The Faster Payments Service (FPS) used to facilitate card transactions in the UK is “clunky” and badly needs updating, according to a new review of the country’s card payment sector. The “Future of Payments Review” calls on the payments sector to embrace open banking technology capable of offering an alternative to industry giants Mastercard and Visa, which process the majority of payments in Britain.
This, in turn, could create a “healthier” market, says the review, which calls on the government to develop a “national payments vision and strategy.” Overall, the UK payments sector was “in a good position with many positives,” writes the report’s author, former Nationwide chief executive Joe Garner. But he warns that the UK “lacks vision and clarity of priorities.”
One of the main causes of inefficiency in the sector, says Garner, was the Faster Payments Service. Introduced in 2008 to replace the BACS system, the FPS reduced the time to settle transactions from days to as little as 80 seconds, triggering a huge boom in e-commerce that continues to this day. Unfortunately, writes Garner, that system now lags behind its foreign rivals, many of which are capable of settling transactions in 30 seconds or less without needing to process customer account numbers or sort codes.
Payments system reforms in the offing?
Garner also reports that many retailers and merchants are “frustrated” with the costs of card payments, with most customers now avoiding the use of cash.
As such, the report argues for the development of a “national payments vision and strategy” underpinned by ten recommendations, including new regulations governing alternative Open Banking payment journeys such as the creation of new commercial model and consumer protections in the space; regular assessments by HM Treasury and the FCA as to whether the evolution of the digital payments sector “is leading to financial exclusion”; and closer alignment of those regulators with oversight over the industry.
Yesterday the government confirmed in its autumn statement that it will implement all of the report’s recommendations. This will have far-reaching consequences for the UK payments sector, says Gareth Lodge, principal analyst for payments at Celent. “For example, “repealing prescriptive EU-derived payments authentication rules allowing industry to better prevent fraud and improve the customer payments experience” would seem an ambitious balancing act of differing goals,” says Lodge. “Similarly, the commitment “to unlocking the full potential of Open Banking-enabled payments and will seek to legislate next year to support this” is a bold statement.”
Lodge believes that any such intervention from the government into the UK payments market may be more disruptive than some may have initially assumed. “I think… the government needs to be clear about what it is enabling versus what it is telling the industry it is responsible for, and what its role is in that,” he says. Without doubt, adds Lodge, “the payments landscape in the UK is going to get a lot more complex.”
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