The PSR has been consulting on a new proposed five year strategy – views were required to be submitted by the 10 September 2021 and the PSR propose to use the feedback received to finalise their strategic approach and ensure that they focus on the right outcomes and, ultimately, publish a strategy that is balanced and credible in the eyes of those they regulate and protect.

You’ll find more on the publication of the proposed five year strategy at: PSR Proposed Strategy.

Having reviewed the PSR’s proposed five year strategy Northey Point submitted the following response to the PSR:

Northey Point welcomes the publication of a new strategy by the Payment Systems Regulator (PSR) and the opportunity to provide feedback ahead of the confirmed strategy being published towards the end of 2021.

Having considered the proposed strategy document, we are pleased to provide the following feedback:

Desired Outcomes

Outcome 1: Access

Whilst we fully agree with the need to protect users of declining payment types (paragraph 4.8) it is vital that the PSR recognises that the UK is fast becoming a digital society and that digital payments reflect this wider societal change. Noting the careful balance between ‘analogue’ and ‘digital’ payments we are firmly of the view that to preserve cash for cash sake will, ultimately, only serve to leave people behind.

Paragraph 4.9 notes that Bacs Direct Debit and Direct Credit are widely used and depended upon but suggests that that may not meet the needs of all users. We note that (a) there are already a range of alternative payment options that are seeking to establish themselves in the marketplace. One of these is Request to Pay and which would benefit from PSR intervention to gain traction. Equally, as signalled in previous Northey Point submissions, the ‘narrow, Faster Payments first, strategy risks the danger of any detriments in Bacs Direct Debit and Direct Credit not being addressed as, in effect, the strategy for these significant payment systems appear to have been set in aspic.

As part of the new PSR strategy it is important to consider why the slow adoption pathway of new overlay innovations such as Request to Pay has occurred (paragraph 4.10). It would be helpful for the PSR to consider whether it needs to intervene and review why market adoption of new overlay services appears to be slow given the underlying end user demand and corresponding global activity.

Outcome 2: Protection and Confidence

The cost of providing the UK’s payments infrastructure is difficult to determine in the context of the UK’s ‘free in credit’ banking model. This challenge is compounded by the fact that consumers do not (a) see the cost in the current account they use, (b) that most retail payments are processed free of charge and (c) the consumer often has unrealistic expectations when ‘something goes wrong’ with a payment.

Whilst it is important to stress the personal liability we all have when making payments (paragraph 4.21) it is important that an appropriate focus is centred on education and the provision of tools such as Confirmation of Payee. Northey Point has long campaigned that ‘safer payments need service ubiquity’.

The current use of Faster Payments and the potential new use cases does not reflect the use that were originally intended for this payment scheme and, on this basis, the protection model is not fit for purpose for a number of uses. Unlike card payments and Direct Debit, the level of consumer protection in Faster Payments is limited and has resulted in an inequitable and unsustainable protection model. There needs to be a better protection model for users of Faster Payments, differentiated by the ‘flavour’ of payment type used within Faster Payments.

When considering the scope of Outcome 2 it is important that the PSR considers whether the Direct Debit Guarantee remains appropriate, fit for purpose, and appropriately balanced between stakeholders. Some 50 years after its launch is the unlimited Guarantee in time and amount still appropriate?

Over the past few months, we have seen a card operator proving that payment protection can be a competitive issue.

Some years ago, ‘bank error’ and ‘customer error’ payment recovery processes were developed for Bacs and Faster Payments respectively, to what extent could these mechanisms be developed to increase confidence and protection when ‘payments go wrong’?

Paragraph 4.35 considers the likelihood of new payment systems establishing themselves here in the UK, does the role, scope and remit of the PSR permit sufficient flexibility to adapt to a radically new mechanism?

Outcome 3: Effective Competition

The development of new overlay services had been reduced due to the delay in delivering the proposed NPA. Given that real end user innovation will occur at the overlay level to what extent should the PSR be considering whether intervention is required to stimulate competition in the meantime – especially given that we are unlikely to see the NPA facilitating overlay innovation for the duration of the five-year PSR strategy.

To what extent is the disintermediation of the physical debit / credit card by smartphone based virtual wallets and Open Banking solutions an area that the PSR ought to be considering?

True development based incentives and promotion is very difficult to achieve with a not for profit / non-interchange based payment system operator. This position presents an inequality when compared to for profit payment system operators.

Given the significant innovation occurring within the Open Banking space we would expect that Open Banking initiatives, regulatory focus and Open Banking’s relationship with payment schemes to feature within the scope of Outcome 3.

Outcome 4:  Efficient and Sustainable

Unwrapping the true opportunity of ISO20022 has long been discussed and, apart from the RTGS Renewal programme, largely unaddressed. Reference Northey Point blog: Moving with all the alacrity of an arthritic glacier.

Outcome 4 makes reference to the part standards play in the area of reconciliation, it is important to note that services seeking to achieve market adoption are already focussing on the challenge of reconciliation. For example, Request to Pay offers end to end immutable reference data.

We note the high expectation on the proposed NPA to unlock the use of ISO 20022 in the UK’s payments landscape and consider this to be a significant dependency and, therefore, risk.

We also note that the strategy does not reflect the role that Open Banking will have in establishing new payment standards. Indeed, Open Banking is already utilising overlay services based on new standards to provide innovative solutions. It is our view that setting payment standards within an organisation like Pay.UK and / or Open Banking limits the applicability and obligations to comply

Priorities

Priority 1: Access

True access and real choice to payment types is vital as Burkhard Balz of the Bundesbank, states:

Consumers should be able to decide for themselves how they pay. For us, it is important to have a broad mix of options and that efficient methods for payment are available.”

It is worth considering, however, where competition and choice best occurs. To be an effective scheme Direct Debit is offered on an equitable basis but there is plenty of opportunity for differentiation, innovation and competition in the provision of overlay services. Conversely developing different ‘flavours’ (or attributes) of a Faster Payment provides significant opportunity for Near Real Time / Real Time innovation. Such innovation could support levels of consumer protection, non-repudiation and batch options, although this would require a move from the ‘narrow, Faster Payments first’ strategy for the NPA.

Sometimes there are factors outside of the payment system operators (and the regulators) control – for example; constraints imposed by smartphone hardware and operating systems.

It is encouraging to see that the strategy considers the subject of access to cash and seeks to address the needs of those that have to or want to rely on physical banks, but it is ultimately important for the good of all in society that digital alternatives are also considered.

We are concerned that the positioning of paragraph 5.23 suggests a fixation on whether (or not) Bacs Direct Debit and Direct Credit provide sufficient flexibility. Whilst the flexibility of these payment instruments is an important matter, we suggest that the PSR should take a more holistic and wider view on the payments eco-system and the suitability of alternative solutions to address any functionality gaps.

In describing what the PSR will do (also paragraph 5.23) we would urge the PSR to unpack why the adoption of overlay services such as Request to Pay and Confirmation of Payee has not been ubiquitous and adoption has been slow.

This aspect of the PSR’s focus should also understand the opportunities and risks of new payment systems developing or entering the UK – e.g. payments linked to social media platforms and CBDC / crypto payment systems. In this light the criteria and timing of any new system designation needs to be clearly determined.

Whilst we agree that any activity must take into account the perspectives of vulnerable consumer groups (paragraph 5.27) we’d also argue that it is important that the payment protection of all users is clearly understood and articulated.

The strategy clearly articulates a desire to protect access to cash (paragraph 5.29) but it is important to recognise that to preserve cash for cash sake will, ultimately, only serve to leave people behind.

Priority 2: Protections

It is important that the PSR strategy considers appropriate mitigants and protections that pre-empt fraud occurring. We note that over the last 12 to 18 months, probably as a consequence of the introduction of the Confirmation of Payee service, there appears to have been a disproportionate fraud liability shift towards the end user.

We believe that there is a clear case for differentiation of types of Faster Payments which could include a type of payment that offers clear consumer protection, however we note that the narrow, Faster Payments first NPA strategy may preclude such innovation.

We also note that the adoption of services that provide end users with additional levels of protection can experience slow adoption because they are dependent upon actions of other banks which often result in services being constrained by the lowest common denominator. This challenge was first surfaced some 21 years ago in the Cruickshank report.

Protections are also often constrained by the need for user consensus and not for profit operators of payment systems are often constrained in making changes.

Notwithstanding the importance of the payment schemes offered by Pay.UK and the protection it delivers through the rules and its governance process, we believe priority 2 is too focussed on Pay.UK and needs a more inclusive application (paragraph 5.52).

Priority 3: Competition

We are supportive of the two-pronged focus to (a) promote competition between payment systems and (b) supporting and developing other interbank systems to provide greater competition. That said, the merger of Bacs and Faster Payments into Pay.UK’s guardianship has reduced the occurrences of interbank payment system competition.

Similar to comments made elsewhere in this response the success of Priority 3 appears to have a disproportionate focus on Pay.UK. We’d argue that the PSR should be open to the fact that the fulfilment of this Priority might emanate from sources other than Pay.UK.

Priority 4: Renewal and governance of interbank payment systems.

Whilst this Priority could encompass a wide scope it is clear that the PSR consider the primary focus to be that of the proposed NPA and Pay.UK’s responsibility to deliver the new architecture. If this is the intention it might be useful for the priority to be more clearly defined.

Different ownership models, commercial incentives, funding and governance arrangements makes the PSR’s achievement of Priority 4 difficult to achieve.

Given the current status of the NPA programme, the narrow Faster Payments first strategy, the proposed NPA timeline, Pay.UK’s governance, organisational and funding model we question whether the desired outcomes relating to the priority can be fulfilled during the five-year lifespan of the PSR strategy (or even a ten-year horizon). We note the reference to Pay.UK funding dependencies (paragraph 5.97) and (a) question why, after many years, the NPA programme has yet to have an agreed business case and

funding model and (b) why Pay.UK does not have an agreed approach to supporting and promoting overlay services such as Confirmation of Payee and Request to Pay.

Issues to keep under review

Given the increased importance of cross border trade in a post Brexit economy we question the decision of the PSR to leave cross border payments under review.

Notwithstanding the cost, complexity and friction in cross border payments, it seems that cross border payments have been excluded due to current payment system designation and the probability of powers enabling regulatory resolution. This apparent assessment appears to be the wrong way round – i.e. if there is a detriment then should it not be addressed? It seems strange to rely on alternative initiatives like the BoE’s RTGS Programme given that that programme is unlikely to address the underlying issues with cross border payments

Proposed Measures

Priority 1

It is a concern that the PSR does not have the data or information to measure the impact of its actions. Whilst we agree that data collection and analysis should not become of primary focus of the PSR it is difficult to understand and substantiate the success (or otherwise) of both the PSR’s achievements to-date and of the desired future regulatory outcomes outlined in the proposed strategy without the availability of functional measures.

Paragraph 6.7 suggests a very narrow engagement focus on a small number of organisations, it is important that measures are developed in conjunction with a wide variety of stakeholder groups.

Paragraph 6.8 appears to focus on direct alternatives to ATM’s rather than the extent to which alternative digital payment options address the issue of ATM availability.

Paragraph 6.9 suggests a measure that has some duplication with the role and reporting of the Bank of England’s regulatory objectives.

There is a danger that some of the PSR’s desirable outcomes might be outside of the control of a payment system operator.

The proposal to undertake periodic research regarding transaction choices and how people and businesses make payments might be better fulfilled by utilising the data published by UK Finance.

Priority 2

We support the utilisation of UK Finance fraud reporting as a definitive source of payment fraud vectors. Whilst measures to determine the effectiveness of the Contingent Reimbursement Model are vital it is important to understand (and measure) the effectiveness of activity undertaken to prevent the fraud occurring in the first place. That said, we understand the difficulty in determining such measures as, for example, with Confirmation of Payee it is impossible to determine the effectiveness of an in-app message when a person initiates a payment.

Priority 3

When collecting payment system transactional data, it is important to address how ‘on-us’ transactions are handles, especially when a PSP with large market share routes ‘on-us’ transactions outside of a payment scheme.

Priority 4

The focus of Priority 4 and the measures outlined on page 76 appear to be fixated on Pay.UK to the detriment of other payment system operators. The schemes operated by Pay.UK are not the only inter bank payment solutions today and, we suspect, not in the future.

We would question the effectiveness of a measure that considers the number of rule changes as measuring the number seems to be a blunt instrument.

Also, we question whether the proportion of transactions migrated from Faster Payments and Bacs to the proposed NPA is, in itself, a suitable measure of innovation and competition.

Whilst we consider that new entrants into the provision of overlay services might be a useful indicator, we believe that such a measure (a) fails to address the market adoption of overlay services by existing providers (e.g., lack of market adoption with Request to Pay) and (b) measuring the entrants as a finite number neither proves nor disproves adoption (e.g. providers of Confirmation of Payee overlay services).

Measuring the number of direct participants is a useful but appears to be counter to the objective of the PSR to ensure a vibrant and competitive indirect access payment scheme model.

Overall, we believe that the proposed measures provide a useful starting point but will need a significant amount of unpacking and focus. Such unpacking will, of course, include what action would be taken based on the output from the measures.