Navigating the UK’s new era of crypto regulation
Harmonising crypto globally UK’s payment pioneering IOSCO’s blueprint for a unified digital asset regulation
Crafting the future with HM Treasury’s NPVS vision
“As the leading community focused organisation in the space we are privileged to be a part of The Payments Association. Engaging with like-minded payments professionals and being a part of the CEO roundtables and projects are just some highlights of our partnership to date.”
Jamel Derdour, Group ChiefMarketing Officer, Transact365
P5 Barclays bags Tesco Bank for £600m
P7 Global shift: IOSCO’s regulatory blueprint for harmonising digital assets and crypto
P10 How better regulation can power up UK fintechs
P12 Is the UK losing its charm as a global finance hub?
P17 News in brief: The latest member updates and news
P18 One by one the challenger banks have failed
P20 A regulatory regime for stablecoin is coming: Here’s what we know
P26 Charting the future: Developing the UK’s national payments vision and strategy
P28 Setting the standard: Reducing the carbon footprint in payment processing
P30 AI upheaval and regulatory challenges redefine the future of fintech
P33 AI and human-enhanced transactions: Personalised and secure global payments
Welcome to the spring 2024 edition of Payments Review. This issue focuses on the evolving landscape of payment regulations and innovations.
Leading our coverage is the unified effort by the FCA and BoE to regulate stablecoins, setting a new precedent in the crypto space. We also explore the intricacies of EMI and PSP licensing in the post-Brexit era and IOSCO’s blueprint for global digital asset and crypto regulation.
We explore how digital payments can enhance climate resilience, strategies for addressing financial inclusion in the payments sector, and AI’s potential impacts and challenges in fintech. Don’t miss Riccardo Tordera-Ricchi’s insightful column on the digital pound, shedding light on its future in the payments industry.
This edition also introduces the ESG Working Group’s innovative project to establish a universal carbon footprint standard for the payment industry. Moreover, we include a detailed article on HMT’s development of a National Vision and Strategy for UK payments.
Complementing these features are four thought-leadership articles from The Payments Association members, offering diverse perspectives on the current and future state of the payments industry.
We hope you enjoy reading the first 2024 edition of Payments Review. If you wish to contribute or share your ideas, please do not hesitate to get in touch.
P36 Serving the underserved in the payments space
P40 Why banks should leverage buy now, pay later in 2024
P42 Card is king: Can digital payments drive climate resilience?
P46 Why payments should prioritise operational resilience in 2024
P48 To meet customer expectations, PSPs must prioritise end-to-end reconciliations
P50 Digital pound revolution: Navigating new horizons in payments
P7 IOSCO’s regulatory blueprint for harmonising digital assets and crypto P20 A regulatory regime for stablecoin is coming: Here’s what we knowAnjana Haines
Editorial director
Anjana.haines@thepaymentsassociation.org
Benjamin David
Editor
Benjamin.david@thepaymentsassociation.org
George Iddenden
Reporter
George.iddenden@thepaymentsassociation.org
Tony Craddock
Director general
Ben Agnew
CEO
Emma Banymandhub
Events director
Maria Stavrou
Operations director
Tom McCormick
Sales director
Tom Brewin
Head of projects
Riccardo Tordera
Head of policy and government relations
Sophie Boissier
Membership director
Gavin Alexander
Data and workflow manager
Jay Bennett
Projects assistant
Michele Woodger
Projects and content coordinator
Natasha Healy
Projects coordinator
Suzanne Smith
Digital sales manager
Martyn Fagg
COO
Tillo
Joe Hurley CCO
Crown Agents Bank
Kit Yarker
Director, Product and Propositions
EML Payments
Manish Garg
Founder & CEO
Banksly
Andrew Doukanaris
CEO Flotta Consulting
Mark O’Keefe
CEO
Optima-Consultancy
Mark McMurtrie
Director
Payments Consultancy
Paul Adams
Head of strategic alliances
Trust Payments
Miranda Mclean
Chief marketing officer
LHV Bank
Sarah Jordan
Project financial crime member
Anant Patel
President, supply chain payments
Monavate
Jessica Cath
Head of financial crime
Thistle Initiatives
Lorraine Mouat
Head of payment services
Thistle Initiatives
Lorraine Mouat, head of payments services, Thistle Initiatives
he coming years herald a convergence of new directives, regulations, and technological advancements poised to redefine payment services. This transformative wave expands the realm of alternative payment methods (APMs) and compels payment service providers to explore innovative distribution channels. The UK government’s commitment to financial sector reforms introduces opportunities and challenges, triggering increased competition from diverse quarters.
Navigating this intricate web of new regulatory requirements demands a competent workforce and substantial financial resources. As the payments sector experiences rapid growth, regulatory scrutiny intensifies on the effectiveness of governance, systems, and controls. This emphasis extends beyond new entrants to include previously authorised firms, aligning with enhancing operational resilience.
Simultaneously, regulatory attention intensifies on the robustness of firms’ wind-down plans. Unearthing weaknesses prompts the Financial Conduct Authority (FCA) to emphasise that firms must reassess and fortify their wind-down plans for resilience and compliance.
The looming Payment Services Directive 3 (PSD3) is set to reshape the regulatory landscape. E-money firms must anticipate potential re-authorisations, necessitating proactive preparation. The Future Regulatory Framework Review (FRFR) anticipates
strengthened requirements for safeguarding customer funds and the introduction of a Client Asset Sourcebook (CASS)-like regime. Payment services firms must prepare for enhanced scrutiny and compliance obligations in this crucial area.
Operational resilience is poised to take centre stage. Firms should have created self-assessment documents and reviewed the robustness of their infrastructures, contingency planning, and crisis management for uninterrupted service delivery before the March 2025 deadline.
The New Payments Architecture (NPA) is set to revolutionise the payments landscape. Targeted for ‘go-live’ in H1 2025, it aims to enhance transaction efficiency, security, and adaptability. In strong customer authentication (SCA), the FCA signals increased flexibility, departing from a prescriptive regime to introduce adaptive measures. Anticipated flexibilities in SCA regulations could enable tailored approaches, promoting a dynamic and userfriendly authentication framework.
As the industry grapples with multifaceted changes, firms must integrate regulatory considerations into strategic decisions, finding synergies between business and regulatory change programs. In the intricate dance of regulatory shifts, technological evolution, and competitive dynamics, strategic foresight and adaptability are guiding beacons for payment services firms.
Barclays has agreed to a £600 million deal to purchase Tesco’s banking arm as the retailer makes a strategic shift away from finance.
Barclays will acquire all of Tesco Bank’s retail banking operations, including credit cards, loans, and savings accounts, as part of the landmark deal.
Under the second phase of the agreement, Barclays and Tesco will embark on a 10-year strategic partnership. This collaboration will involve Barclays providing Tescobranded banking products and services through Tesco’s retail channels.
It comes a few weeks after Tesco rival Sainsbury’s announced it was planning a ‘phased withdrawal’ from its banking business and would sell financial services through third parties instead.
Barclays Group chief executive C.S. Venkatakrishnan says: “This strategic relationship with the UK’s largest retailer will help create new distribution channels for our unsecured lending and deposit businesses.
“We are able to bring our expertise in partnership cards developed over decades in the US to enhance further the highly successful Tesco Clubcard loyalty scheme.”
The purchase will give Barclays access to its customer base of around six million customers, significantly boosting its own audience.
The deal is subject to regulatory approval and is expected to complete in the second half of 2024.
Barclays UK consumer bank division generates the highest return on tangible equity and consumes less capital than its investment bank, according to J.P. Morgan.
Wrapping up the deal from a willing seller means the price was on attractive terms at around a 40% discount to the tangible net asset value.”
The bank is set to update its shareholders in February, with investors looking for capital and operational efficiency improvements to boost their equity return.
A decade ago, supermarkets were widely regarded as the leading contenders to disrupt the market dominance of established players in the sector.
However, due to the growth of fintech challenger banks such as Revolut, Monzo and Starling, interest in retail banking operations ebbed.
“Ring-fencing” regulations introduced in 2014 also helped to separate retail banking activities from investment banking; this added a new layer of complexity and costs for new entrants, including grocers, who were required to comply with separate regulations for each segment.
According to Matt Britzman, equity analyst at Hargreaves Lansdown, Barclays’ recent manoeuvre is a strategic decision.
He tells Payments Review: “The deal makes a lot of sense for Barclays. Tesco’s book is largely focused on unsecured lending and credit cards, which play into Barclays’ strengths. Plus, wrapping up the deal from a willing seller means the price was on attractive terms at around a 40% discount to the tangible net asset value.”
Britzman added that the proposed sale of Barclays’ German consumer business
could also mean that it acquires the cost of Tesco’s book and simultaneously leaves its capital levels “broadly flat”.
Tesco Bank has informed that current customers are not required to take any immediate action. The bank will reach out to its customers in the forthcoming months with any updates.
The deal is expected to be completed in the second half of 2024, pending regulatory approval.
IOSCO’s new policy recommendations aim to create a unified global framework for regulating digital assets and cryptocurrencies, enhancing market integrity and investor protection.
George IddendenThe urgency to regulate the rapidly expanding digital asset and cryptocurrency sector is palpable. The market’s notorious volatility and susceptibility to manipulation have sounded alarm bells for investor protection and fair-trading practices, making it a pressing challenge for governments and financial institutions worldwide.
Not only this, but the degree of anonymity that cloaks certain crypto transactions makes the sector the perfect breeding ground for money laundering and terrorist financing, threatening the integrity of the market to a large degree. These alone underscore the imperative for comprehensive regulatory frameworks.
Playing a pivotal role in global financial regulation, the International Organisation of Securities Commissions (IOSCO) is instrumental in fostering
investor market integrity. In the realm of cryptocurrencies and digital assets, IOSCO’s role is significant. It provides guidance and recommendations to regulate crypto-asset service providers (CASPs), aiming to establish standards that mitigate potential risks and ensure fair trading practices.
In November last year, IOSCO implemented policy recommendations for Crypto and Digital Asset Markets (CDA Recommendations) to establish a globally coordinated framework for regulating CASPs.
The market’s notorious volatility and susceptibility to manipulation have sounded alarm bells for investor protection and fair-trading practices.”
Regulating and licencing CASPs is a significant priority laid out in the recommendations.”
These recommendations aim to address potential areas of harm such as market manipulation, money laundering, and investor protection through measures like licencing, capital requirements, and robust AML/CFT compliance, fostering a responsible and secure environment for cryptocurrencies and digital assets to thrive.
According to nChain’s sales solutions leader, Brett Johnson, “This harmonisation is poised to be a key driver in the wider acceptance and incorporation of blockchain technology and crypto assets into the mainstream financial ecosystem.”
Market volatility and manipulation are two of the most significant issues that are hindering the application of the crypto space. The industry body believes that by implementing robust market surveillance mechanisms, including advanced technologies and data analytics to monitor trading patterns, the issue of market manipulation will be mitigated.
The recommendations aim to increase transparency and promote fair trading practices in cryptocurrency markets. CASPs are expected to provide accurate and timely information to investors and regulators, including details on pricing, trading volumes, and order book data. These requirements ensure that market participants have reliable access to information.
Regulators are urged to establish and enforce rules promoting fair trading practices in cryptocurrency markets. This may involve implementing measures to prevent front-running, spoofing, and other manipulative trading strategies that can distort market prices and undermine investor confidence.
The recommendations also suggest that regulatory oversight of CASPs is necessary to ensure that they comply with relevant laws and regulations. Regulators are encouraged to conduct regular inspections and audits of CASPs to assess compliance with regulatory requirements and detect potential misconduct or violations.
Regulating and licencing CASPs is a significant priority laid out in the
recommendations. IOSCO has put a great deal of emphasis on establishing a licencing framework for CASPs, which includes entities like cryptocurrency exchanges and wallet providers. The aim is to improve market integrity and protect investors.
Being used heavily as a means of paying for goods and services abroad represents a difficulty in its own right. Cross-border payment methods are notoriously difficult to regulate given the different jurisdictions will often have their own frameworks. The recommendations aim to promote cross-border cooperation and harmonisation by facilitating information sharing, coordinating regulatory enforcement actions, and developing common standards and best practices.
VE3 Director, Manish Garg, believes that the recommendations made by IOSCO address critical issues in the crypto-asset space, including investor protection, market integrity and systemic risks. The aim, of course, is to create a harmonised regulatory framework that can be adapted globally.
While Garg acknowledges the good intentions of the proposed regulations, he also recognises the challenges that may arise in their implementation. These
challenges stem from the rapidly evolving nature of the crypto market, differences in national regulatory frameworks, and the need for international cooperation. Garg believes these factors could hinder the uniform enforcement of the guidelines, thereby affecting their effectiveness in promoting transparency, fairness, and efficiency in markets.
“The recommendations are wellcrafted for promoting transparency, fairness, and efficiency in markets, but their effectiveness will largely depend on the ability of regulatory bodies worldwide to enforce these guidelines uniformly,” he says.
“The implications of implementing these recommendations include increased investor confidence, reduced risk of market manipulation, and fostering innovation within a regulated environment, potentially leading to
broader adoption and integration of crypto assets into the global financial system.”
Johnson says key systematic risks have also sensibly been addressed through oversight mechanisms designed to mitigate negative spill over from the crypto market into the traditional financial ecosystem.
He adds: “These recommendations may not mitigate the risks of investment in crypto assets entirely, but they mark an important step in the evolution of global regulation.” Moreover, the potential impact of a framework for CBDCs will have seismic impacts on both retail and wholesale models, helping to guarantee the currencies “operate within a secure and transparent market setting”.
Johnson argues that retail currencies mean a more secure everyday transaction for consumers; meanwhile,
for its wholesale counterparts, the guidelines aim to drastically improve interbank settlements and overall systematic stability.
Industry reception so far
So far, the industry has reacted largely positively to the recommendations, with the most enthusiasm being shown by investors who have welcomed the potential for less risk exposure and tightened security.
Crypto exchanges and other service providers, on the other hand, are currently attempting to navigate the delicate balance between fostering innovation and adhering to regulatory compliance, according to Johnson.
Despite most of the feedback being positive, there are still concerns about stifling the flame of innovation and the cost implications of compliance for smaller firms.
Johnson says: “With thoughtful implementation, these recommendations will pave the way for a future where crypto assets play an integral role in diversified investment portfolios and the broader financial ecosystem. With several spot bitcoin exchange-traded funds already have been approved, a regulated crypto future seems closer than ever.
These recommendations may not mitigate the risks of investment in crypto assets entirely, but they mark an important step in the evolution of global regulation.”
Omar Salem explores how regulatory reforms and increased capital can drive UK fintech expansion.
One of the first questions any fintech founder or investor asks is how it will be regulated. Regulation affects every aspect of a fintech’s business, from how it interacts with customers to the amount of capital it needs to hold. Financial regulation is also expanding to cover not only firms providing financial services but also technology firms providing the infrastructure.
The UK’s robust and globally respected regulatory framework has helped launch and attract some of the world’s leading fintechs. UK Finance CEO David Postings recently indicated that he would like to see more risktaking in the UK, but there is much to do to improve how
regulation works without increasing risk. Nonetheless, there is significant scope to improve the UK’s regulatory architecture to protect consumers better and support fintechs. If we want the country to continue to be a global leader in fintech, we must continually work to optimise our regulatory framework.
There are major improvements to the UK’s regulatory system that could be needed across three stages in the life cycle of a fintech. Firstly, the Prudential Regulatory Authority (PRA) and the Financial Conduct Authority (FCA) authorisation process should be improved. Secondly, a more consistent approach to regulation should be put in place. Thirdly, the pools of
capital available to high-growth firms should be expanded.
The UK rightly has a rigorous process for authorisation of new financial services firms. This is vital to protecting the integrity of the UK’s financial sector, ensuring financial prudence and protecting consumers. It is partly because the process is so well regarded that fintechs seek authorisation in the UK as a stamp of approval. However, there is scope to speed up the process and include more accountability without weakening the effectiveness of the authorisation process.
The slow pace of the PRA and FCA’s authorisation process stems not solely from an intrinsic need to take so long but because there is a lack of accountability in the authorisation process. This originates partly from different interpretations of the statutory provisions that are supposed to ensure applications are processed within specific time frames but, in practice, are ineffective. In addition, the mechanisms for challenging regulators’ decisions are unsuitable. For example, it would make sense for firms to be able to request a quick review, at the informal feedback stage, of a case officer’s plans to recommend that an application be refused. This would bring greater
accountability and support greater confidence in the regulators’ decision-making concerning authorisation applications even when an application is refused. It is possible to have both an effective and prompt authorisation process, but we need to revise the statutory framework to tighten the process. Of course, we must also ensure that the regulators are sufficiently resourced and staffed to process applications effectively.
A more consistent framework for regulation
Associated with the issue of authorisation is the patchwork nature of the UK’s licensing and regulatory regime. Separate licensing gateways apply to:
● Banks, insurers, investment firms, mortgage lenders, consumer credit firms and certain cryptoasset issuers and service providers (FSMA 2000);
● Electronic money institutions (Electronic Money Regulations 2011);
● Payment institutions (Payment Services Regulations 2017);
● Central security depositories (UK CSDR);
● Consumer buy-to-let mortgage providers (Mortgage Credit Directive Order 2015); and
● Benchmark administrators (UK Benchmarks Regulation).
The slow pace of the PRA and FCA’s authorisation process stems not solely from an intrinsic need to take so long but because there is a lack of accountability in the authorisation process.”
This array of regulatory regimes should be consolidated into a single licensing framework, with the core authorisation requirements standardised with additional bespoke requirements where necessary. Besides simplifying the authorisation process, this would have the key benefit of allowing authorised firms to add new regulatory permissions without needing to go through another complete authorisation process again, saving resources for regulators and firms.
The government has indicated through the Future Regulatory Framework that it is heading towards a more consolidated regulatory system, with regulatory requirements pushed into the regulators’ rulebooks rather than being prescribed in legislation. In a policy paper published in July 2023, progress was promised by the end of the year, but this seems to have been limited so far.
The key to the successful development of fintechs is access to the right capital at the right time. The fintech sector, along with other high-
growth sectors, is strategically important to the UK and has the potential to provide highly rewarding returns to investors. There is, therefore, a strong argument from a public interest perspective for using regulation to support earlystage high-growth companies
While positive steps have been taken through the UK Government’s Khalifa Review of UK fintech to support funding for the fintech sector and the Mansion House Pensions Compact to support greater investment by pension funds in highgrowth companies, more needs to be done. One option would be to require all pension funds to invest a minimum proportion of funds in early-stage high-growth companies, either directly or through a specialised fund that could be developed. A relatively small percentage of
UK pension fund investments are steered toward earlystage high-growth companies, which could have a massive positive catalytic event, potentially encouraging other investments into these companies.
Regarding listing, it is recognised that the UK market faces challenges, although these should not be exaggerated. Nevertheless, a radical reset of the UK’s promised listing regime is underway, including introducing a new single listing category for equity shares in commercial companies. This removes certain restrictions to listing and allows dual-share classes, meaning it should be particularly attractive to fintechs. It has been gratifying that the FCA has moved to reform the regime following feedback, and it should
take a similar approach to authorisation and the broader regulatory framework.
London is rightly a leader in financial services and the fintech sector. The quality of our regulation is an essential factor in this. However, we must be at the cutting edge to maintain this position. For the fintech sector, critical developments should include improving our authorisation process, implementing a more consistent regulatory framework and increasing the pools of capital available to high-growth companies.
As Brexit and new regulatory frameworks redefine the playing field, the UK’s role as a global finance hub faces significant challenges, especially in the payment services and fintech sectors.
George IddendenFor years, the UK has held the crown for payment service provider (PSP) licencing, attracting businesses from all over the globe with an efficient system and a golden ticket: passporting rights that allowed access to operate seamlessly across the European Economic Area (EEA).
Over the past 20 years, the accessibility of the payment services industry has never been greater, with payment institutions (PIs) and electric money institutions (EMIs) benefitting greatly. As of December last year, the number of PIs and EMIs given a licence to operate in the EEA stood at 883 and
342, respectively. PSP licences in the UK were 407 and 232, according to the Financial Conduct Authority (FCA).
Despite the UK making up a large percentage of the PI and EMI licences issued in the EEA, Brexit dealt a heavy blow to financial service providers’ aspirations for a pan-European reach.
The passporting system operated on the basis of “mutual recognition”. This means that if a financial regulator in one of the EEA member states considered a PSP suitable to operate, other member states had to accept this decision. This eliminated the need for repetitive licencing procedures and encouraged cross-border competition, benefitting providers and consumers.
Crucially, passporting rights were revoked with the UK’s departure from the European Union (EU), significantly altering the landscape for UK-based PSPs, who now face various challenges when aiming to operate across the EEA. This means that firms now require authorisation in destination countries to operate post-Brexit.
The decline in licenced EMIs warrants a thoughtful examination of its potential consequences on the UK economy, emphasising the importance of a regulatory framework that supports both stability and innovation.”
According to data collected by PSP Labs from the European Banking Authority and the FCA, the deadlines for implementing PSD1 (1 November 2009) and EMD2 (30 April 2011) in the EU led to a significant rise in the number of authorisations for both EMIs and PIs. It is worth noting that this increase occurred during the global economic recession of 2009/11.
This period saw the first wave of payment service provider (PSP) authorisations, resulting in a rise in payment and e-money institutions in response to regulatory changes. The years spanning 2018 to 2020 marked another pivotal period, characterised by the transposition deadline of the second Payment Services Directive (PSD2) in both the EU and the UK.
This period saw a second wave of authorisations for EMIs and PIs, although the growth was relatively more subdued than the earlier wave. Nonetheless, during this time, the impact of PSD2 on fostering entrepreneurship within the PayTech sector became clear. The directive acted as a catalyst for the establishment of numerous startups, leading to an increase in the issuance of PayTech licences and indicating a shifting landscape in financial services regulation.
Between 2020 and 2023, the PayTech sector experienced the ongoing effects of regulatory changes following the implementation of PSD2. A study conducted by Polasik et al. (2020) showed that PSD2 has had a lasting impact on the sector’s development. As the sector continues to evolve, it is
necessary to conduct further research to fully understand the long-term impact of PSD2 on the PayTech landscape. By the end of this period, analyses have suggested that the regulatory changes brought about by PSD2 have not only led to short-term growth but also have the potential to bring about long-term structural changes in the European financial ecosystem.
There were several scandals in the banking and payments sector from 2018 to 2023, including German bank Wirecard, which came under fire over allegations of fraud and forgery that prompted a small boom in PI and EMI licence withdrawals and cancellations. As a direct result, regulators looked to instil a more stringent approach to authorisations.
According to James Borley, exauthorisations manager at the FCA and now Cosegic managing director, applying a more relaxed approach at the gateway meant more firms were able to get through; however, those days are over.
With the failures of several payment firms (Ipagoo, Supercapital, Premier FX, etc.) and the criticisms coming from the Gloster Report, the FCA seems to have decided that it has been too lenient previously with applicant firms and that firms should really be able to demonstrate better they are ‘ready, willing and organised’ at the point at which the application is submitted.
Borley says: “That’s fine as a principle, but doesn’t really help new start-ups, unable to generate income until authorised, but knowing that the assessment of their application might take anything up to 12 months.”
Irreparable damage or a positive move? Some arguments suggest that tightening the restrictions could help foster higher quality startups to contribute to the UK’s ecosystem. Polymath Consulting Founder and CEO, David Parker, tells Payments Review that he believes it could be a positive. He says: “In many respects, what is happening here is simply cleaning up the cupboard and just being more careful about who gets licenced.”
Parker claims that while it may have been easier for a firm to acquire an EMI or PI licence in the past than in countries such as Luxembourg or Ireland, making the regulatory frameworks more stringent can only help to drive up the quality of firms operating in the UK.
Regulation still needs to create a more supportive environment for startups, Parker says. “They must ensure that new regulations on VRPs or open banking requirements don’t hinder development and make it harder or too costly for new start-ups,” he adds.
London remains a leading tech hub in Europe, with a thriving fintech sector, housing over 18,000 tech companies.”
Thistle Initiatives’ head of payment services, Lorraine Mouat, believes there is a critical need for enhanced oversight.
She tells Payments Review: “I’m sure we all appreciate the ongoing need to ensure consumer protection, prevent financial crime, and maintain the stability of the financial system. However, has this gone too far? Do we require a more delicate balance to avoid stifling innovation and hindering the competitiveness of the market?”
Mouat claims that the repercussions of a shrinking pool of licenced EMIs extend beyond just regulatory compliance, with firms struggling to obtain proper licencing, facing operational challenges, and potentially exclusion from the digital payments ecosystem.
She adds: “This could limit the diversity and dynamism within the financial sector, hindering the innovation and services that EMIs bring to the table.”
Listen now to stay ahead in the rapidly evolving world of payments.
Where does the UK rank now?
London has been the leading tech hub in Europe for a considerable amount of time. Despite the concerns surrounding Brexit, investors’ interest in the city has not declined. In 2023, London was ranked third in the “Best Cities for Startups” ranking, highlighting its strong access to early-stage funding opportunities. The UK ranks first in the Global Startup Ecosystem Index 2023.
Polymath Consulting Founder and CEO, David Parker, tells Payments Review that the UK remains at the top of the pile. He said: “The bottom line is we have the right combination of people, money, regulators, market, to still make it very attractive.”
He describes the eradication of passporting rights from the Brexit deal as nothing more than a slight “pain”, maintaining London still has enough gravitas in the financial sector to make it an attractive place to set up shop.
The passporting system’s loss has significantly altered the landscape for UK-based PSPs, now facing challenges in operating across the EEA.”
Mouat is less positive about what it could mean for the UK’s chances of attracting a new wave of innovation, claiming an absence of regulated EMIs might impede the UK’s ability to harness the benefits of financial technology fully.
She acknowledges that as crossborder transactions, financial inclusion, and the efficiency of payment systems could all be impacted, the biggest concern must be the potential impact on the global payments market.
“While acknowledging the FCA’s focus on stricter regulation in the EMI sector, it is crucial to strike a balance that fosters innovation and growth,” she comments. “The decline in licenced EMIs warrants a thoughtful examination of its potential consequences on the UK economy, emphasising the importance of a regulatory framework that supports both stability and innovation.”
The UK remains a leader in fintech innovation, including peer-to-peer lending, challenger banks, cybersecurity, insuretech, regtech, AI, paytech, and blockchain startups. However, the loss of passporting rights for PSPs has presented various challenges for UKbased PSPs aiming to operate across the EEA.
Despite these challenges, London remains a leading tech hub in Europe, with a thriving fintech sector, housing over 18,000 tech companies, and a 10% global market share in fintech. Additionally, the UK still attracts top talent, with 42% of overseas workers in UK fintech, and London alone hosting over 350,000 software developers, making it an attractive place for fintech companies to scale and maintain the health of the UK’s position as a leading global finance hub.
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Last month, Lloyds announced it was winding down its mobile banking service this year as it slashes 1,600 branch jobs.
The move comes as the banking group looks to push more resources towards its online banking division.
Lloyds launched the service as an alternative to High Street branches, with vans serving customers in towns and cities across the country.
The service is being wound down after the number of consumers has dwindled.
Customers were able to use the vans on set days and times for their everyday banking needs, including cashing cheques, withdrawing cash, paying bills, and general account enquiries.
Lloyds said it would introduce 32 more “community bankers” in locations where mobile branches were currently active.
On average, 54 branches shut every month across the UK since January 2015 as mobile banking becomes more prominent.
Consumer group Which? expressed its disappointment at the banking group’s decision, calling for more shared banking hubs to be implemented for those who are less comfortable banking online.
J.P. Morgan Payments recently unveiled a new omnichannel payments solution at the National Retail Federation annual show in New York.
The new platform integrates various payment channels, empowering merchants to streamline transactions seamlessly across in-store, online, and mobile platforms.
By eliminating the need for multiple vendors, the banking giant is hoping to simplify the process for clients, ensuring a cohesive end-to-end payment experience.
J.P. Morgan Payments claims that the full-stack solution can now provide an in-store experience that mirrors the speed and efficiency of an e-commerce transaction.
Jean-Marc Thienpont, managing director of omnichannel & biometric solutions at J.P. Morgan Payments, says: “This is a gamechanging payment offering for all sizes of businesses. Our clients have asked us to deliver a true, full stack solution, and now we can.”
The Bank of England’s (BoE) governor, Andrew Bailey, has reassured the finance sector by claiming that UK banks are in “sound health” despite a tough few years.
During a speech at Loughborough University, Bailey shared his thoughts on the future of the UK banking sector. He indicated that there is reason to be optimistic about the sector ’s prospects but also needed clarification about the stagnant share prices of major lenders.
Bailey attributed this to the significant economic disruptions caused by the Covid-19 pandemic.
He also praised banks for their resilience during recent challenges: “UK banks have come through the turbulence of the last four years in sound health, and that has enabled them to contribute to maintaining financial stability and to support the economy and their customers during these difficult times.”
The UK’s leading challenger banks, Revolut, Starling and Monzo, have seen a 45% fall in customer complaints regarding account closures between 2022 and 2023, according to the latest data.
New data reveals that the Financial Ombudsman Service received 170 complaints regarding account closures by Monzo, Revolut, and Starling between January 1 2023 and November 30 2023.
Monzo has 8.7 million customers in the UK. Meanwhile, Revolut and Starling have 6.8 million and 3.6 million, respectively.
Account closures were thrown into the limelight last year after Nigel Farage’s Coutts scandal, which prompted the resignation of Dame Alison Rose, NatWest Group CEO and Peter Flavel, Coutts CEO.
One by one the challenger banks have failed
SBy Matthew Lynn, Financial columnist for The Telegraph and The Spectator
ainsbury’s has decided to wind down its banking unit. Tesco has sold out to Barclays. The attempt by Metro to recreate high street banking with bright, colourful stores open at the weekends is floundering, and even the mighty web giants such as Apple and Amazon are struggling to make much progress. Over the last decade, many so-called challengers have tried to move into the UK’s banking industry, but they have all failed so far. In reality, payment processing is a hard business with tiny profit margins, and so long as that is true, the grip on the market held by the major banks looks secure - even if they won’t be able to make much money.
On the surface, it should have been a great opportunity. After all, Sainsbury’s has a well trusted brand name, and hundreds of outlets across the country, plus millions of loyal customers. It should have been relatively simple to add some banking services to the rest of the product range. The same is true of the other retailers that tried to muscle into banking, as well as all the challenger banks that have tried to build a presence on the high street, and more recently on everyone’s smartphone. The traditional financial giants have meaningless brands, a
bloated cost-base and a terrible reputation for poor customer service. If any industry was ripe for low-cost, customer-friendly innovation, it was surely banking.
But last month Sainsbury’s said it was planning a “phased withdrawal” of its banking business, effectively giving up on its venture into finance. Tesco announced a long-rumoured sale to Barclays. M&S and John Lewis have long since given up on their attempts to turn themselves into banks. It does not stop there. Metro Bank’s attempt to drag branches into the 21st century may have looked appealing a few years ago, but there are not enough customers to make it work. Even more significantly, there is little sign that even the giants of the web, which have crushed so many other industries, have been able to make banking a success. Apple is reported to be ending its credit card partnership with Goldman Sachs. Amazon has been discussing a bank account for years but still hasn’t launched anything of significance, while Meta, the company that owns Facebook and WhatsApp, gave up on its ambitious plans to launch its own currency. True, app-based banks such as Monzo are making some progress with snazzy smartphone-based finance, but there is
little sign they can turn that into a mass market product.
Add it all up, and one point is clear: The high street banks will maintain their grip on basic financial services for a long time to come. Sure, banking and payment processing has some superficial attractions. But there are two big problems. First, no one is very interested in switching. Plenty of companies have tried, but getting people to switch from one account to another has proved incredibly hard. After all, the accounts are free anyway, so you can’t undercut your rivals on prices, and any additional services you might offer are usually so dull that no one can get interested in them. Next, the margins are wafer-thin. True, Mastercard and Visa both make plenty of money, but that is by providing the infrastructure for transferring money between banks and
retailers. For the company providing the account, profits are very slim. Nobody is willing to pay for an account since there are plenty of free ones on offer, so in effect, you must provide a complex piece of software for nothing. In the past, banks could use the deposits they collected for loans, but with low-interest rates and plenty of rival sources of capital, there is not much money to be made there either. You can try upselling by adding on insurance, mortgages or other services.
The challenges will come to nothing - even from companies as big as Sainsbury’s and Tesco.”
In reality, payment processing is a hard business with tiny profit margins, and so long as that is true, the grip on the market held by the major banks looks secure - even if they won’t be able to make much money.”
Still, again, the results have been very disappointing, and when the banks are successful (such as with payment protection plans), it is typically through mis-selling and only results in huge fines. There just isn’t much money to be made from providing bank accounts.
The result? While plenty of other industries have been turned upside down over the last decade, finance remains as secure as ever. The major banks and credit card companies are not likely to be destroyed any time soon, and most of their competitors will quickly fall by the wayside. There won’t be a lot of money to be made. The margins are too thin for that. But the industry will remain secure, and in another decade, or perhaps even two, will still be dominated by the same big names. The challenges will come to nothing - even from companies as big as Sainsbury’s and Tesco.
With the UK’s financial watchdogs set to establish a regulatory regime for stablecoins, payment service providers must brace for stringent new standards in operations, redemptions, audits, and consumer protection.
Marcel Le GouaisFirms operating in the stablecoin market face stringent new regulations across the full gamut of operational standards, redemptions, independent audits and consumer protection as the financial watchdogs enact plans to create a regulatory regime for cryptocurrencies.
In the government’s latest moves to execute a phased strategy for crypto regulation, a Treasury policy statement preceded two discussion papers from the Financial Conduct Authority (FCA) and the Bank of England (BoE) late last year, which set out proposals for all stakeholders including payment systems providers in the fiat-backed stablecoin space.
Piling on the onslaught of regulatory literature, the Prudential Regulation Authority (PRA) also issued a Dear CEO letter to banks on their use of deposits, e-money and regulated stablecoins.
Last year, the Treasury’s initial policy statement mapped out the broad direction of travel, stating an intention to define fiat-backed stablecoins in legislation by capturing stablecoins that hold (in part or wholly) a fiat currency as backing.
The BoE’s discussion paper, which closed on February 6, sets out a regulatory framework covering any payment systems that use stablecoins at a systemic scale. It focuses on sterlingdenominated stablecoins only, as the bank believes these are most likely to become widely used for retail payments.
The FCA’s discussion paper (having closed on the same date) defines the standards that issuers and custodians of regulated stablecoins will have to meet, as well as payments system providers, once the regime comes into force.
The two financial regulators are proposing rules that have significant implications for operations, compliance, business structures, governance, backing assets, customer communications, and, ultimately, departmental budgets.
On a potential flipside, the proposals could help to open this market up. The regulators are considering changes to payments legislation to enable the use of fiat-backed stablecoins for retail goods and services payments. The law change would enable stablecoins issued both within and outside the UK to be used for this purpose.
The impact of allowing in foreign issuers is subject to debate; however, with The Payments Association informing the FCA, it’s likely no major global stablecoins would qualify for such a confined regime. Yet, this is just one proposal of a multitude that could evolve
as the dialogue with the regulators gathers pace.
As for the relevant legislation used to enact a new regime, the issuance and custody of fiat-backed stablecoins will be regulated under the Financial Services and Markets Act 2000, while the use of stablecoins for payments will come under the Payment Services Regulations (PSRs).
Once the watchdogs assess the feedback, new rules will be drafted for consultation. The Treasury will then enact secondary legislation changes.
Essentially, this is still the beginning; a widening net of regulations through different phases will encompass more crypto stakeholders as the government moves forward.
In an immediate sense, the breadth of regulators’ activity here is vast. A framework is being established that extends their remit far beyond existing supervision of policies for anti-money laundering (AML) and counter-terrorist financing (CTF) in crypto.
Preparations, if they haven’t already, will need to start imminently for those affected.
The impact of allowing in foreign issuers is subject to debate; however, with The Payments Association informing the FCA, it’s likely no major global stablecoins would qualify for such a confined regime.”
The FCA discussion paper provides some context on the estimated size and shape of the stablecoin market – and, therefore, the sprawling scale of the regime it needs to establish.
that for Q2 2023/24, it did not hit its target to process new authorisations for payment services and e-money firms within the required timeframe.
during these periods or when an issuer collapses into insolvency.
Applicants in the stablecoin market may find their perseverance tested.
For the industry, the FCA’s drive to transparency will undoubtedly have an impact.
More than 200 cryptoassets are in existence, which purport to maintain a stable value against one or more fiat currencies, according to the regulator.
Redemptions at par
The FCA also points to 2022 figures that show on-chain stablecoin transactions exceeded $7.5 trillion on the Ethereum blockchain alone.
Once firms secure authorisation, one of the more taxing new regulations issuers and payments service providers will face relates to redemptions.
The regulator’s principal aim here is to ensure holders can convert their stablecoin into fiat at par value at all times while the issuer is solvent. Acknowledging that holders can sell their stablecoins on an exchange at any time, the FCA believes this proposal will allow them to redeem with the issuer at par when the coin has de-pegged on the secondary market.
The US dollar stablecoins issued by Circle and Tether exert something of a duopoly on the wider landscape. As of 12 October 2023, the FCA states, these had a combined market dominance of around 87% within a total stablecoin market capitalisation of $123.4 billion.
Against this backdrop, the FCA will have a vast in-tray of authorisations to wade through. Its discussion paper states that all stablecoin issuers will need authorisation to issue fiat-backed stablecoins in or from the UK.
The FCA is proposing that all stablecoin issuers must ensure redemption at par to all holders of the regulated stablecoin by the end of the next UK business day after receiving the redemption request. There will also need to be more transparency around the fees charged.
The watchdog says that redemption restrictions are “rarely clearly communicated on corporate websites” and are “not always reasonable or proportionate”. It states that issuers commonly do not commit to specific redemption periods and reserve the right to pause or halt redemption at their sole discretion.
The Payments Association says in its consultation response that the FCA should require the publication of redemption policies on exchange websites to ensure users are fully informed.
In its consultation response, The Payments Association says there will be many situations where next-day redemption is operationally challenging, such as a mass run on a particular stablecoin.
The FCA adds it is “aware this will be a significant change for issuers who currently seek to interact only with wholesale or institutional clients”.
Overseas stablecoins:
Whose role to assess?
The Treasury’s plan to open up the market to stablecoins issued outside the UK, which
Authorisation will come with requirements related to minimum capital held, AML rules and know-yourcustomer (KYC) checks, as well as accountability for directors through the Senior Managers Regime and where relevant, the Consumer Duty.
There is also a cost element for the FCA to consider here; The Payments Association explains that if issuers are allowed to charge cost-effective fees for redemptions, this could disadvantage users wanting to redeem only small amounts.
From the regulator’s perspective, though, consumer protection is paramount, particularly during times of market turbulence.
The FCA has a chequered history of processing authorisations on time, though it has made improvements during the past 18 months. The watchdog’s figures show
The FCA highlights the risk of stablecoin holders not being able to get par value for their coin on the secondary market
Once firms secure authorisation, one of the more taxing new regulations issuers and payments service providers will face relates to redemptions.”
is covered in the FCA paper, has one of the more significant implications for payments service providers.
Whitehall is considering whether to give the FCA powers within the PSRs to authorise payment arrangers, who would then assess overseas stablecoins against regulatory standards. Payment arrangers must provide evidence to satisfy the regulator they can assess and approve overseas stablecoins, along with information about any thirdparty assessors they propose to use. They must secure extra permissions under the PSRs to enact this role.
The FCA says that stablecoins introduced to the UK payment chain must be monitored weekly by the payment arranger to ensure they remain compliant. The regulator is considering whether further requirements, such as reporting and disclosures, should be made to ensure the smooth functioning of approved overseas stablecoins.
The association adds in its response that there is “a strong case” for the FCA to play a more active role in this process, for example, by assuming the role of verifying assessments made by payment arrangers.
On a related matter, the FCA is considering requiring custodians that use subcustodians and other third parties to comply with new requirements. These include undertaking due diligence in the selection, appointment and periodic reviews of the third party and ensuring that any custody assets deposited with a third party are identifiable separately from those belonging to the custodian.
In its response, The Payments Association points out that payment approver conditions are likely to be operationally challenging and disproportionate due to the ongoing monitoring and the third-party auditing of assessments.
The BoE’s purview on stablecoin will include payments service providers that are systemically important (as well as payments system operators) because, according to its discussion paper, they pose risks to the functioning of the whole payment chain.
Its response explains, “It appears that the FCA won’t hold a UK payments service provider responsible if the foreign stablecoin provider fails, as long as the UK payment services provider has followed the FCA rules. This is not fair for end consumers and is likely to create confusion.”
Across its discussion paper, the FCA focuses largely on the retail use cases for stablecoin, but it’s seeking industry feedback on how to differentiate regimes for institutional and wholesale use cases.
Another proposal that could have a material impact is a requirement for custodians to conduct reconciliations of each client’s cryptoassets on a real-time basis to identify and resolve discrepancies promptly. This would consider on- and off-chain internal and relevant external records.
That means these firms will be subject to the entirety of the bank’s powers, reflecting the regulator’s belief that payment systems for stablecoin should be under the same regime as commercial banks.
The Payments Association says in its response that members are clear there should be differentiation between retail and wholesale, with retail including customer duty responsibilities, while the focus on wholesale should be on keeping their peg and financial stability.
Under the proposals as worded, custodians would have to cover any shortfalls if discrepancies are not resolved after reconciliations.
The lingering question here, however, is how the central bank defines systemic.
“By differentiating them, institutions would be able to assess and accept risks better, and different backing assets could be used for both wholesale and retail,” The Payments Association’s response states.
The Treasury determines which service providers should be recognised as systemic, and the BoE’s discussion paper doesn’t appear to be definitive in quantifying it. It states that a firm could be viewed as systemic in its own right (for example, a wallet that provides services to multiple non-systemic stablecoins) or because it provides essential services to a systemic payment system or a systemic service provider.
The Payments Association notes that technical controls and systems would need to be properly assessed to accurately assess holdings in an evolving market like crypto.
This is one of many areas in the paper that will remain uncertain for now, though there’s some certainty on a separate topic. The FCA confirmed in its proposals that cover under the Financial Services Compensation Scheme would not apply to firms facilitating payments using fiat-backed stablecoins.
The Payments Association poses a set of questions to the bank on this, such as what the transition from a nonsystemic firm to a systemic firm would look like and if a firm categorised as systemic can appeal that decision.
A range of service providers, including cloud outsourcing firms and security and encryption software specialists, could be caught by the central bank’s framework if their services are critical to the issuance, transfer, or custody of stablecoin.
Ultimately, The Payments Association asks for clarity on regulation scope between firms and for clear standards to be agreed to demonstrate where different organisations fall.
It also remains to be seen whether the BoE will live up to its pledge of a “flexible regime” that will accommodate different business models in this market.
As for specific proposals from Threadneedle Street, a notable element in terms of potential impact is on separation of legal entities among firms operating multiple functions in stablecoin.
Another separate proposal will affect wallet providers.
The bank states in its paper that combining activities within the same group through vertical integration can lead to vulnerabilities, including “conflicts of interest, inadequate safeguarding of clients’ funds and assets, as well as complex and potentially reinforcing risk profiles.”
As the entities safeguarding holders’ means of control over their stablecoins, they must ensure that holders’ legal rights and ability to redeem the stablecoins at par in fiat are protected at all times.
which commercial gains for the issuers are possible to make it worthwhile for them to come into the market and to ensure the public are suitably educated to understand the benefits of regulated stablecoins.”
other activities such as “admitting a cryptoasset to a cryptoasset trading venue” or “dealing in cryptoassets as principal or agent”. Both of these will be subject to an initial consultation.
The regulator highlighted FTX’s collapse as an example.
Protecting consumers and ensuring financial stability are the principles undergirding the FCA and the BoE discussion papers.
While it may be a matter for a future scenario than the present, the bank is also proposing a rule that non-UK issuers of stablecoins must have a UK subsidiary.
A significant concern is that the FCA retains a balanced approach and doesn’t drive healthy competition out of the market by rendering profitability unfeasible for many firms.
Perhaps the work on stablecoin is a litmus test to bring other cryptocurrencies under a mainstream regulatory regime. The fear is the extent to which the watchdogs will stifle the innovation and growth observed in crypto during recent years.
The Payments Association has pointed out that if the government wants to make the UK a global hub for cryptocurrency, forcing systemic stablecoin issuers to be established in the UK may make this unworkable.
The Payments Association acknowledges in its response to the FCA that reduced consumer harm and increased competition could materialise from the advent of regulated stablecoins, while adding that the industry will know for sure only once several issuers are registered and their stablecoins are being used.
Its response added:
The government’s latent move on stablecoin could be perceived as another sign that the broader crypto market is undergoing a steeper trajectory of maturity, with layers of consumer protection, oversight and operational standards being imposed that align a little closer to mainstream finance.
As the dialogue progresses with the regulators, the market will at least have a new tool to hold the watchdogs accountable for – their new regulatory duty to enable competitiveness.
“The key is to create a regulatory environment in
The direction of travel of the government’s phased strategy is also coming into view. In the near future, the Treasury intends to capture
If the FCA and PRA claim they will make efforts to engender economic growth and competitiveness within stablecoin while ushering in a new regime, they will have to prove it.
HM Treasury is developing a vision and strategy for UK payments. This could herald a period of leadership of payments by the government – if the ingredients are right.
George Iddenden
At one time, the UK was seen to lead the world in payments. Even without clear leadership from the government, the industry, institutions, and regulators charted a path towards a world where payments continued to work better for everyone. However, in recent years, this approach has stopped working. While not great in number, the initiatives currently need co-ordination, leading to difficulties in aligning the regulation towards the common goal of being a world-leading jurisdiction.
There are now too many uncoordinated initiatives, with poorly aligned regulations and insufficient collaboration towards making the industry better and being a world-leading jurisdiction from which to set up and run a payments business.
Against this backdrop, the UK’s Chancellor, Jeremy Hunt, visited India. There, a digital ID and universal payments infrastructure has been rolled out for most of the country’s 1.2 billion population since it was piloted in 2016. Folklore has it that the Chancellor made a payment while shopping using a QR code, and this made him ask, ‘Is the UK’s payments industry falling behind’?
Upon returning to the UK, Hunt commissioned Joe Garner, a seasoned financial services leader and ex-CEO of Nationwide, to find the answer. In
his Mansion House speech in July, the Chancellor announced that the Future of Payments Review would be undertaken over the summer, and the report was featured in his Autumn Statement in November.
The Future of Payments Review presented sound analysis and strong recommendations for change. But the two biggest recommendations were simple: firstly, payments is sufficiently important for the government to have a National Payments Vision and Strategy (NPVS). And secondly, the NPVS had to be produced and owned by HM Treasury (HMT).
To help align the industry’s main stakeholders around this idea, The Payments Association (TPA) convened a breakfast at Mansion House in January 2023. It was attended by senior representatives from HMT, the Bank of England, Open Banking Ltd and the Centre for Finance, Innovation and Technology (CFIT), as well as the Payments Systems Regulator (PSR) and FCA, other trade associations, politicians and TPA members. The Lord Mayor of the City of London opened the discussion and invited guests to express their views about HMT’s work on NPVS.
What is the NPVS and what should be its aim?
TPA believes that HMT’s announcement of the NPVS marks a significant milestone in the UK’s efforts to modernise its payment systems and keep pace with the evolving needs of consumers and businesses. With the right ingredients, it should promote competition, innovation, and customer choice while ensuring the safety and reliability of payments.
TPA also believes that the NPVS must be designed to complement the Future of Payments Review findings, offering a comprehensive approach to reshaping the payments ecosystem. To realise its full potential, the NPVS must incorporate several elements: a visionary and upbeat forward from a senior government representative, a bold and clear vision statement and a roadmap to guide actionable outcomes.
The Payments Association’s Director General, Tony Craddock, believes that a successful NPVS for the UK is characterised by a vision statement that is clear, easily understood, and memorable. “It should ambitiously reflect the government’s objectives, positioning the UK payments ecosystem as a leader on the global stage,” he says. This vision should be driven by a public-private partnership aiming to achieve significant user outcomes, including increased investment, job creation, improved status for the UK, and better consumer and business satisfaction.
Additionally, Craddock says, the NPVS should transform the payments ecosystem into one that is progressive, resilient, and innovative, underpinning an inclusive and diverse society. “It should enable trusted, secure, and accessible payments that benefit everyone, facilitating global transactions.”
The NPVS must also involve users and channel partners in innovation, licensed entities in collaboration, and technology specialists in working together towards a shared goal. Its regulators should balance policing with partnership, competition with innovation, and resilience with growth.
Inclusive engagement: Who’s at the table?
The NPVS should include a comprehensive and inclusive template that brings together the entire payments ecosystem, including stakeholders beyond the payments industry, such as customers and consumer groups, regulators, merchants, big tech companies, licensed entities, trade associations, membership bodies, technology companies, and advisors.
The NPVS’s central objective must be to ensure that end-users of payment systems are prioritised and their needs met. Outside the bank providers, three key stakeholders need to be engaged: regulators to maintain the integrity and efficiency of the system; merchants to ensure data integrity and participate in dispute management processing transactions; and Big Tech to take responsibility for information flowing through their systems in the flow of payments.
TPA believes the NPVS should have a broad scope and that various monetary form factors must be considered throughout the development process. These form factors include account-based domestic digital payments, cards, mobile wallets, cash, tokenised assets like central bank digital currencies (CBDCs) and stablecoins, as well as innovative credit products like buy now pay later (BNPL) and cross-border payments using digital currencies.
According to Craddock, the NPVS should not list specific initiatives as their inclusion could become rapidly outdated and lead to subjective and contentious selections. However, an appendix or separate document could be created postagreement of the NPVS to review and evaluate potential activities, initiatives, or programs. “This approach ensures the NPVS remains a guiding document rather than a detailed action plan,” he says. “It will be more effective and durable, and avoid short-term thinking and turf wars.”
Craddock listed various initiatives for future consideration, including building next-generation payments infrastructure and the Retail Liability Network that is being developed by a task force at UK Finance. Programmes to attract and facilitate investment in technology companies and licensed payment firms through Venture Capital and Private Equity should also be considered.
A three-year roadmap, laying out the timeline and milestones for achieving the
Institutions, trade associations, Payment Systems Operators, selected FMIs
desired outcomes (not initiatives), should be an integral part of HMT’s NPVS, as should a series of next steps outlining the immediate actions to be taken following publication.
Governance is everything. TPA has drafted some initial ideas that reflect the importance of HMT in leading payments, making decisions and assessing performance, and an alliance across the industry that is involved with reviewing and prioritising initiatives, simplifying structures and making recommendations to HMT. These ideas also include a new group of regulators to focus on payments, listening to the concerns and priorities of the industry alliance in light of the principles defined by HMT.
A framework of principles categorised into two levels should guide the implementation of the vision while also assessing its progress, suggests TPA. First-level principles should focus on enabling innovation that delivers beneficial outcomes for payment users, promoting an efficient payments ecosystem with fair commercial practices, and deploying modular APIenabled payment technologies suited to the problems at hand.
According to Craddock, these principles also “emphasise the importance of progressive governance that bolsters government leadership and ensures accountability, while utilising principles-based regulation where regulators work in tandem with the industry to achieve the vision.”
Second-level principles delve into specific areas of focus. For payments users, these include focusing on the needs of consumers and businesses for secure and safe payments, and
FCA, PSR, PRA, FMID/Bank of England, Home Office
providing choice and transparency while also reducing payment costs through competition and innovative services.
TPA advocates for intelligent and secure payment experiences to reduce fraud, appreciating the ongoing importance of cash for certain segments of the population and integrating payments into the education system. Competition should be used as a driver of positive change, ensuring fair value exchange among all stakeholders using suitable commercial models.
The NPVS is set to be a dynamic and evolving framework with specific timelines and processes for review and refinement. Publication of the NPVS is not currently set, but ideally, it would be presented a year after the Chancellor announced the Future of Payments Review at the Mansion House Speech in July 2024.
Beyond this initial launch, the NPVS is designed to be a living document, with updates scheduled every two years.
These biennial reviews will assess the NPVS’ achievements against its success criteria, ensuring the vision remains relevant and effective in the rapidly changing payments landscape.
These initial ideas from TPA will likely evolve rapidly. But an industry rarely faces such a pivotal moment in its evolution.
“With courage and determination, the government can show its leadership, knowing that it has the support of the whole ecosystem to implement it effectively,” says Craddock. Perhaps Mansion House in the City of London will be where, as it has been for generations, the future of money is determined.
Imran Ali, director, payments consulting, KPMG, discusses the ESG Working Group’s innovative project to create a universal carbon footprint standard for the payment industry, driving environmental sustainability across organisations of all sizes.
What is the project and its main objectives?
We aim to establish an industry standard for measuring the carbon footprint of payments and payment processing. This standard aims to be universally applicable and suitable for any entity involved in payment processing, whether a large bank, a small fintech company, or anything in between. The standard will offer a straightforward method for these companies to assess the carbon footprint of their payment processes, including card production and digital payment processing. Essentially, it’s an off-the-shelf solution that enables easy and accurate carbon footprint measurement for various payment processes.
The project aligns closely with the goals of the ESG Working Group under the Payments Association, which focuses
on fostering awareness and best practices in environmental, social, and governance aspects within the industry. A key objective, as outlined in The Payments Association’s Manifesto developed last year, is to create an industry standard for measuring the carbon footprint of payments. This objective is part of our broader aim to reduce the environmental impact of payments across the industry. The standard we’re developing is designed to be easily adoptable by both large and small organisations in the payments sector, thereby supporting the ESG Working Group’s mission to advance sustainable practices in the industry.
What are the current challenges organisations, especially SMEs, face in measuring the carbon impact of their payment processes?
First, there needs to be more awareness and knowledge about measuring the carbon footprint of their payment processes and implementing environmentally friendly practices. They often need help finding the proper guidance and information sources.
Second, the cost factor is significant. Adopting environmentally-friendly policies or practices usually entails additional expenses, such as hiring third-party services, acquiring software, or dedicating resources to develop and implement these processes. These challenges are particularly acute for smaller organisations trying to assess and reduce the carbon impact of their payment processes.
How do existing solutions by large organisations differ from what is feasible for smaller firms?
Large organisations have started assessing the carbon footprint of their payment processes, a concept that still needs a standard across the industry. Some UK banks have created their own methods tailored to their operations. These aren’t broadly applicable, though. We aim to learn from these larger organisations and develop a universal standard. This will allow other firms, particularly smaller ones, to adopt these practices more efficiently, leveraging the experiences of larger companies for more efficient implementation.
What’s involved in developing this standardised framework?
First, it’s crucial to determine the broader environmental impacts of payments processing. While digital transactions are generally less carbon-intensive, traditional methods, such as cards, cheques, and cash handling, significantly contribute to the carbon footprint. Our approach includes exploring industry-wide strategies, including centralising cash processing and optimising cash deliveries, to reduce this environmental impact effectively.
We’re developing the framework by studying practices from related industries like capital finance and mortgage lending and aligning with a standards body for existing frameworks. The process entails analysing various physical and digital payment processes and backend and
customer-facing elements. Our objective is to create a measurable formula to assess the carbon footprint of various payment processes. This framework will enable organisations to input specific data and calculate their carbon footprint, providing a consistent, adaptable tool for diverse organisations to gauge their environmental impact.
What will ensure the framework applies to large and small organisations?
We’re focussing on consistency, simplicity, and versatility. The framework will cover standard processes relevant to all sizes of organisations but will be adaptable to specific processes, like international payments for large banks or domestic payments for smaller firms. The framework must be easy to understand, adopt, and provide consistent outputs across different organisations. This means standardising the measurement units (like kilojoules or watts) to allow for comparison both within and between organisations. The goal is to create a universal standard that can be applied to any payment process, whether domestic, international, card-based, or digital.
How will this standardised framework benefit SMEs and drive industry-wide practices?
First, it aids in reducing carbon footprint, which benefits the industry. Second, it helps SMEs become more ESGconscious, enhancing their brand and contributing positively to the climate. This aspect is increasingly important as larger firms prioritise ESG-friendly partners for business collaborations. By adopting the standard and acting on its outputs, SMEs can demonstrate their commitment to ESG policies and carbon footprint awareness. This contributes to environmental betterment and makes SMEs more attractive to larger companies looking to do business with environmentally responsible firms.
Focusing on the industry more broadly, the project will highlight the environmental impact of organisational processes to motivate reductions in carbon-heavy activities. If it reveals, for instance, that producing plastic cards is carbon-intensive, this may prompt the industry to explore alternatives like digital cards or more sustainable materials. The
initiative aims to stimulate a collective industry effort to re-evaluate and reduce carbon footprints after adopting the standard. It aims to inspire individual and collaborative efforts within the industry to modify processes or payment methods for environmental benefits.
How critical is collaboration with other stakeholders, and what kind of support or collaboration are you seeking? Collaboration is essential to avoid multiple inconsistent standards, as some banks are already exploring carbon footprint reduction. The aim is to establish a consistent, industry-wide standard for fair comparison and reduction of carbon footprints. This effort goes beyond just creating the standard; it’s about promoting its adoption across the industry. Effective carbon footprint reduction relies on this collective action. This collaborative strategy is in line with the The Payments Association Manifesto’s commitments to develop, adopt, and act on the standard, ultimately reducing the industry’s overall carbon footprint.
We are actively seeking broader engagement from the market to advance this initiative. While the ESG working group within The Payments Association is currently leading the work, the success of this project hinges on widespread participation. We need more than just a handful of people; it requires a collective effort. This is an open invitation to anyone interested in reducing the carbon footprint and making payments more environmentally friendly. We encourage them to join the conversation and collaborate with us in the working group. The more diverse the participation, the more successful this initiative will be.
What challenges have you encountered, and how are you addressing them?
A significant challenge we’re facing is aligning with an existing standards body, as there’s no ready-made payment standard for this initiative. This is a pioneering effort in the industry, and we’re navigating uncharted territory. We have started discussions with an industry body working on something similar, aiming to align with them. Developing our standard is an option, but it could be more challenging for others to adopt and for us to create, given our expertise.
Our approach is to learn from existing standards bodies, adopting their methods and frameworks to give us a head start. The positive response and support from those we’ve engaged with have been encouraging, as they recognise the value of our objectives.
How do you plan to encourage widespread adoption of the framework and how do you see it evolving?
Our strategy involves extensive promotion and leveraging our connections. The Payments Association has strong ties with various bodies, and we plan to use these channels to advocate for the framework. We will actively engage with our members and partners to highlight the standard’s benefits. The diversity within our ESG Working Group, which includes large institutions and smaller fintechs, shows broad interest in this initiative. We aim to use the influence and variety of channels available through The Payments Association to promote the standard and persuade organisations of its value.
The framework will evolve through ongoing refinement from industry feedback. It may expand to cover the carbon footprint of end-user behaviours in payments. Developing effective reporting for organisations using the standard is crucial for accurate measurement and action demonstration. Future goals include an industry report on the UK payments’ carbon footprint, the standard’s effectiveness, and carbon reduction achieved. This effort could pave the way for global adoption, making the standard a worldwide benchmark.
Significantly reduce the environmental impact of payments, making the process more efficient and environmentally conscious. We aim to establish payments as a recognisably low carbon footprint process and encourage the entire industry to adopt this approach. Ultimately, we want to position the UK as a leader in managing and reducing the carbon footprint of payments. This initiative is about demonstrating on a global scale our commitment to environmental consciousness and taking concrete action to reduce our carbon footprint as part of a broader commitment to sustainability.
Artificial intelligence is rapidly transforming fintech, facing both opportunities and challenges from impending regulation and legacy technology issues.
George Iddenden
In August last year, buy now, pay later giant Klarna declared it was going ‘allin’ on AI. The company’s co-founder Sebastian Siemiatkowski announced the Swedish fintech would be banking heavily on AI investment to build out its shopping and lending product offering. Ultimately, the reasons behind the move point towards undercutting the sectors’ incumbent players and the broader legacy banking space.
In the blog post, Siemiatkowski implies that the impacts of AI on traditional banking could be hugely transformational by giving legacy banks more agility when offering consumers better services. According to Siemiatkowski, AI can open up a new world for the traditional sector, “providing options just a tap away” meanwhile, it will force “banks to compete on value and better products, not entrapment. That’s why at Klarna, we are going all-in on AI.”
The Cambridge Centre for Alternative Finance discovered that 90% of fintech companies already use AI, seeing an 80% improvement in speed and accuracy. Similarly, a study conducted by the Gillmore Centre for Financial Technology in November last year finds that 93% of fintechs believe that generative AI is set to revolutionise the financial services industry. Given this
popular embrace of AI in the fintech sector, how will regulatory bodies respond to these rapid technological advancements?”
Recently, the Bank of England (BoE) warned about the growth in AI usage and how the technology could threaten the stability of the UK’s financial sector. The Bank’s financial policy committee (FPC) noted a recent surge in technology, data availability, and more cost-effective computing, leading to increased interest and adoption in the sector. According to the committee, most firms have suggested that their use of AI technology was ‘relatively low risk’; however, wider adoption of the technology could threaten the financial system’s stability.
The concern from the BoE is that a more significant number of financial services firms, including fintechs, are taking up AI to help boost their product and service offerings, which could help to skew markets. AI and machine learning (ML) are high on the agenda for the FPC, with it saying it would “consider the financial stability risks” of the two technologies this year while it seeks to “ensure the UK financial system was resilient to risks that may arise from widespread adoption”.
One of the benefits of the new wave of AI technology is the ease with which startups can build their own AI systems.”
With industry bodies looking at the technology, what’s the appeal for fintechs? Primarily, fintechs operating on a smaller budget than their legacy banking counterparts will be looking at efficiency. At its current stage, generative AI technology, including models like ChatGPT, can help banks increase their straight-through processing rates, increase their insights into their client’s transactions, and deliver on changes more cost-efficiently, according to Kjeld Herreman, head of strategy advisory at RedCompass Labs. While AI has been used in the financial services market for fraud detection, recent technological advances have meant that its capabilities in stopping fraud have grown in accessibility, opening the door for fintech firms to strengthen their security.
Most banks are years away from having the data needed to train and deploy effective generative AI models.”
One of the benefits of the new wave of AI technology is the ease with which startups can build their own AI systems. According to Herreman, this is pivotal to halting new forms of fraud. He says: “As fraudsters start to use AI for nefarious purposes such as deepfakes, banks will quickly need to address these threats to protect their customers by developing their own AI systems.” AI can significantly help with customer personalisation and fraud prevention, with start-ups like Sprive using AI to help customers pay off their mortgage debts faster, saving years on deals and thousands in fees.
Divergent views on AI’s future in fintech
Not all are optimistic about the future of the technology in the fintech space. B2B banking software company SaaScada’s CEO and co-founder, Nelson Wootton, tells Payments Review that AI adoption in fintech “represents the mood of the financial services industry”. Wootton adds that fintech’s faith in the fledgling technology might be misplaced and that investors will become privy to what he describes as an “ugly truth” in the fact that “most banks are years away from having the data needed to train and deploy effective generative AI models.” Wootton believes that the majority of AI solutions that have been deployed in the finance sector so far are “repackaged old tech”, meaning the industry will struggle to meet the “sky-high” expectations it set itself in 2023. “This will mean, in 2024, fintech’s AI bubble will pop,” he admits.
Sprive’s founder and CEO, Jinesh Vohra, disagrees with Wootton’s view that most tech is outdated and argues that this is just the start for the fintech industry. He doubts that the AI bubble will burst in 2024, claiming that fintechs are still in the infancy of leveraging the immense capabilities of AI and harnessing the opportunities that come with utilising the data within their organisations. Vohra played up AI’s ability to help build more efficient customer personalisation products for startups such as his. He also paid testament to just how much the tech has streamlined operations for Sprive, an important feature for smaller startups. “In the wider context, these capabilities should help contribute to the sustainability and long-term viability of the fintech industry,” he adds.
NICE Actimize’s chief data scientist, Danny Butvinik, agrees, emphasising that there is great potential for the reliance on AI to pay off in the coming months by primarily automating services. Butvinik claims that automating in areas including credit scoring, fraud detection, and
financial advice can help produce “more efficient and accurate services”.
While AI has been used in finance for years, recent advancements, particularly in deep learning and neural networks, have significantly improved accuracy and efficiency. This boosts challenger banks in market shares against the traditional banking sector. Yet, UK regulators seem to have pulled the reigns in when acting hastily towards regulating the AI space, which could ensure the continued upward trajectory of fintech’s use of AI across 2024.
Despite the pessimism of some, many seem to be holding their nerve and expect AI to continue to fuel growth in the fintech sector, especially in financial hubs like London, which boasts a thriving fintech ecosystem. Whether any upcoming regulation will choke the ambition of the fintech space remains in the hands of the BoE and the FCA, both of which are keen to ensure the stability and growth of the fintech space through 2024.
As fraudsters start to use AI for nefarious purposes such as deepfakes, banks will quickly need to address these threats to protect their customers by developing their own AI systems.”
Dmitry Tsymber delves into the transformative role of AI in fintech, highlighting its potential for creating secure, efficient, and personalised payment experiences while underscoring the irreplaceable value of human expertise in complex operations.
Artificial intelligence’s (AI) impact on the payments landscape is nothing short of transformative –from personalised customer experiences and seamless cross-border transactions to enhanced security and prompt fraud detection, AI-driven innovations are reshaping how we interact with money. While AI is a good enabler, the human factor remains irreplaceable, especially in complex business operations. In 2024, the industry’s overall focus will be placed on security measures and internally tailored and created AI solutions to ease processes on a new level.
Financial institutions and businesses are leveraging AI to enhance payments systems, making them more efficient, secure, and customer-centric than ever before. AI brings increased automation, smarter decision-making, and personalised experiences and revolutionises fraud detection, benefitting the finance industry. All of this contributes to improved efficiency and higher profits – the AI in fintech market size, according to Mordor Intelligence, is estimated to grow from US$ $44.08 billion in 2024 to $50.87 billion by 2029. So, the question arises: Which areas will be most affected by this transformational source?
Human and AI intelligence combined
It is important to emphasise that the entire fintech industry is knowledge-intensive,
and behind every AI technological innovation stands a human professional. AI is a good enabler, a tool doing great pre-work and easing processes, but when the business runs complicated operations, the human factor in service is irreplaceable.
The art is to use it to create a symbiotic collaboration between AI and human specialists, complementing human abilities and reducing the amount of manual work and number of man-hours rather than replacing professionals in the payments industry. Therefore, if a business integrates AI into its operations, it does not automatically imply employee job loss.
The human factor is significant in customer service, bringing added value that AI cannot replace. AI’s algorithms empower businesses to predict and analyse customer preferences, delivering
personalised product recommendations. In my opinion, businesses need to develop their own AI engines or platforms rather than use and rely on generic ones, ensuring that AI is a good facilitator.
Consider this example – when a customer interacts with AI during a call, and a customer service specialist takes over, all relevant information is already available in front of him, ensuring a much faster and more efficient solution for a consumer in need. AI-driven payment platforms, utilising data analytics, adapt payment options to individual preferences, improving seamless experience, customer loyalty, and satisfaction.
AI will play a pivotal role in the future of enhanced fraud detection and prevention in fintech, especially due to the rising number of digital transactions.
For instance, it is predicted that the total value of the AI financial fraud detection and prevention market in 2027 will reach $10 billion, reflecting a 57% growth compared to 2022. By continuously monitoring transactions, AI identifies and flags potential money laundering activities, facilitating further investigation.
With its advanced algorithms, AI enhances the accuracy and speed of identifying illicit financial behaviour, strengthening fraud prevention measures and ensuring a secure and compliant financial ecosystem. Machine learning algorithms can quickly spot patterns and anomalies, helping financial institutions safeguard their customers’ assets and maintain trust in the payment ecosystem. In other words, by utilising AI-powered fraud detection and prevention measures, fintech companies can ensure the safety of their customers’ assets, establish a secure environment, and meet regulatory requirements.
Seamless cross-border transactions
Higher transaction volumes demand greater efficiency and speed. Thus, AI plays a transformative role in crossborder transactions, revolutionising the global economy. AI empowers real-time currency conversions and compliance checks, improving security and eliminating customer bottlenecks, resulting in faster and cost-effective cross-border payments. Additionally, AI-driven analytics analyse market trends and risk factors, aiding decision-making and risk management for businesses involved in cross-border deals. This technology streamlines the international payment process, reducing fees and providing transparency to users during international transactions. For instance, consumers can send money from the UK to India using many different chains of correspondent banks. AI comes in handy in terms of optimising this flow by processing historical data, thereby making transaction time faster and cost-efficient.
What’s in it for 2024?
Since fintech has gone through significant disruption in the past few years, it is expected that the industry will only partially consolidate AI’s growth and machine learning resources. Still, AI is a trend, and a wide range of AI applications
will be utilised in fintechs and banks in 2024, the biggest focus being security measures and customising self-built tools to facilitate processes.
Fraud risk management tools and generative AI solutions for automated compliance functions will be seen as the top priority. At the same time, the industry proactively needs to address security risk control and prevention models associated with AI integration in business operations. In the age of AI, the most crucial matter is to ensure data security. Despite societal
concerns about potential security risks, this technology is a force for good when adopted and regulated correctly, bringing positive changes for both consumers and business operations.
The art is to use it to create a symbiotic collaboration between AI and human specialists, complementing human abilities and reducing the amount of manual work and number of man-hours rather than replacing professionals in the payments industry.”
Millions in the UK are underserved in the payments space, facing challenges in accessibility and digital exclusion, with fintech innovation, financial institutions, and regulatory bodies playing key roles in addressing these issues.
Chris MenonThere are millions currently underserved in the payments space. Fundamental issues, such as reduced accessibility to cash, difficulty obtaining basic bank accounts and digital exclusion, present challenges to improving this situation despite benefits from fintech innovation.
While estimates vary as to the scale of the problem in serving the financially underserved, it’s clearly an issue that affects millions in the UK alone, with payments being an important part of it.
Fair4All Finance is a notfor-profit organisation founded in early 2019 to improve the financial well-being of people in vulnerable circumstances by increasing access to fair, affordable, and appropriate financial products and services. Lauren Peel, director of marketing, consumer insights and propositions, Fair4All Finance, defines ‘financially underserved’
broadly as “where people can’t access or get the most benefit from existing financial products in the market and are less financially resilient as a result”. She estimates this includes at least 17.5 million people in financially vulnerable circumstances.
Specific examples of this vulnerability include instances where people cannot access affordable credit and loans, can’t build savings, and are under-protected from an insurance perspective.
Moreover, although the organisation hasn’t looked at payments specifically, Peel points out: “With over 17.5 million people in financially vulnerable circumstances, payments will play a role for many of these people”.
A tighter definition is provided by Fran Boait, co-director at Positive Money UK, a not-for-profit advocacy group aiming to promote reform of the money and financial system. She
3.5% of the UK population lived further than 2km from a bank, building society, Post Office branch, or ATM where they could access cash. That equates to roughly 2.4 million people.”
states that in the context of payments, the term ‘financially underserved’ describes anyone who may struggle to access basic means of payment like physical cash or a bank account. She stresses: “Money is a basic utility, and the inability to use it, or securely save it, is a serious impairment to a person’s ability to function within society.”
The Financial Conduct Authority (FCA) estimates that some 1.1 million adults in the UK are ‘unbanked’, which means they are without a bank account. However, Fran Boait explains that it’s difficult to know how many of these people are denied access and how many choose to avoid handing their money to private banks, without more specific data. “With regard to people’s access to physical cash, bank branches are the main point of free access. But with almost 5,818 of these having closed since 2015
(Which? figures), that access is dwindling,” she says.
She also cites a recent government briefing, which found that in April-June 2023, 3.5% of the UK population lived further than 2km from a bank, building society, Post Office branch, or ATM where they could access cash. That equates to roughly 2.4 million people. “Moreover, with cash payments being increasingly refused by retailers, anyone who relies on cash is currently underserved in the payments space (Which? Have figures on this from Jan 2021 and Sept 2021),” she adds.
Boait’s focus on cash is relentless but understandable, given its importance, as she explains: “Currently, cash is the only public form of money available to the public, so in restricting people’s access to cash, banks are not only denying them their preferred means of payment, but they are also ensuring those people have to resort to the very same private payment methods which they predominantly operate and own. Without cash, we’re seeing the basic utility of money
being privatised. The public can only make non-cash payments via accounts at private banks, which aren’t driven by social purpose. Without a bank account, you cannot access basic necessities like housing or most forms of employment. It leaves you totally on the fringes of society, with no way in.”
Shaun May, strategy and innovation manager at NatWest, accepts the importance of cash to customers, stating that although cash makes up less than 15% of all payments, it remains the second most popular payment choice in the UK. Similarly, he agrees that cash is especially important for those underserved in the payments markets, with digitally excluded consumers being twice as likely to use cash most/all of the time.
“We recently identified 2,500 customers paying to withdraw cash at ATMs and wanted to let them know how to access their cash without paying fees. Where customers weren’t engaged with us digitally, we sent letters signposting how to access free cash, collectively saving them over £90,000 in the first year,” he says.
“We are also heavily involved with Cash Access UK, providing shared banking hubs and deposit solutions through cross-industry work, that provides consumers and retailers with a long-term and sustainable way to withdraw and pay-in their money,” he adds.
Other payment types
Peel from Fair4All Finance stresses the importance of considering all the different types of payments when thinking about the impact of being financially underserved. Worryingly, there are issues
for the unbanked that are further impacted by the issue of digital exclusion. She outlines specific problems with various forms of payment:
• While peer-to-peer payments are going digital, in the UK, they are quite clunky (requiring a sort code and account number and have presented a serious fraud risk (mainly authorised push payment fraud, some of which has been mitigated through confirmation of payee).
• Payment for in-person goods or services is similar to the above, except merchants will also have a near-field communication point of sale accepting cards and Apple Pay/Google Pay.
• The best deals are usually found online, or the cheapest way to pay for services is through digital means such as direct debit for energy bills. To use digital channels, people need to have access to the internet and be able to use the digital interface. They also need a financial product such as a bank account with a debit card, a credit card account, or a pre-paid debit card. Indeed, she points out that even pre-paid debit cards usually carry a monthly service fee and/ or a transaction or ATM withdrawal fee.
Of course, such issues do create business opportunities for companies offering innovative solutions within the payments space. Peel argues that those getting it right and making a difference utilise “business models where the
merchant uses the payment product as a marketing/ advertising channel and in return pays for the payment service”, citing Zilch and HyperJar as examples.
Fintech
For example, Zilch was launched in 2018 and is a direct-to-consumer adsubsidised payments network using an app. It combines payments and advertising to offer customers flexible payment solutions for online and in-store transactions, with the vision “to eliminate the cost of consumer credit, for all customers, for good”, according to a spokesperson.
Since launching its digital Mastercard in 2020, Zilch has provided customers with over US$440 million in rewards and savings, driving over $2.4 billion in commerce to retailers. “Zilch’s innovations have shown the industry that interest-free credit with no late fees can be safe, rewarding, regulated, reported to major CRAs, and free – all at the same time,” boasted a spokesperson.
Fintech Zilch also partnered with debt advice charity StepChange last year to offer the latter’s direct advice service to its customers, in a first for a buynow-pay-later provider.
Clearly, fintech innovation can help some of the underserved in the payments space. However, Positive Money’s Fran Boait warns: “it isn’t a golden bullet for reducing financial exclusion purely on the basis that there are millions in the UK who are digitally excluded, and therefore don’t benefit from the complete digitisation of money, payments, and banking services.”
For context, she cites a recent NHS report that shows that 11.9 million people (22% of the population) do not have the digital skills needed for everyday life in the UK. “Thus, whilst we see a role for fintech in providing services on top of a publiclyissued digital pound, the priority for policymakers right now must be protecting the cash system,” she concludes.
Peel agrees that fintech isn’t a cure-all and argues that the answer lies with the banks. “The banks need to provide the base layer of financial products, including extending the marketing and availability of a basic bank account, so that there is an origin and destination for payments in the digital world, and so that all consumers can engage with new payment methods such as cheque scanning at one end of the scale or open banking payments on the other.”
Shaun May contends that having an open dialogue with its customers and putting
customer insights at the heart of its payment strategy can ensure the right level of support, education, and investment for them all. “This has enabled us to pursue targeted innovations, such as offering our vulnerable customers a fee-free cash delivery service to their door – through which we delivered over £10 million since launching during the pandemic, and £5 million in 2023 alone,” he says.
To those who argue that as a regulator, the Payment Systems Regulator (PSR) should be doing more to ensure the underserved are catered to, it was at pains to point out what it has been doing.
A spokesperson tells Payments Review: “Our strategy is designed around the outcomes we want to see in payments, which are all part of making sure people can make and receive payments in ways that suit their needs. We are taking
active steps to progress all of our strategic outcomes. For example:
• “We are expanding the use of Variable Recurring Payments (VRP) through open banking, which can offer consumers and businesses more control and choice in how they pay for essential services like utilities.
• “Last year we issued Specific Direction 12 to LINK, maintaining the broad geographic spread of free-to-use ATMs. We are working closely with other regulators, authorities and industry to support the growth of digital payments, while making sure the UK’s cash system is sustainable and continues to provide access to those who need it.”
Despite repeated attempts, the FCA wasn’t keen to be directly quoted on its views on these issues. However, a spokesperson referred to a September 2023
speech in which the FCA’s CEO Nikhil Rathi states:
“We recognise we have a wide remit and a range of powers. But we do not have all the levers – some of them sit with governments – in Westminster and the devolved nations. Others sit with the industry and consumers themselves. But if we pull these levers in the same direction, together, we can make a significant impact.”
In that speech, Rathi admits that “the proportion of adults in financial difficulty rose from 8% in May 2022 to 11% in January 2023. That’s 5.6 million people in difficulty”.
Moreover, in a speech published on 24 January 2024, Rathi admits: “We are concerned about the risks of financial exclusion”. Yet, he carefully avoided criticising government policy, stating only: “Without a greater commitment to financial education, these will be difficult to fully eliminate.”
Nevertheless, given the scale of the identified
problems and their systemic nature, some question whether more strategic government action is needed.
Fran Boait from Positive Money advocates for increased government involvement in the financial sector. She asserts, “The government should absolutely be ensuring that financial providers are addressing the needs of the underserved.”
Boait points out that while the Treasury has committed to making cash accessible within specific distances for urban and rural residents, these measures might be too late. She calls for immediate action to prevent further bank branch closures and to fast-track the introduction
of ‘bank hubs’ throughout the UK. These hubs, linked with the Post Office, would offer comprehensive banking services to all customers. Furthermore, Boait recommends that the government should compel lenders to provide accounts to individuals regardless of their housing or immigration status, aiming to reduce the number of unbanked people in the UK.
Boait highlights a specific proposal from Positive Money, which might face significant resistance. She explains, “At Positive Money, we believe that the best option here is the introduction of public bank accounts via the Bank of England.” These
accounts would differ from private ones by having less stringent requirements and offering savers immediate higher interest rates. Boait argues that such a move could create competition, potentially compelling private lenders to enhance their services to attract customers. She believes this competition is necessary to improve the overall quality of banking services.
Whatever measures are eventually adopted to serve the marginalised in the payments space better, it’s a vital issue that needs to be addressed if the UK is to reach its full economic potential and deliver a more inclusive society.
A recent NHS report shows that 11.9 million people (22% of the population) do not have the digital skills needed for everyday life in the UK.”
As banks embrace the buy now, pay later trend, Carolina Soares explains that they stand at the forefront of a shifting financial landscape, offering a unique blend of security, flexibility, and consumer-centric solutions.
The financial world is rapidly evolving, driven by changing consumer needs and technological advancements. The buy now, pay later (BNPL) sector is experiencing a remarkable rise in Europe and is forecasted to reach an impressive €300 billion by 2025
When the term ‘BNPL’ is mentioned, names like Klarna and Affirm likely come to mind. These companies specialise in providing BNPL financing options for purchases at participating retailers. However, is this path easy for all? Some BNPL providers are currently facing significant challenges.
This is where banks and payment platforms have a chance to shine. By refreshing their BNPL or credit offering with the help of a payments vendor, banks can offer consumers a unique way to pay. This transition point represents a unique opportunity to redefine credit offerings and assert relevance and competitiveness in the market.
The rise in e-commerce transactions during the Covid-19 lockdowns led to a significant increase in BNPL services, contributing to the growing demand. The competition among BNPL apps is reshaping the European mobile BNPL market landscape.
In recent quarters, traditional BNPL apps – such as Klarna, Clearpay, and
Affirm – have achieved nearly 10 million installs in the first half of 2022. These services have become popular mainly with millennials and Gen Z because they provide a fast and frequently interestfree method to pay for purchases over a period of time.
However, concerns have arisen about the potential financial risks of pure-play BNPL companies. Unlike traditional financial institutions, BNPL providers are not required to conduct ‘ability to pay’ evaluations or provide consumers with truth-in-lending statements. This lack of scrutiny raises the possibility of increased debt accumulation and financial distress for certain users.
The opportunity for new players
Pure-play BNPL providers face challenges due to inadequate creditworthiness assessments, leading to financial struggles and unprofitability. This vulnerability in the BNPL model highlights a significant opportunity for banks and other payment platforms.
With established processes for assessing creditworthiness, banks are wellequipped to manage financial risks. They know precisely to whom they can lend money, a capability where typical BNPL providers may struggle. By adopting a more consumer-centric approach, banks
Pure-play BNPL providers face challenges due to inadequate creditworthiness assessments, leading to financial struggles and unprofitability.”
can maintain their position in the credit market and address the potential risks associated with BNPL services.
Banks are bound by legal and regulatory requirements
Banks, bound by regulatory and legal mandates, adhere to robust reporting requirements, ensuring transparency and user safety. In contrast, many nonbank BNPL companies have provided incomplete or, in some cases, no information to nationwide consumer reporting agencies. BNPL providers must report positive data to promote consumer financial wellness.
Banks are the user’s preferred BNPL provider
Trust plays a vital role in making financial decisions, and financial institutions have gained considerable trust from their current customers. A survey by The Financial Brand found that 78% of respondents would be more likely to use BNPL financing options offered by banks with which they already have an account.
Banks provide more flexibility than BNPL services, which often restrict users to select merchant agreements. The combination of this adaptability and the trust people have in banks puts them in a leading position in the BNPL market.
Banks can build BNPL products/ features, taking advantage of their reputation, existing user relations, and
functionalities (e.g. credit assessment, payment in physical stores, an overview of accounts, etc.).
A BNPL solution offered by banks
Analysing the current market, product opportunities, and user needs in the current landscape, banks are well suited to offer BNPL and have assistance in shaping their BNPL offerings. The main idea is this: A BNLP product for banks, with no merchant dependency and powered by payment processors.
A BNPL product can empower users to make credit purchases in online and offline stores and manage their repayments directly through the app. Customers can choose the specific
The rise of BNPL services marks a new chapter in consumer finance.”
amount of their instalment for each purchase, a departure from most credit cards that only allow the management of purchases in a bundle.
In addition, there is a need for a clear and transparent service free from hidden fees, confusing interest rates, and lack of visibility into payment details.
This is the product option that your bank can use to its advantage. It’s a level of flexibility your customers won’t find in traditional credit cards.
Choose distinction, choose a new era of BNPL
The rise of BNPL services marks a new chapter in consumer finance. By integrating BNPL functionalities and
building new BNPL products, banks and payment platforms can work together to offer products that resonate with modern consumers’ desire for flexibility, transparency, and convenience. The advantages of offering BNPL services position banks to meet today’s market needs and establish new standards in the evolving consumer finance landscape.
Digital payments emerge as a key player in driving climate resilience, offering a sustainable alternative to traditional cash transactions in the finance sector.
George IddendenThe phrase ‘cash is king’ was popularised by the CEO of Volvo, Pehr Gyllenhammar, after the 1987 stock market crash. Since then, it has signified the importance of having cash readily available due to its flexibility, security, and potential buying power compared to other assets.
However, the pressing issue of climate change has prompted the need for a different approach to finance. To turn the tide in the fight for climate resilience, decisive action must be taken across all sectors, including payments. Green finance emerges as the industry’s strategic approach to channel resources into more environmentally sustainable solutions.
Climate resilience is the capacity to prepare for, respond to, and recover from climatic events with minimal damage. While payments might not be the first industry people consider when considering carbon emissions, it might have a larger carbon footprint than expected.
According to the Royal Mint, the energy consumption per tonne of circulating coins from 2022 to 2023 was 4,360 kWh per tonne. Meanwhile, a separate report by the British Retail Consortium claimed that every card payment in the UK produces 3.78g of CO2 on average. This means that over one million tonnes of CO2 are released into the atmosphere from the 25 billion card payments made annually in the UK on average.
While that figure seems alarming, digital payments can contribute to a lower carbon footprint for the industry. New initiatives such as open banking can help to make a difference. For example, instant payments could produce up to 80% less CO2 than cash transactions. A 2022 World Bank and the Cambridge Centre for Alternative Finance report found that digital payments “contribute to financial inclusion, efficiency,
and potentially environmental sustainability.” While the study acknowledges the need for further research, the initial findings paint a promising picture for the future of the payments industry’s carbon footprint.
In 2016, the Bank of England (BoE) shifted from paper to polymer banknotes. The first polymer banknotes of denomination £5 were introduced in 2016, followed by a £10 note the next year. Currently, all banknotes issued in the UK are made from a polymer material.
The BoE has stated that while polymer notes have not been around long enough to determine their circulation life, they are estimated to have a lifetime of 2.5 times greater than their predecessor. It quotes a study published in 2015 that found that polymer notes used in Australia lasted between six and nine times longer.
Enhanced transparency required Fintech firm Fils aims to empower businesses to translate environmental, social, and corporate governance (ESG) principles into actionable initiatives. Company CEO Nameer Khan believes transitioning towards climate resilience will require a “collaborative effort across multiple fronts”.
Khan claims that by aligning financial practises with climate goals, the “sector can contribute to building a more sustainable and resilient future”. An important part of that is increasing transparency and disclosure about climate-related risks and the opportunities faced by financial institutions. He adds: “Better reporting standards can help investors, regulators, and other stakeholders make more informed decisions about meaningful climate action.”
A 2023 study published in the Journal of Environmental Psychology found that “providing consumers with feedback on the environmental impact of their purchases can lead to a significant reduction in consumption.” Data compiled from digital transactions can help to provide much-needed transparency.
Initiatives, including that of Swedish fintech firm Klarna, aim to help consumers become more aware of their carbon footprints when shopping online. The company launched its Emissions Tracker tool in September 2022 to increase transparency and encourage more sustainable shopping habits. Reaching over 150 million consumers, it is uniquely positioned to “help drive education and awareness around the environmental impact of their shopping habits,” according to Sara Davidson, sustainability marketing and communications lead of Klarna. The company’s CO2e insights tracker, featured in the Klarna App, provides
emissions estimates for a wide range of products, including fashion, electronics, and beauty, totalling over 170 million items.
Davidson says the tracker does more than just calculate; it offers “detailed analysis covers the entire product lifecycle–from raw material extraction to final delivery,” ensuring that consumers can grasp the full impact of their purchases.
Davidson notes the high engagement level with the tool, revealing that “over 460,000 consumers [are] tracking their carbon footprint monthly,” which has grown by 150% year-overyear in 2023.
Another study conducted in 2022 by the University of California, Berkeley, found that offering consumers the option to offset carbon emissions associated with their purchases significantly increases their willingness to pay.
Alongside the obvious benefit of making consumers more aware of their carbon footprints when shopping, analysing spending patterns through anonymised data could help identify resource-intensive industries within the sector.
Not only can digital payments play an essential role in reducing the carbon footprint of the payments industry, but they can also help foster greater financial inclusion in future areas vulnerable to climate change for disadvantaged communities. According to The State of Food and Agriculture study conducted by the Food and Agriculture Organization in 2022, digital financial services have great potential to enhance the efficacy of aid and enable recipients to manage their financial resources more efficiently, especially in climate-related disasters.
Digital financial services have great potential to enhance the efficacy of aid and enable recipients to manage their financial resources more efficiently, especially in climate-related disasters.”
Furthermore, digital platforms can be utilised to crowdfund projects resilient to climate change and provide microloans for eco-friendly farming methods. This empowers communities to increase their resistance to the adverse effects of climate change.
In 2020, the Central Bank of Brazil launched Pix, an instant payment system. Unlike traditional transfers, Pix operates 24/7, 365 days a year, allowing users to send and receive funds instantly using various methods like QR codes, phone numbers, or unique keys. Since its inception, the cashless convenience has exploded in popularity, with over 140 million users and over 4.5 billion monthly transactions as of January 2024. Pix has boosted financial inclusion significantly, with 60% of users previously unbanked or relying solely on cash. This swift and inclusive system paves the way for a more efficient and financially accessible future for the country.
Green finance emerges as the industry’s strategic approach to channel resources into more environmentally sustainable solutions.”
While wider use of digital currencies could, on one hand, be valuable in helping lower the carbon footprint of the sector and offer more accessible payment options to consumers, the other side of the coin is that it could pose issues in the event of a climate disaster.
Some might argue that ditching cash for good in the name of the climate could mean the ability to respond quickly to natural disasters is increased in more developed geographical locations. It could mean quite the opposite for those living in more under-developed areas and countries more likely to suffer from climate change.
Cash might serve as a lifeline if a community in a remote location loses access to digital payment services. Storing cash poses its issue in this situation, however. A climate emergency might cause so much destruction that cash reserves are demolished, leaving communities at the mercy of black markets.
While there are definite cases for digital payments, some tricky conversations exist around ditching cash for good. In the UK, approximately 14% of payments are still made via cash.
According to Imran Ali, director of payments at KPMG, there would be substantial exclusion ramifications of doing so. He says: “A significant minority of the population still rely on cash for budgeting or ease of use. Moving away completely would impact vulnerable demographics and sole traders who prefer cash as it is easy to recycle.”
On the other hand, agility to switch between the two is crucial. In The Payments Association’s Sustainability Superheroes – A how-to guide to ESG for Fintechs white paper, BPC’s Nadia Benaissa details how BPC adapted its ESG efforts to match the changing society and focused on contactless payments over cash during the pandemic. They collaborated with Filipino transport agencies to integrate cashless and paperless ticketing systems while ensuring vulnerable users’ needs were met by embedding free passes for students and elderly individuals into their cards or phones
The traditional notion that ‘cash is king’ is being challenged by the imperative to address climate change and build resilience for what lies ahead. As highlighted by the energy consumption of circulating coins and the emissions from card payments, the carbon footprint associated with physical currency underlines the need for a more sustainable payment approach.
Encouragingly, the rise of digital payments, especially initiatives like open banking, presents a promising avenue for reducing the industry’s environmental impact. Instant payments such as Brazil’s Pix not only provide a valuable use case in helping the UK, as demonstrated by the World Bank and the Cambridge Centre for Alternative Finance, but offer a substantial decrease in carbon emissions compared to cash transactions.
The adoption of polymer banknotes by the BoE further exemplifies the industry’s commitment to longevity and sustainability. Enhanced transparency, advocated by fintech firms like Fils and exemplified by Klarna’s Emissions Tracker tool, aims to empower consumers to make environmentally conscious choices and fosters more responsible spending habits.
However, the intersection of digital payments and climate resilience extends beyond environmental concerns. The ability of digital financial services to enhance aid efficacy, manage resources during climate-related disasters, and empower disadvantaged communities highlights a broader societal impact.
There are more conflicting points of view when discussing digital payments vs. cash in a society not likely affected by climate change; however, when facing the issue of climate change and responding to natural disasters with agility, digital payments, for the most part, offer a comprehensive solution. As services continue to broaden in usage and capability, it is comforting to know that solutions are available to help communities in need. The combination of financial innovation, transparency, and inclusivity positions the payments industry as a key player in building a more resilient and sustainable future.
Napoleon understood the importance of resilient supply chains as his Grande Armée spread across Europe. Today, payment firms are being told to improve the resilience of their operations by overseeing their ICT supply chains. The EU’s Digital Operational Resilience Act, affectionately known as DORA, is on top of the agenda.
DORA’s deadline looms large. EU banks, e-money issuers and payment institutions have until January 2025 to meet DORA’s tougher and more prescriptive standards for managing ICT risks. The regulation also impacts providers of ICT services.
A lot of ink will be spilt in the coming months. Firms must be ready to present to their regulators a package of documents evidencing their readiness
to bounce back from disruption. This includes a digital operational resilience strategy, crisis communication plans and an ICT third-party risk strategy.
DORA’s impact on contracts is most likely to cause trepidation. Firms must reopen their contractual arrangements with ICT service providers to ensure they comply with DORA. The most onerous obligations relate to services that support critical or important functions.
The whole supply chain will be impacted. Firms are expected to use their contracts with ICT service providers to push elements of DORA onto subcontractors, including access and audit rights. Firms are responsible for monitoring key ICT risks down the supply chain, which means repapering contracts to include more reporting obligations.
Firms must draw up a new register about the ICT services they use. This
Exploring the challenges and strategies for payment firms to comply with the EU’s Digital Operational Resilience Act (DORA) by 2025, Simon Treacy offers insights into the evolving landscape of ICT risk management.
register includes details about the contractual arrangements with thirdparty providers and their subcontractors. Regulators will use firms’ registers of information better to understand the ICT dependencies across the EU financial system.
DORA gives regulators another tool in their arsenal. Firms can expect more intensive supervision about protecting ICT systems, detecting anomalous activities, responding to cyber threats and managing third-party providers. Regulators plan to hold senior managers to account for how they manage ICT risks.
Mind the gap
Firms must be ready to present to their regulators a package of documents evidencing their readiness to bounce back from disruption.”
Managing multiple regimes – and multiple regulators – is another element for firms to factor into their resiliency planning.”
The good news is that firms need a standing start regarding DORA. Several aspects of DORA should be familiar to payment service providers. For example, the regime for reporting ICT-related incidents builds on existing payments legislation. Firms can also draw on their experience of implementing EU outsourcing guidelines when tackling DORA’s contractual requirements.
But DORA goes further than the existing framework. For example, policies will need to be revised to reflect DORA’s remit. A wider range of incidents need to be reported under the new regime. DORA’s impact on contracts is not limited to outsourcing arrangements.
Firms should use a gap analysis to help focus their DORA implementation projects. Comparing the regulatory framework as it applies today against the higher standards set by DORA reveals the extent of the uplift which needs to be completed before the end of the year.
Unhelpfully, firms are facing a moving target. The full suite of technical standards and delegated legislation –including the rules on subcontracting
– will only be finalised six months before DORA starts to apply. Firms have no choice but to engage with their ICT service providers on the basis of the draft texts that have been released so far.
Going global
DORA is not the only show in town. Key aspects of the UK’s operational resilience regime start to apply next year. UK payment institutions, e-money institutions, and recognised payment systems will be required to remain within the impact tolerance levels they have set in case of a severe but plausible disruption. Preparing for this deadline should be the focus for firms in 2024, supported by their mapping exercises and scenario testing.
The differences between the EU and UK regimes exemplify the problem faced by payment firms with an international footprint. As well as operational and reputational risks, ICT incidents and cyber-attacks will increasingly have legal and regulatory consequences, too. Managing multiple regimes – and multiple regulators – is another element for firms to factor into their resiliency planning. Napoleon had it easy.
Simon Treacy, senior associate (Knowledge), Linklaters
Nick Botha explains that PSPs must enhance their end-to-end reconciliations to deliver seamless, efficient payment services and stay competitive in the rapidly evolving fintech landscape.
The payments sector’s success and growth over the past decade can largely be attributed to firms’ ability to meet and exceed customer’s expectations. Unlike established banks, fintechs are largely free from the legacy tech stacks that slow down banks from modernising. So, payment service providers (PSPs) can anticipate customer needs and provide services that address their problems. However, as new PSPs emerge, the landscape becomes increasingly competitive. So, PSPs have to meet changing customer expectations more quickly.
PSPs are facing growing demands
Customers are becoming accustomed to faster, more convenient payment experiences, so they expect more embedded, frictionless payment experiences in the future. Central banks and governments also pick up on the economic advantage of meeting these customer demands.
Last year, the Federal Reserve launched its instant payments service,
FedNow, in the US. Chair Jerome H. Powell said it “built the FedNow Service to help make everyday payments faster and more convenient” for households and businesses over the coming years.
The European Council and European Parliament also reached a provisional decision on its SEPA instant payments proposal, trusting the plans “will improve the availability of instant payment options in euro to consumers and businesses in the EU and in EEA countries.”
And in November, the HM Treasury launched its Future of Payments Review as part of the Autumn Statement. The report states that the “UK consumer benefits from a world-leading payments experience today – but it could be even better.” To achieve this, the report recommends the government develop a strategy in which improving customer experience is central.
So, PSPs face huge pressures to adapt to customer expectations – from both customers and centrally. Offering faster, more convenient payments is no longer a “nice-to-have” – it’s an essential
Payment service providers can anticipate customer needs and provide services that address their problems.”
offering. With all this in mind, industry leaders have responded by making meeting customer demands their primary focus. But to ignore the role operations play in adapting to a changing landscape would be a massive error.
Operations: The missing link
According to our 2023 Payments Industry Outlook 2023: Strategic Priorities, Operations, Regulation and Data report, 14% of payment firms are not currently profitable. On top of that, one-third (33%) are breaking even. A contributing factor is underinvestment in operational efficiency, leading to higher than optimal costs as they focus on developing solutions to their customers’ problems.
By underinvesting in operations, back-office teams get overstretched, and their hiring costs rise as firms require additional headcount to mitigate capacity rather than investing in technology.
By neglecting back-office operations, these firms will likely be relying on inhouse systems and heavily dependent on spreadsheets. However, manual
processes lack the scalability and flexibility needed to respond quickly to change. As well as a lack of flexibility, manual processes also raise PSPs’ risk of regulatory breaches and result in poor data control.
How to achieve a robust framework
Firms must solidify their end-to-end reconciliation processes to deliver the seamless payment process that users have come to expect. To meet customer demands for instant payments like FedNow, it’s essential to understand that these changes represent a fundamental shift in how payments operations must work –both in a holistic sense and across the end-to-end operational flow. Real-time payments need real-time reconciliations, so slow and inefficient operations just won’t cut it anymore.
The first step to improving your operations is to review your processes from end to end and identify and correct any inefficiencies – from data transformation to exception management
to reporting. Firms must prioritise and address areas that would benefit most from investment. This is usually where there’s an overreliance on manual tasks.
Doing this ensures firms have processes that can handle any further changes and new customer demands in the future while also being better placed to meet regulatory change.
The bottom line
The payments sector thrives on firms’ ability to exceed customer expectations, with agile fintechs leading industry innovation and front-end development. However, neglecting operations risks inefficiencies – not to mention regulatory breaches. So, firms must ensure reconciliation processes are efficient from end-to-end if they’re to deliver the frictionless payment experiences customers expect. By prioritising operations alongside customer-focused innovation, PSPs ensure they achieve sustained growth and relevance in a dynamic, fast-changing payments ecosystem.
The first step to improving your operations is to review your processes from end to end and identify and correct any inefficiencies.”
Since 2021, The Payments Association has been closely involved in the transformative discussions surrounding the Bank of England (BoE) and HM Treasury’s initiative on the digital pound, a potential UK central bank digital currency (CBDC). The recent consultation paper and its aftermath represent a crucial juncture in our financial system’s evolution, one that professionals in the payments industry should keenly observe.
The response to the consultation paper was unprecedented, with over 50,000 submissions, a testament to the paramount importance of this initiative. These responses spanned from practical design considerations to critical issues such as privacy, cash access, and the broader societal impact of a CBDC.
In our industry, where innovation and adaptability are key, the digital pound presents both an opportunity and a challenge. The proposal is not to replace existing monetary forms but to complement them, offering a secure, versatile option for a range of transactions. This aligns with the government’s
recent actions to preserve cash access, ensuring a balanced financial ecosystem.
The legislative process for introducing the digital pound is at a pivotal stage. The government has announced the need to introduce primary legislation before any launch.
The BoE is preparing for primary legislation, anticipating the possibility of government action in this direction. This preparation by the BoE recognises the necessity of primary legislation, resolving a longstanding debate about whether it could proceed without a vote from Parliament. Some had suggested that the BoE could move forward without parliamentary approval. Still, the BoE’s acknowledgement underlines the importance of involving Parliament in such significant monetary decisions.
One of The Payments Association’s discussions has revolved around the Labour Party’s constructive approach towards the digital pound. Their recent ‘Financing Growth: Labour’s Plan for Financial Services’ document, published on January 31 2024, indicates an openness to embracing CBDCs, while prioritising privacy and individual freedoms. This progressive
stance is essential to ensure the design of the digital pounds respects democratic values and personal liberties.
The digital pound also opens avenues for privatesector innovation, fostering a competitive and efficient payment landscape. It is envisioned as an adaptable platform, empowering the private sector to develop and shape future retail payment services. This is crucial for keeping the UK at the forefront of global financial innovation and for ensuring our financial systems remain responsive to evolving payment needs and technologies.
While the decision to introduce a digital pound is yet to be made, the
groundwork being laid is indispensable. It enables the BOE and the government to adapt to the changing payments landscape and significantly reduces the lead time for a future decision. This preparatory phase is instrumental, regardless of the eventual outcome.
The conversation about the digital pound strategically positions the UK’s financial system for future challenges and opportunities. The ongoing work on the digital pound ensures that our financial infrastructure is robust, inclusive, and adaptable, ready to embrace the future of money in an increasingly digital global economy.
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