On 10 June 2021, the Payment Services Regulator (the PSR) issued "Our proposed PSR Strategy". The consultation paper sets out the PSR’s proposed strategy (the Strategy) outlining its desired outcomes for the payments sector and its main areas of focus in order to achieve these outcomes over the next five years. The Strategy marks the first of its kind for the PSR, signalling the importance the payments ecosystem will continue to play in the coming future.
Over the last few years, the payments ecosystem has drastically changed due to the predominant shift towards digital payments, facilitated by innovative products and platforms allowing digital payments to be increasingly accessible. In the three years prior to the COVID-19 pandemic, the use of cash had already decreased by 20 per cent. Now, with businesses and consumers’ lives shifting online due to the pandemic, user habits and preferences have altered further towards the digital landscape.
The PSR recognises that there is a need to adapt their methods in order to aid the governance and oversight of the ever-evolving payments landscape in order to meet its statutory objectives of promoting competition, innovation and the interests of service users.
Outcomes and strategic priorities
The Strategy sets out the following four outcomes to be met over five years:
- All users have access to payment services that meet their needs in terms of functions, quality, cost and other relevant factors;
- Users’ interests are adequately protected when using payment systems so that they can use systems and services with confidence;
- Payment systems are designed and operated to enable effective competition in the provision of payment services; and
- Payment systems are efficient and commercially sustainable.
The Strategy details the following four strategic priorities to achieve these outcomes.
1. Ensure users have continued access to the payment services they rely upon and support effective choice of alternative payment options
This priority is centred around ensuring that the cost, quality, accessibility of payment systems and the systems themselves are operated for all user groups within the payments sector.
The PSR acknowledges the requirement to ensure that all users’ needs are provided for through a number of payment systems. There is recognition that different types of users necessitate distinct approaches, as well as there being sub-groups of users who have varying requirements such as those who are financially excluded, financially vulnerable or on uncertain income. Both the rules and standards that govern payment systems and the services provided to users should be established with the needs of the consumers and organisations that use them in mind.
The Strategy details a number of actions to meet this priority. These include helping the development of new services to meet users’ needs, protecting access to cash for cash users, ensuring that information about a range of payment options continues to be promoted and facilitating competition to help fulfil user needs. The Strategy also places an emphasis on understanding the views and perspectives of vulnerable consumer groups to ensure that their needs are considered, noting that operators and participants in payment systems should be mindful of the needs of vulnerable customers when designing and implementing their services.
This priority also accords with similar focuses voiced by the FCA and the Bank of England. One of the FCA priorities in its recently published 2021/22 business plan (the Business Plan) is to make payments safe and accessible and it intends to do so to work with the PSR on this. The FCA has also been increasingly focused on vulnerable customers, stating in the Business Plan that they will continue to intervene so customers, including those in vulnerable circumstances, are not unfairly disadvantaged. In addition, both the FCA and the Bank of England have also been focused on protecting access to cash, particularly for the vulnerable.
Going forward, the PSR will want to ensure that users’ needs are met and will intervene as appropriate to ensure this and to ensure providers do not impose terms or conditions detrimental to payment services users in the UK.
2. Ensure users are sufficiently protected when using the UK’s payment systems now and in the future
This priority focuses on the PSR recognising that there are a number of threats which users need to be protected from, such as authorised push payment scams, as well as an information gap existing between those who can understand and assess the costs and benefits of different payment services and those who cannot. The PSR notes that these protections are especially crucial for vulnerable customers. It is noted that users each need to have sufficient knowledge to make informed choices and be sufficiently protected to achieve this.
Part of the work that has been done by the PSR with respect to this priority includes directing six of the largest banks to implement confirmation of payee.
To meet this priority and achieve the desired outcome, the PSR aims to develop the governance of rules surrounding the interbank system. The PSR wants to see interbank systems providing effective alternatives to card payments. One possible approach the PSR could take is to decide what the relevant protections should be and how they should be designed and funded. The PSR also states that it could require them to be created using its direction-making powers.
However, the PSR acknowledges that it would be difficult for a regulator to understand the technical capabilities of the systems as well as the system operators. As such, a more effective approach would be to consider how to develop the governance framework of Pay.UK, the retail payments authority, thus allowing Pay.UK to be at the forefront of developing protections and conduct rules which would benefit all users within the sector.
3. Promote competition in markets and protect users where that competition is not sufficient, including a) between payment systems within the UK and b) in the markets supported by them
The Strategy states that that an increased emphasis needs to be placed on developing competition, acknowledging the vital role that competition plays in enhancing the accessibility, affordability and experience for the user. In addition, it is important in the evolving digital payment sphere to encourage payment providers to be innovative, with debit card payments currently the most popular payment method in the UK.
To do this, the PSR will expand its focus to promoting competition between payment systems rather than simply focusing on competition within specific payment systems. It will also work with the interbank systems to facilitate greater competition through this service.
Given the importance of competition within the payments sector, if effective competition is not being achieved, the PSR will assess its regulatory measures to raise the level of competition and in turn strengthen the protection afforded to users.
The PSR has already conducted some with regards to promoting competition in the payments industry by carrying out a market review into the supply of card acquiring services – a final report on this is expected later this year.
4. Ensure the renewal and future governance of the UK’s interbank payment system supports innovation and competition in payments
In order to ensure that payment systems are efficient and commercially sustainable, the PSR has designated implementing a stringent governance system as a priority.
This is seen to be of increased importance as Pay.UK are responsible for monitoring the creation of the New Payments Architecture (NPA), the proposed new method of organising the clearing and settlement of interbank systems which has the potential to future-proof payment services in the UK. It is hoped that the NPA will come into force over the next few years and provide stability and resilience to payments as well as increase competition and innovation.
The PSR notes that Pay.UK will need to develop conduct rules and policies to support new services and gives the example of developing a ‘consumer protection’ scheme to support retail purchases made over the interbank system. The PSR will support Pay.UK to allow them to fulfil their objectives of creating access to a safe, robust and best-in-class infrastructure to stimulate competition and innovation by ensuring funds are allocated to Pay.UK and providing support for the development of the interbank rules.
In addition, to ensure interoperability of standards across different service providers, the PSR will support and promote coordination amongst service providers where it thinks it is needed but not happening.
The PSR recognises that there are many other issues affecting the payment services sector, in particular the use of data, cross-border payments and ESG considerations. At this time, the PSR have chosen to not focus on these over the next five years but state that they will continue to monitor the evidence and keep these under review.
The PSR has asked eight questions to seek views on the Strategy. Responses to the consultation need to be submitted by 17.00 on 10 September 2021. It is expected that the final strategy will be published by the end of this year.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, August 2021