaller PSPs in a potentially less competitive environment, and the overarching responsibility of defining APP fraud cases. These anxieties, especially regarding smaller PSPs, might be indicative of fears that compliance costs and challenges could lead to industry consolidation, reducing consumer choice. Charting the path ahead Responses suggest a unanimous call for more proactive measures. Strengthening data sharing mechanisms, intensifying education efforts for payment users, and establishing shared financial and technical liabilities with tech platforms are some of the focal recommendations. These reflect a broader sentiment: while institutions are ready to adapt and align, they hope for an environment that fosters collaboration, knowledge sharing, and shared accountability. “Financial fraud is a national emergency needing effective preventive measures. Bringing every player, including big tech and merchants, to the table with stateof-the-art data sharing solutions is crucial. Mandating reimbursement doesn’t solve fraud issues but could encourage more first party fraud,” says Riccardo Tordera, head of policy and government relations at The Payments Association. In conclusion, the survey paints a vivid picture of an industry standing at the crossroads of innovation, regulation, and adaptation. While the PSR’s intentions are unanimously acknowledged as vital, the journey to October 2024 seems rife with challenges, calls for clarity, and a collective aspiration for a collaborative road ahead. The ball is now in the court of regulatory bodies to respond, guide, and collaborate for a fraud-resistant future.

SECTION HEADER

SPOTLIGHT

‘A true product person is curious and pushes for challenges’ Cheyenne Datuin, product manager, Form3 Born in New Zealand, trained lawyer Cheyenne Datuin speaks to Payments Review about how she got into the payments industry and why London is an attractive city for working in fintech

Tell us about your career path? How did you get into the industry?

After graduating from law school back home in New Zealand, I started my career on a products graduate program at the Bank of New Zealand. I had clerked at a law firm and wasn’t so sure about practising law. The graduate program gave me the flexibility to learn about various consumer banking products, how these services affect our lives and how payments are the backbone of the global economy. I went on to work as a business analyst at a SaaS tech company called Freedom (acquired by Visa), which provided payments and transaction management for tier one financial institutions and corporate customers. I traded working with bankers

for working alongside engineers and UX designers, exposing me to a different stage of the payments chain. I’m now London-based and working at Form3, where we build cloud-based payments infrastructure so financial institutions can connect to multiple payment schemes using one API. I work closely with UK financial institutions and manage Form3’s Faster Payments and Bacs products, having built multiple APIs for the company.

What challenges have you faced?

Professionally, things can move really quickly at startups so I’ve learned to embrace ambiguity as a positive aspect – it’s always exciting when no two days are the same. I’ve also had to learn to advocate for myself – learning

to trust my instincts in a professional setting which has helped me lead the direction of the products I manage.

What has been your biggest achievement?

My biggest achievement professionally ties into a life achievement, which was moving to London and starting to work here. Prior to joining Form3 I had no UK payments experience and this was the smallest team I’d joined (circa 150 employees back in 2021). My work with Form3 has been a big professional achievement for me as I’ve launched several new API services since joining and I now manage Form3’s largest product portfolio. Form3 has signed some of the biggest banks in the world and provides best in class payments technology.

A true product person is always curious and pushes for new challenges.

How does the payments sector differ in London to back in New Zealand?

New Zealand showed payments innovation promise in the 1980s, when they adopted point of sale terminals which quickly became the norm there, when most of the world was probably more into cash. But London of course has more investment and innovation for fintech most especially with open banking and Faster Payments (though this has been around for several years now). Things generally move a lot faster in London and I would love to see some of that appetite for partnership and innovation back home in New Zealand.

SECTION HEADER

A real time payments scheme in New Zealand would mean more efficient and reliable movement of money, which ultimately contributes to a smoother functioning economy and inclusivity. This is especially important in New Zealand, where small-medium business accounts for 29.3% of employment and contributes to over 25% of New Zealand’s GDP.

What challenges do you think the payments industry is facing?

There are lots of new payments tech companies that focus on solving one part of the payments chain – whether that’s account reconciliation, fraud or even banking-as-aservice tech. But consumers are only concerned with the end of the payment journey and the financial institution or card provider that represents that. So it’s important for all involved parties to build robust, scalable technology and share insights. At Form3 we have built a Mandate Management service for DDIs, Confirmation of Payee and are working on a fraud product so we can enhance the payment experience for our customers across our entire platform.

faster, which can have a devastating impact on victims. The best way to combat this is by collective effort and data shared across financial institutions, technology providers and regulators. This is also why it’s important for financial institutions to modernise their payments estates – so they can get ahead, extract data and insights quickly and ensure protections for their customers.

What would be your advice to someone coming into the industry?

2. Document what you’re learning and use that to help others understand your product and what it’s solving. That might help you build API documentation or inform a robust sales pitch. It’s good practice to have tangible collateral throughout, especially if you are planning on building new payments services which introduce new (and better) behaviours.

3. Get to know the people you cross paths with well – whether that’s your customers, or colleagues in separate business lines. All roles interact with payments differently and have unique perspectives. A customer success role might understand customers in a different way to say, your colleagues in operations.

1. Get comfortable with questioning what you don’t initially understand – every tech stack or payments jurisdiction will be different. If you’ve joined a payments tech company, you should understand your build well enough so that you can explain what your engineers have built to kindergarteners.

What would you like the payments industry to achieve from your perspective?

It’s exciting to see the huge US market shift towards instant payments especially with the launch of FedNow. While we’ll see instant payments volumes increasing across markets, banks are faced with the challenge that fraud happens

Winter 2023

FC360

Financial Crime 360: How the industry came together to combat fraud George Iddenden

Crafting the experience The Payments Association’s annual Financial Crime 360 conference took place at the Royal Lancaster Hotel in London on Tuesday, 21 November. Hundreds of industry professionals from across the payments industry heard from some of the sector’s most important voices on the ever-present issue of financial crime and its solutions. Financial Crime 360 helps the full finance ecosystem address and tackle the key challenges in fraud and money laundering through industry collaboration and the adaption of new technology to safeguard their customers and organisations from these crimes. More must be done… An opening address made by Lord Mayor, Michael Mainelli, warned listeners that sticking a plaster over the issue wasn’t sufficient and the payments industry will ignore failsafe solutions at their own peril. The significant shift towards digital fraud and rise of artificial intelligence (AI) being used to both protect and increase the risk of crime was pointed out by headline sponsor Visa’s chief risk officer Natalie Kelly. In order to combat the growing rise of fraud online, Visa has spent over $10 million on cyber security measures. Highlighting the significant difficulty in addressing fraud, Kelly says “That’s a tonne of money. And I say that because anybody getting into the payment space is going to have to spend that type of money to fight fraud.” Technology, however, is firmly making a valiant effort in at least halting the efforts of fraudsters, with Kelly claiming that Visa stopped $41 billion being defrauded from both consumers’ pockets and financial institutions in 2022. “Operational resiliency is very important, especially to our regulators here in Europe, and especially to our consumers, because they have expectations of our brand to work. We have to invest, we have to protect the consumers and we have to drive operational resiliency for the economy,” adds Kelly. It’s not only tech that is making a difference however, with panels discussing the role of regulators being widely attended. The collective plan to reduce the levels of financial crime being seen in the industry was one of the key themes of the event, with a focus on the regulatory actions expected in the next 12 months as well as updates on the well documented

work being carried out by the Payment Systems Regulator (PSR) on authorised push payment (APP) scams. Data is key Jane Jee, project financial crime lead at The Payments Association, did not play down the scale of the hurdles in front of the industry and expresses that “a whole ecosystem approach is necessary, but achieving it is the real challenge.” The comments were made during a discussion with panellists from the Financial Conduct Authority (FCA), the PSR, Ofcom and Which?. Speakers agreed that data sharing is crucial in consumer protection across payment systems, however the industry must do better at sharing the data quicker. Kate Fitzgerald, head of policy at the PSR, emphasised the need for more data sharing by saying: “If you’re a firm that needs to protect itself and its customers from fraud, then sharing data with whoever you’re doing business with makes absolute sense in terms of helping you to mitigate fraudulent transactions.” Smaller tech firms were also called on to help join the fight to combat fraud, despite the currently regulatory challenges. Most in attendance agreed that any possible data sharing solution must rely on real-time technology in order to be an effective method in halting criminal transactions. Jee called for the right systems to be put in place to “stop things that are happening as they’re happening.” Seamless fraud: is education enough? The conversation around consumer awareness dominated the halls of the event, with some suggesting the time for education has been and gone.

FC360

Helen Fairfax-Wall, head of digital and fraud policy at Which?, calls for the end of the conversation around consumers not being educated enough on the subject as technology grows smarter. Fairfax-Wall says “I hope this conversation starts to put to bed this idea of consumer awareness as a prevention technique, because we already know that fraudsters still manage to get through. “Previously you would see spelling mistakes, errors in the brand’s logo or things like that, but now with the advances in technology, we’re going to see seamless fraud.” “We need to stop saying, well, it’s about education. Because unless anyone’s got something really compelling, that’s done now and I think we need to put it to bed”. Leveraging collective intelligence Industry professionals agreed that one of the best methods for fighting financial crime moving forward is leveraging collective intelligence and further data sharing. Ed Towers, head of regtech and advanced analytics at the FCA, called on the industry to engage with more data sharing initiatives. He adds: “We do recognise that smaller firms obviously have to consider the cost of taking part in these initiatives, but the number of schemes is increasing. “We’ve set a good precedent for this and I think some of the sort of legislative changes coming through hopefully start to create more incentives and make some of these things slightly easier. “We want to see real engagement from industry and the industry bodies around this topic because it’s such an important issue.” Moving forward The conference offered the chance for industry insiders to listen to important voices on an issue which impacts the payments industry on a detrimental scale. As a result, a myriad of solutions to help combat fraud moving forward were discussed, debated and pondered upon. Financial Crime 360 laid bare the complexity of the challenge of combatting financial crime, however it also proved that industry collaboration is the only way to fight it effectively.

Winter 2023

SECTION HEADER

Introducing The Payments Association’s

ESG Toolkit

The ESG Toolkit is an evolving library of essential resources – created and curated by The Payments Association ESG Working Group – that supports companies in the payments industry in adopting sustainable and progressive strategies towards the environment, society, and business governance. Access articles, podcasts, educational resources, and other featured content to begin your ESG journey.

View ESG Toolkit by scanning the QR code.

PROJECT ESG

How fintechs can supercharge sustainability and gain consumer trust

Karine Martinez, head of sales, Edenred Payment Solutions

t’s not easy being green, especially when environmental, social and governance (ESG) obligations are mounting amid an uncertain economic picture. But businesses can no longer ignore the voices of consumers worldwide who are demanding immediate and impactful climate actions – and this is where fintechs have a vital role to play. The United Nations has declared 2021-2030 the Decade of Action, and is demanding that businesses take meaningful action towards a more sustainable future. In addition, investor pressure is building, with 82% of investors

Winter 2023

saying ESG needs to be embedded in corporate strategy, according to PwC data. Any business that thinks it can get away with ‘greenwashing’ is in for a rude awakening. As the global push towards sustainability gathers force, the demand for fintech-driven ESG solutions is definitely out there – and growing. According to KPMG, the market size for such solutions could surge from $21 billion in 2022 to more than $160 billion in the next five years. But if this potential is to be realised, fintechs will need to pay close attention

to how new regulations and reporting standards will impact their business. Global pressure to stamp out greenwashing is building It’s clear to see that government and regulatory demands for more ESG actions are intensifying worldwide. During 2022, several fines and remedial actions were imposed on companies found to have given misleading or incorrect ESG information, a prime example being the US Securities and Exchange Commission, which fined two financial institutions for misstating and omitting information in ESG disclosures.

PROJECT ESG

and boards to do the right thing by their businesses, shareholders and their customers. This is unsurprising given the sharp rise of climate-focused litigation over the past few years – according to the London School of Economics, of more than 2,000 cases brought globally since 2015, around 15% were filed between the years 2020 and 2022. At the same time, employees are increasingly demanding more ESG action from their employers. With a global skills shortage threatening to slow the pace of innovation, businesses are finding it harder to recruit and retain the right staff who can shape the future of fintech. They will have no option but to listen to the views of potential employees who want their social values reflected in the organisations they work for.

Efforts to speed up ESG reporting standards are also ramping up. With the establishment of the International Sustainability Standards Board (ISSB) at the COP26 climate summit in 2021, and the release of data reporting and climate-related disclosure standards in June 2023, companies now have a consistent global framework for investorfocused sustainability reporting. Already, authorities in Singapore have acted by proposing ISSB-aligned mandatory climate reporting for listed and large nonlisted companies. These new reporting standards should go a long way in easing one of the big challenges in the way of further ESG adoption – a lack of clarity over data. Research from McKinsey shows that a lack of data was one of the key reasons why companies aren’t able to properly assess ESG programmes when evaluating competitors, suppliers, and potential partners. Incentivising ESG at the corporate level is being factored into remuneration and rewards policies, to motivate leaders

Around 40% of Gen Z and Millennial consumers say that environmental impact is a crucial factor in their purchasing decisions.”

Rising consumer demand for climateconscious payment technology As ESG moves up political and commercial agendas, fulfilling a growing consumer demand for climate-conscious actions is fast becoming a necessity for brand success. Younger Millennial and Generation Z consumers won’t hesitate to shun brands who merely pay lip service to sustainability – around 40% of Gen Z and Millennial consumers say that environmental impact is a crucial factor in their purchasing decisions. The good news is that the emergence of game-changing technology is enabling businesses and their customers to join forces and tackle climate change – and achieve sustainability goals together through innovative fintech solutions. During the pandemic, we saw just how quickly consumers were able to switch from cash to contactless and digital wallet or in-app payments, helping to reduce paper usage across retail, hospitality, transport and other cashheavy sectors. And with less cash in usage, the carbon footprint linked to the transportation and disposal of cash and coins was reduced too. While it’s great to see consumers and businesses embracing digital payments, there are those who still prefer physical payment cards. Here, solutions like ecofriendly payment cards and wearable tech made from recyclable materials can help businesses forge deeper

PROJECT ESG

connections with their customers through items they carry every day. One of the ways businesses can take meaningful action and make positive impacts is by encouraging consumers to make climate-conscious purchases, with innovative tools like carbon calculators at the checkout that can help consumers reduce their carbon footprints. One incentive that I have personal experience with, is ekko’s move to a green recyclable debit card and accompanying app, powered by our issuing and processing services. This solution enables consumers to see how their purchases and payment behaviour impact their carbon footprint and are incentivised to make more climate-friendly purchases, while contributing to plastic recycling and tree planting initiatives. As AI and machine learning (ML) make their way into more business areas, they have incredible potential to gather, speed read and validate data quality, plus trace it to specific ESG

touchpoints or programmes that can help fintechs to serve their customers with climate-conscious solutions. From a wider corporate/investor standpoint, AI and ML can analyse massive datasets in real-time and identify viable sustainable investment opportunities based on ESG data standards to enable better decisions and discover potential areas for development. Who knows? Maybe with these technologies, we are about to see the emergence of the first green fintech unicorns. ESG needs an evergreen approach Companies that adopt ESG objectives across their business models will be better positioned to reach new customers and retain them. But ESG is not a tickbox exercise. Complacency is not an option. As new climate emergencies occur, and new risks to sustainability appear, ESG is a continual journey. Fintechs and their partners therefore need to keep their eyes on the horizon,

and use the tools and data at hand to anticipate their next steps. By measuring and reporting transparent metrics on governance, strategy, risk and opportunities, progress will be easier for customers, regulators and potential investors to track. A proactive approach should involve ongoing engagement and discussion with key stakeholders to gain consensus on short-term actions and longer-term strategies. Getting management buy-in as early as possible will ensure fintechs chart the correct course. The fintech sector now has the opportunity to harness technology, creative ingenuity, and treasure troves of data to tackle sustainability obstacles and create a healthier planet. Not only can we ensure continued profitability, but we can also do so in a way that meets consumers’ growing needs for more climate-conscious action, and ensure that fintech paves the way for a more sustainable world.

The Payments Manifesto Building a world class payments industry, together

#PaymentsManifesto

Winter 2023

MEMBER PERSPECTIVE

How augmented reality is shaking up e-commerce Monica Eaton explores how augmented reality is used in the marketplace and what impact it might have on the payments industry.

rom a business standpoint, augmented reality (AR) bridges the gap between browsing and buying. It lets shoppers ‘try’ items by interacting with them in a controlled, virtual environment. This makes for a smoother experience and more informed decisions. It brings a fresh and interactive dimension to marketing strategies. In short, AR isn’t just a buzzword; it’s shaping up to be a major player in both consumer experience and business revenue streams. How will it be rolled out to the market, though? And, what ramifications might AR present to the payments space? The current state of augmented commerce Augmented reality genuinely enhances the shopping experience. Through smartphones or virtual reality (VR) headsets, AR offers a peek into how products could fit into our lives, whether in our homes or on our bodies. Imagine checking if a sofa matches your living room decor or previewing a makeup shade,

all done virtually without leaving your home. Multichannel retailer Argos, for instance, lets buyers use AR to ‘test’ furniture products in a virtual rendering in their living room. Many businesses are already taking advantage of AR to boost their bottom lines. By 2024, it will be part of the shopping routine for more than 85 million Americans. On top of that, the revenue from AR advertising alone is expected to reach an impressive US$8 billion (£6.6 billion) by the same year. Sixty-seven percent of ad agencies already use AR to get the word out about products and services. This isn’t just some passing fad; the AR market is expected to be worth $50 billion next year. Plus, 61% of all shoppers said

they’d rather go with retailers who offer AR experiences. In short: augmented commerce is here to stay, and every brand should have it on their radar. Six augmented commerce trends to watch for Some pivotal trends we can expect to see more of in the next year include:

1 Advancements in AR hardware The tech underpinning AR, such as depth-sensing features like LiDAR and ToF, keeps improving. The market reflects this, with predictions indicating that mobile AR revenues will swell to $36.26 billion in 2026.

Big names like Google, Microsoft, and Lenovo are revisiting the ‘smart glasses’ concept, adding another layer to the AR experience.

2 In-store gamification Augmented reality is helping make shopping fun. Brands like Tesco employ AR to gamify the in-store experience, enhancing customer engagement and loyalty. That’s why 56% of consumers prefer AR to kick off their shopping journeys.

3 The rise of virtual try-ons ‘Virtual try-ons’ are among the most popular retail AR applications, especially for fashion and beauty. This type of technology has seen the most growth between 2017 and 2022. The technology appeals to a wide demographic, from 57% of the Silent Generation to 92% of Gen Z.

4 Social media as an AR gateway Social platforms like Snapchat and Instagram were among the first to adopt AR for branding, offering filters that users could apply to promote products. Most smartphone users will regularly engage with AR

Revenue from AR advertising alone is expected to reach an impressive US$8 billion (£6.6 billion)”

MEMBER PERSPECTIVE

via social media. A case in point: Christian Dior’s 2021 AR campaign on Snapchat and Instagram garnered over 1.3 million impressions.

5 In-store AR mirrors Augmented reality-enabled mirrors come in two varieties: some use digital screens behind a regular mirror, while others are like oversized smartphones with a reflective display. There’s interest in the technology, especially in the US, where many consumers

The market reflects this, with predictions indicating that mobile AR revenues will swell to $36.26 billion in 2026.”

are willing to visit stores specifically because they offer this feature.

6 The virtual showroom The ‘virtual showroom’ concept extends the trybefore-you-buy experience from apparel to home goods. This kind of AR application can significantly increase conversion rates for merchants. The technology is similar to virtual try-ons, widening the scope of its application across different sectors.

How this affects the payments industry Augmented reality has quickly embedded itself into the fabric of how we shop and engage with brands. Trends like those outlined above underscore both the versatility and the viability of AR in retail. There are broader effects, as well; for instance, the potential for retailers to reduce refunds and chargeback issuances. In 2020, 64% of e-commerce customers sought refunds because the product didn’t meet their expectations based on its description. Thirtyseven percent returned items simply because they didn’t like what they received. Augmented reality has the potential to mitigate these pain points. By offering a more accurate visualisation of products, AR can prevent instances of buyer’s remorse. The all-too-common justification of ‘this wasn’t what I expected’, which frequently leads to returns and chargebacks, could be a thing of the past. We’re still in the early days of this transformative retail approach. However, AR’s potential to significantly reduce chargebacks and refunds, while providing a better experience for customers, is hard to write off. Mitigating customer dissatisfaction through AR is promising, but it’s a story that’s still unfolding.

Monica Eaton is founder and CEO of Chargebacks911.

Winter 2023

PAYMENTS UNPACKED

PSD1, PSD2, PSD3: 15 years of EU legislation in a nutshell

ho, at the beginning of the 2000s, could offer payment services in the European Union? At that time, it was extremely difficult to answer the question. Companies which provide payment services could fall under extremely different legal requirements from one member state to another. In some countries, one company needed to require authorisation. In others, the same activity would require to become a credit institution, obtain an electronic money institution (EMI) licence, a dedicated licence… or no authorisation at all. In 2007, the EU ended this and harmonised the law across the continent with the first Payment Services Directive (PSD1). Choice of a directive In EU laws, two key terms often appear: “directives” and “regulations.” These are important tools that the EU uses to make and enforce laws, but they work in slightly different ways. Directives are like guidelines that the EU gives to its member countries. When the EU issues a directive, it tells each country what the end goal or result should be. However, it leaves the specific details of how to achieve that goal up to each country’s own laws and government. So, member countries have some flexibility in implementing these rules, as long as they achieve the intended outcome. On the other hand, regulations are more like strict, one-size-fits-all rules. When the EU passes a regulation, it becomes the law in every member country, and each country has to apply it exactly as written. There is less room for individual interpretation or adjustment. One of the main advantages of the directive is that the European legislator does not have to think about every single

payment institution that may be affected by the new text. Each country can adapt the legislation to its own specific payment landscape. On the flip side, the lack of standardisation of the rules on the dayto-day retail payments scope can be challenging, as discussed below. PSD1: Foundation for a single European retail payments market PSD1 was introduced in 2007 and enforced in 2009 with the primary objective of laying the groundwork for a unified European retail payments market. This legislative framework was designed to serve as the legal basis for establishing a single European payments market, enhancing the safety and innovation of payment services throughout the EU. Its core aim was to make crossborder payments as seamless, efficient, and secure as domestic payments within any EU member state. Another significant aim of PSD1 was to foster competition and diversity in the payment services sector, thereby reducing the exclusivity of traditional banks in this domain. This directive opened the door for new players to enter the market and introduce price competitiveness, beyond the traditional world of banking institutions. An important consequence of PSD1 was the introduction of electronic money institution licences, which paved the way for non-traditional entities like Ayden to thrive in the European market. The landscape of payment service providers expanded as a result, with thousands of them settling in the EU. PSD2: Open banking and strong customer authentication for groundbreaking legal innovations The European Commission quickly

proposed to revise PSD1 in July 2013. It was adopted in 2015. PSD2 widened the scope of PSD1 by covering new services and players as well as by extending the scope of existing services, enabling their access to payment accounts. Three major points were at play: • Extended geographical coverage of the directive. • Harmonisation of open banking on the continent. • Strong customer authentication for electronic payments. Geographical coverage While PSD1 had limited jurisdiction and only applied to payments occurring within the European Economic Area (EEA), it did not grasp payments involving third countries. However, PSD2 brought about significant changes by including payments to and from third countries when one of the involved payment service providers operates within the EU. This extension of scope ensured that a broader range of international transactions is subject to EU regulations and information requirements, especially regarding information disclosure. Open banking Open banking allows individuals and businesses to securely share their banking data with third-party providers, such as fintech companies and other financial institutions. This data gathered through open banking can include information about account balances, transaction history, and other financial details. The data comes through application programming interfaces (APIs), which enable the secure exchange of information between different financial service providers.

PAYMENTS UNPACKED

The revised PSD2 played a pivotal role in providing a stable regulatory framework for open banking in the EU. PSD2 constrained banks and financial institutions to open up secure access to their customer’s account information to licenced third-party providers. PSD2 also introduced specific strong customer authentication measures to enhance security and protect the privacy of individuals engaging in open banking payments. By establishing these regulations, PSD2 encouraged the development of innovative financial services and improved customer choice by enabling new players to enter the market. In this way, PSD2 provided a stable and secure regulatory framework for open banking, benefitting both consumers and the financial industry as a whole. However, the picture is not fully bright. Open banking implies that a third-party provider (TPP) will connect to a bank through APIs. But all APIs are not the same and of the same quality. Hence, the absence of uniformity in the PSD2 APIs offered by various banks presents a significant hurdle for TPPs. It is impractical and demands substantial resources to integrate with a distinct API for every bank. This fragmentation of APIs can result in unintended consequences. To streamline their operations, TPPs may opt to exclusively work with the APIs of the largest banks, potentially neglecting customers of smaller banks. This approach allows them to reach a maximum number of potential clients with minimal development efforts. In response to API fragmentation, some aggregators came into play over the past few years in order to answer the need to uniformise API for TPPs. Strong customer authentication Under PSD2, all payment service providers, including banks, were mandated to adopt robust security measures. A key requirement was the implementation of strong customer authentication (SCA) for electronic payments — with some exceptions — ensuring heightened security. This measure aimed to strengthen the security of electronic payments and, consequently, provide greater protection for consumers. SCA existed before PSD2, but PSD2 certainly enhanced electronic payment

Winter 2023

security for customers and harmonised these dispositions across the continent.

thus consumer confidence, in credit transfers across the EU.

PSD3: “An evolution, not a revolution” of retail payments In June 2023, the European Commission suggested new evolutions for the directive, after a year of consultations. The idea of a third directive, PSD3, is set. The amendments suggested by the European Commission aim to represent “an evolution, not a revolution” of the EU payments framework. The amendments are meant to improve the functioning of EU payment markets and to solve some issues that were raised after PSD2 came into force, for instance, about open banking and technical implementation aspects of the directive. A few objectives, though, particularly stand out as they did not appear in previous iterations: • Strengthening measures to combat payment fraud. • Allowing non-bank payment service providers (PSPs) access to all EU payment systems, with appropriate safeguards, and giving them a right to have a bank account. • Further improving consumer information and rights.

Redefine how PSPs access bank account services Regulations governing bank account services provided to non-bank PSPs are set to become significantly stricter. Banks will face more severe obligations if they wish to refuse PSPs access to their services. Banks are key to non-bank PSPs. They ultimately hold customer funds. They allow PSPs to access EU payment systems. Hence, banks will be asked to provide extensive explanations detailing why they are preventing a PSP from this access. This could include compelling reasons to suspect illegal activities conducted by or through the PSP or concerns about the PSP’s business model and risk profile posing substantial threats to the credit institution.

IBAN-name check to combat payment fraud The European Commission has pushed forward a proposal for instant payments, introducing a service that identifies and alerts the payer about any discrepancies between the name and unique identifier of the payee before a euro-denominated instant credit transfer is finalised. In an effort to create a consistent framework for all credit transfers within the EU, PSD3 aims to extend this service to cover all credit transfers. Importantly, this service must be offered to consumers without any additional charges. Under this proposal, the payment service provider of the payee will have to, upon request from the PSP of the payer, verify whether the unique identifier (IBAN number) and the payee’s name, as provided by the payer, are in alignment. This measure aims to enhance security,

Refund rights and GDPR to protect consumers The European Commission’s proposed directive introduces two key refund rights for consumers: • Incorrect IBAN-name check: This provision offers protection to consumers who have suffered financial losses due to the failure of the IBAN-name verification service to detect a mismatch between the payee’s name and IBAN. In such cases, affected consumers are entitled to refunds. • “Spoofing” fraud: The directive addresses situations where consumers fall into “spoofing” fraud traps, where scammers impersonate bank employees and deceive consumers into taking actions that lead to financial harm. Victims of such fraud will be eligible for refunds, too. Here again, in line with the will to harmonise several pieces of EU laws, the proposal also emphasises alignment with the General Data Protection Regulation (GDPR) to safeguard consumer data and privacy. It introduces clarifications and adjustments aimed at ensuring consistency with GDPR regulations, further enhancing consumer protection and data security.

Numeral and Payments:Unpacked This article was originally published by leading bank orchestration platform Numeral and recently featured in the Payments:Unpacked newsletter from Mike Chambers – subscribe for free at: www.payments-unpacked.com.

MEMBER PERSPECTIVE

What is unified commerce? Daniel Holden explains the meaning and significance of unified commerce and why it is vital to the customer experience.

ayments and commerce are complex industries, and as new technology and methods develop, that complexity increases. As the processes that companies use to conduct their business become simpler and more accessible for customers, the pressure on businesses to accommodate those developments continues to rise. With so many aspects to bear in mind, businesses need to focus on merging their resources and bringing payments, commerce, and

data together to create a simple all-in-one resource that can cover all bases. The solution is known as unified commerce. Taking this action frees employees of the burden of having to coordinate a series of different tools and systems, and allows them instead to focus more closely on highquality customer service. Unified commerce is a financial strategy that centralises data, commerce, and payments onto one platform. The aim is to provide a straightforward and streamlined process across a

company’s various channels to deliver an improved customer experience. In this article, we will discuss some of the many aspects that benefit from unified commerce, payments and data, and the cascading effect this has on other areas. Unified data helps you understand customers The use of data and analytics to drive forward business decisions is an indispensable tool within operations and will help a company to thrive. Having a clear and concise way to analyse the behaviour

of your business provides you with an understanding of the success of specific products and customer preferences, and provides insights on how to proceed with certain products. With a wider understanding of customer habits, you can then pursue alternative methods of advertising and marketing, specifically promoting certain products; and even specifically targeting customers and recommending products they are more likely to purchase and enjoy.

MEMBER PERSPECTIVE

Trust’s Converged Commerce pools our resources, including our analytics insight tool, Tru Insight. Through data analysis, you can secure more sales and guarantee more happy customers due to an extensive knowledge of your customers’ needs and how your business can continue to cater to them.

commerce, payments and data, POS systems become fully integrated with the company software, and in turn with the rest of the data in the company. This benefits the use of hardware and makes POS systems an invaluable data collection tool simply by tracking payments and allowing you to analyse and use that collected data later on.

Integrating your hardware The mass pooling and convergence of the various resources at a business’s disposal can affect every aspect of the company’s operations. Hardware is a massive part of the retail and hospitality industries in the shape of POS systems. With the unification of

Unified commerce and data retain customers Using these methods of unification can also help boost the opportunities for customer loyalty. Via the use of trackable data, the coordination of these opportunities and efforts can be more finely tuned and organised. Loyalty schemes have

With the unification of commerce, payments and data, POS systems become fully integrated with the company software, and in turn with the rest of the data in the company.”

Winter 2023

become a massive part of modern-day retail. Many brands offer loyalty cards, which involve collecting the contact information of the cardholder and providing rewards for repeat visits to a business. One of the simplest and most common examples of this is where cafes offer free drinks once a cardholder has made a certain number of purchases. Rewarding customers for visiting a business is a simple but effective way to develop loyalty and to secure useful contact data to be used for marketing purposes. Closer customer relationships can be formed in this way, and communications via information secured during a sale can encourage an employee to participate further in your data collection and develop loyalty to your business. Requesting feedback from customers on how they enjoyed their experience and asking them to rate it can help build a connection with a brand. Customers want to be treated as individuals and to be valued as a consumer of a company’s product, rather than being viewed simply as a statistic. Therefore, active communication with customers and demonstrating concern for a customer’s experience helps to build customer relations and improve their outlook on the business. With Converged Commerce payments are completely centralised and easily integrated into loyalty schemes through ‘card-linked loyalty’.

MEMBER PERSPECTIVE

Protecting customers’ information Convergence means that security can be improved. Any risk of fraud or other security breaches are unacceptable. When the main pillars of a business structure can work together seamlessly, it means every aspect can be equally protected. A simple structure is also easier for business owners to protect. Having unified commerce, payments and data simplifies the process A huge priority for any business owner should be simplicity without having to sacrifice quality. Unifying your resources helps streamline all processes, thus massively increasing the ease of use of the business operations. This

The use of data and analytics to drive forward business decisions is an indispensable tool within operations and will help a company to thrive.” means a simple method both for customers and employees. Unified commerce, payments and data to provide a seamless experience for customers is commonplace these days and is expected by customers. Converged Commerce can help merchants of all sizes to deliver better

customer experience and embrace advancement in commerce. From quicker data consumption to improved security, the benefits it provides are countless, helping any business to provide customers with a more efficient experience of consistently high quality.

Daniel Holden is the group chief executive officer at Trust Payments

Organised by

In association with

2 October 2024 | JW Marriott Grosvenor House

Visit the awards website over the coming weeks to submit your entries 42

thePAY360awards.com

Online Training Courses

Get ahead in the payments industry with The Payments Association Payments 101, a virtual training course by Neira Jones. Perfect for newcomers and seasoned professionals, this course provides a solid foundation in payments education, covering all aspects of the ecosystem. Join us for the next Payments 101 on 30-31 January . Register now at thepaymentsassociation.org/event/

The Payments Association Regulations 101 is the perfect course to take your payment knowledge to the next level.

Get a comprehensive overview of virtual, crypto, and decentralised payments with The Payments Association Payments 201.

This live virtual event, delivered by Neira Jones, covers payment regulations and frameworks, as well as privacy and security standards and their potential overlap.

Drawing on real-life examples, the course covers underpinning principles, key stakeholders and regulations, and practical applications for all three.

Are you up to date with payment compliance regulations? The Payments Association is proud to off er a comprehensive Payments Compliance training programme, free of charge, thanks to support from members Visa and fscom. Watch the 6, two-hour Advanced Payments Compliance Training webinars on demand now, and stay updated with payments compliance standards. Don’t miss out on this opportunity to enhance your knowledge in the industry.

19th - 20th March 2024 ExCeL, London

NEW VENUE

Headline sponsor:

Come and meet the experts at the UK and Europe’s leading payments event.

100+ 3500+ 50% 100+ exhibitors

attendees

VP and above

speakers

40+

hours of curated content

The Payments ecosystem in one place! Get your tickets now and join the experts www.pay360event.com

Strategic partner:

Digital assets partner:

Host Bank Partner:

Payments Review – Winter 2023/24

Articles inside

What is unified commerce?

PSD1, PSD2, PSD3: 15 years of EU legislation in a nutshell

How augmented reality is shaking up e-commerce

How fintechs can supercharge sustainability and gain consumer trust

Financial Crime 360: How the industry came together to combat fraud

Tackling APP fraud: An industry at a crossroads

UK Big Bang 2.0: Will it happen in 2024?

What an atomic settlements boom could mean for the payments industry

Ethical credit: Financing a sustainable future

Could BRICS countries introduce their own currency for international trade?

How the UK is shooting itself in the foot over crypto

Payments regulation in 2024: A year of evolution