Digital payments - don’t blame us when things go wrong, says industry

FinTech has been a success for the UK this century, with start-ups like Monzo Bank, Revolut, and Starling Bank becoming household names. There are 26 UK FinTech unicorns, while investor website Seedtable lists 69 start-ups that each have venture funding of tens of millions of dollars in that space. 

A burgeoning sector by any measure – second only to the US, with payments at the epicentre, alongside banking services.

In this context the “unashamedly pro-tech” UK government launched the Future of Payments Review last week, chaired by former Nationwide CEO Joe Garner. A call for input from stakeholders is open until 1 September.

But not everyone welcomes such initiatives, with Geoffrey Barraclough, founder of The Business of Payments (‘How paytech makes money’) observing:

Britain seems to be the world capital of reviews, and this one will add yet another report to the pile of documents sitting on the Chancellor’s desk.

It’s a fair point. The government – which scrapped its coherent, forward-looking Industrial Strategy two Prime Ministers ago – seems to have been engaged in an endless, circling process of consultation ever since, which may suggest a vacuum at its centre. Or perhaps it is simply listening. 

Others in the industry have also warned of a review pile-up, with a slew of well-meaning documents sharing similar, and often cross-cutting, aims in recent years, from Open Banking to crypto assets and the digital pound, among others.

The sector is setting the pace without government interference, it believes, and the Treasury’s economic competence since the pandemic has sometimes been open to question. (Seven different Chancellors have been in office since the Conservatives came to power in 2010, and, as with the five different Prime Ministers they served, each has pursued conflicting policies.)

Once more unto the breach, then, is the Westminster Forum events programme, which has done a sterling job in recent years of trying to balance the government’s ever-changing policy and regulatory aims with industry reaction. 

Riccardo Tordera-Ricchi is head of Policy and Government Relations at the UK’s Payments Association – the fulcrum, perhaps, of that process as regards the latest Review. Striking an upbeat and supportive note – at least, initially – he said:

The call for input aims to consider how payments are likely to be made in the future, and make recommendations on the steps needed to successfully deliver world-leading retail payments, further boosting UK FinTech competitiveness.

We're very happy to see that the government appreciates that payments are essential to the UK economy – to people, to businesses, and are a major source of the UK’s competitive growth at the heart of a dynamic and changing Financial Services sector.

We also really welcome the fact that the government is committed to supporting an innovative, efficient, and resilient payment sector, which fosters competition and serves consumers and businesses well…”

But? Tordera-Ricchi continued:

There are nonetheless certain elements of concern that affect the growth and well-being of our industry, particularly when we look at how to effectively protect consumers without causing unintended consequences, such as creating an overly rigid system that stifles innovation, and undermines the capability to attract investment. 

With regard to authorizations, the issuing of fewer EMR [electronic money regulations] and PII licences, slow authorization processes, more and more letters, and increasingly stringent supervision of payments companies all confirm that the Financial Conduct Authority [FCA] is implementing the strategic intent to be an increasingly assertive regulator for payments – despite few firm failures.

Is guarding against commercial failure the core purpose of regulation? That’s news to diginomica. But he continued:

Alongside the implementation of consumer duty, both regulated and unregulated companies in payments are starting to squeal. All these approaches have the undesirable effect of reducing investment, reducing the number of new companies entering the market, and increasing the market share of just the bigger players. 

We already see smaller ones leaving this country. And this worries us, as it undermines competition.

Ouch. But to the outside observer, the sector appears to be booming, with the pandemic adding both impetus and momentum towards digital, mobile-based solutions. And, as with any tech start-up sector, isn’t consolidation inevitable as the most highly invested companies develop their own gravity, bending venture capital towards them? 

Unintended consequences

Perhaps Tordera-Ricchi – always a passionate and clear speaker at these events – had something else to be angry about? He said:

Consumer duty is a major headache for payments companies. And we remain worried that its implementation is only going to add much cost to the industry.

At this point, one can imagine the average Brit turning purple with rage at the prospect of the poor Financial Services sector – worth £173.6 billion ($224 billion), according to the government’s figures – complaining about its duty of care. 

Isn’t the lack of care why many households are struggling in the increasingly long tail of the last financial crisis, let alone the current one? Didn’t the public bail the banks out to the tune of a trillion dollars after the 2008-09 crisis? And didn’t they face a decade of austerity for doing so?

He continued:

We remain convinced that there is a real risk that the cost of the extra layer of detailed analysis and oversight reduces the viability of many payments products. Patience and guidance are required to find the right balance between improvements and breaking the industry.

Breaking the industry? A bold claim. He explained:

The unintended consequences of some not very well thought through policies remain our main concern. For example, I'm thinking of the new policies to reduce authorized push payments [APP] frauds and other scams. While some of the policies to reduce this £485 million fraud problem make good sense and will go some way towards reducing fraud, some policies in particular have potential unintended consequences.

Meanwhile, almost all consumers who experience this type of fraud will get their money back unless they're grossly negligent [so it’s your fault, folks!]. The cost of the compensation will be shared 50:50 between the sending bank issuer and the receiving bank.

But even if they may be powerless to prevent fraud, surely payment providers have a role in not enabling it, especially when scams seem legitimate? And importantly, isn’t that the flipside of a deal in which consumers pay hefty fees just for sending money to people?

He then made a fair point:

Despite up to 80% of these frauds originating from purchases made on social media, social media companies are rarely involved with preventing fraud.

While social platforms outlaw fraud, spotting it and taking steps to prevent it in their quest for ever more advertising dollars is another matter. People sometimes click on apparently genuine ads and order items that they never receive. Yet it’s the payment platform that ends up compensating them.

(Nearly 50% of scam adverts on Facebook and Instagram are investment related, according to the Consumers Association.)

As a result of making fraud the payment provider’s problem, in Tordera-Ricchi’s estimation, Financial Services providers may be less inclined to offer basic services to the most vulnerable sectors of society. A leap of logic, perhaps, but it may be true. 

He said:

They will be less likely to open accounts for low-income, disadvantaged, technologically challenged, older, or vulnerable consumers, or even close accounts to limit exposure to this new level of liability. This is counter to society's objectives of including more vulnerable consumers in our financial system. 

Without involving social media giants, we will not stop most frauds of this kind at their source. The proposed Online Safety Bill is just one step towards securing the involvement of upstream actors, which is critical to prevent fraud. But it is not enough.

He added:

There is some excellent work being done to prevent fraud across our ecosystem. And we support these efforts whole heartedly. But we fear that these latest anti-fraud policies and many other regulations will inflict damage on companies in our industry, including credit institutions and payments institutions.

The BritCoin opportunity? 

There is another dimension to all this, of course: the government’s ambition to make the UK a leading crypto assets hub – a strategy announced by Rishi Sunak when he was Chancellor, just days before the onset of the long crypto winter. In retrospect, a reverse Midas moment for the now Prime Minister.

An added factor is work towards embracing stablecoins and, in all likelihood, a central bank digital currency (CBDC) for the UK in the next five years: the digital pound, or ‘BritCoin’. All of this may pose an existential challenge to the payments sector as it stands. Or is it an opportunity?

On this point, Tordera-Ricchi was tactfully upbeat:

It's important to explore why regulation is now more paramount than ever, and not just in the UK. The payment systems industry submitted its response to the Treasury’s future financial services regulatory regime for crypto assets and call for evidence at the end of April. 

The consultation is important not just for our members, but also for the payments sector as a whole, especially if the UK wants to be a crypto asset hub on the global stage. 

For this to be achieved, clear, effective, timely regulation and practice engagement with the industry is required. […] We'll have to work around some core design principles for the regulatory outcome to be proportionate and focused as well as agile and flexible. But this is a welcome step towards establishing regulatory clarity for crypto assets in the UK. 

The rapid innovation taking place across the crypto system is creating exciting opportunities, but also involves serious risks. Crypto asset businesses will genuinely benefit from regulation, as their growth and safety depend on clear standards thoughtfully applied. These frameworks will accelerate the adoption of socially beneficial innovation.

This has been a common message in recent presentations to the Westminster Forums: regulation is good, says industry after industry, perhaps worried by the government’s backbench-driven determination to tear up every rule in sight.

On the vexed Europe question, he said:

Any legislative proposal should specifically consider the interlinked economics between the UK and the EU through many years of working together. 

Companies that provide crypto asset services in the UK and EU will need to evaluate and analyze the differences between the UK proposals and the requirements of MiCA [the EU’s new rules on Market in Crypto Assets] and figure out how to satisfy both. 

For example, the UK proposal differs in its approach to lending activities, crypto assets, lending platforms, and FTAs, whereas MiCA does not address those, so they fall out of scope. Therefore, aligning around fundamentals would benefit both the EU and the UK businesses. 

He added:

I never think that too much misalignment is good! We need to ensure that we have enough alignment to allow businesses to operate cross border. But we also want to be open to the world, right?

My take

A revealing presentation, with an important subtext. 

At more and more of these policy forums – which attract government speakers, regulators, vendors, and industry groups – business keeps telling government the same thing: regulation is good, and it aids innovation. 

The message from many industries is clear: Don’t rip up the rulebook just because you believe the economy will benefit from uncontrolled market forces. After all, some of those regulations are what have allowed us to trade with our biggest customers and allies – on mutually agreeable terms.

Ahem, but please don’t introduce this rule, or that regulation, says the finance sector, as it will cost companies money. In which case, payments providers have until September to bend the Chancellor’s ear about it. 

It seems the process has already started.