The COVID-19 pandemic accelerated the digitalisation of payments, with consumers shifting from physical cash to digital and contactless payment instruments at a rate unprecedented. This development combined with the continued need to support cash and the surge of digital currencies initiatives has raised questions about the need of a renewed regulatory framework in Europe, and the United Kingdom.
The drive to digital solutions
In the space of almost a few years, the pandemic has condensed and turbo-charged developments that otherwise would probably take some years to materialise. In the case of the payments sector, the obvious legacy of the pandemic had been the rapid acceleration of the drive to digital solutions. The speed of change has been extraordinary and shapes customer experience in new and frequently uncharted ways.
In essence, customers want above all else flexibility: they are becoming increasingly agnostic in the use of payment platforms and channels, as they use different means of payment for different purposes. Customers also want trust since the changing market and social environment arising from Covid-19 has seen a rise in cyber security fraud threats.
We are then navigating a totally new environment, where customers constantly evaluate transparency, speed, and flexibility to make their money transfer decisions like never before. In this new environment, the digital evolution that is changing the payments sector rapidly will continue to do so.
As payments generate roughly 90% of banks' useful customer data - information about who is buying what, how much, and when, the sector has powered the growth of new innovative services.
Mobile, digital currencies and other growing trends
There is an emerging and accelerating shift to the mobile ecosystem, as customers look for the ease and convenience of online combined with the simplicity and security of the app. It is in that mobile ecosystem that, probably, the next big wave of innovation will occur.
For example, sending money to a mobile phone number to direct funds out holds considerable promise for the future as a truly innovative payment solution. This opportunity is definitely, a development worth watching out for, especially as now more than two-thirds of the world has a mobile phone - with smartphones accounting for almost 4 in 5 of all mobile devices.
On top of digital wallets, new services are brought to market including buy now pay later (BNPL) which are added on the many apps bulging in the increasingly ubiquitous mobile wallets use by a growing portion of consumers. Account to account payments, using Open Banking and payment initiation, are also fundamentally changing the dynamic and challenging the current business models.
Another fast-developing area is the digital currencies space, with new projects back by large companies and the emergence across the globe of Central Bank digital currencies (CBDCs). The convergence of new crypto-assets and public-led projects has changed rapidly the conversation around digital currencies, and regulators and policy makers have had to adapt and react.
There are nine countries that have launched a CBDC, and another 30 are in the process of developing one, according to the Atlantic Council, plus 40 are researching the possibility, including the U.S.
Some challenges to overcome and opportunities to explore
Payments play an essential role in all day-to-day interaction from enabling business transactions to benefits payments, locally and globally. Payments also are supporting the development of digital economies and are driving innovation - all while functioning as a stable backbone for our economies.
A connected world cannot take place without seamless payments deployments for people, businesses and NGOs. As payments underpins local and global transactions, the need for robust industry and regulatory agreements are essential to ensure secure and seamless payments across the globe. Data localisation regulation have been put on the spotlights as it restricts the storage, processing, and/or transfer of data within a given country. Ensuring regulators and industry strike the right balance for data localisation regulations will be essential for the success of cross-border payments and innovation.
Another key element is the rise of real-time payments, on a global scale. This development needs to go hand in hand with critical safeguards for fraud, privacy and compliance.
Inclusion will need to remain at the top of everyone's agenda, as customers continue to use different means of payment for various purposes. New technologies and market entrants will challenge existing players by reducing costs and moving to even faster payments.
The challenges and opportunities are to ensure that consumer protection and transparency encourage innovation, which will allow the industry to provide the payments solutions consumers are looking for in the long term.
Regulators zero in on payments
As the payments landscape is rapidly evolving regulators and policy makers have become increasingly invested in the future of the sector, and discussing how regulations should adapt to innovation, competition and new challenges and opportunities.
We are seeing regulators and central banks working more closely with big tech and payment leaders to ensure consumers are protected and payment sovereignty is not compromised. This is especially true in the case of digital currencies, which are gathering momentum.
In 2022, more products and services will be brought within the regulatory perimeter. The FCA will continue its more assertive approach to supervising payments firms, especially once its operational resilience and consumer duty regimes take effect. Changes to payments infrastructure will start to take shape, including setting the future course for Open Banking.
The impact of EU's new policy measures
The European Union has set out an ambitious vision for developing an autonomous European payments market through its Retail Payments Strategy. It is therefore necessary for UK regulators and industry to continue to monitor these developments and, where necessary, engage their European counterparts to ensure a harmonised approach.
In the context of the Payment Services Directive (PSD2) review, the Commission will assess the extent to which the EU's existing consumer protection measures (e.g. rights to refunds) can provide consumers making instant payments with the high level of protection offered by other payment instruments. The Commission will assess the impact of charges levied on consumers for instant payments and, if relevant, it will require that they are no higher than those levied for regular credit transfers.
The review of PSD2 will have wide implications. Strong Customer Authentication (SCA) and contactless will definitely feature high on the list of priorities. The Commission has already committed to exploring whether additional measures should be considered to address new types of fraud, in particular with regard to instant payments. It will also re-examine the existing legal limits on contactless payments, with a view to striking a balance between convenience and fraud risks.
Other new measures such as the Digital Operational Resilience Act ('DORA') and the Markets in Crypto-assets (MiCA) Regulation will have a significant impact on the payments sector, and the United Kingdom should monitor closely the outcomes from the negotiations to ensure it develops a world leading regulatory framework.