Three ways in which the Future of Payments Report could change UK payments

In the summer the government commissioned an independent review of the UK payments industry. Now that the report has landed we pick out three changes that could follow as a result.

Redesign of authentication rules

The report recommends moving strong customer authentication (SCA) rules away from detailed technical standards to a more outcomes-based regime. It acknowledges that SCA has reduced fraud but argues that its prescriptive implementation has harmed the shopping experience. Issues include a lack of flexibility around the contactless limit, a few too many PIN prompts and the need to enter extra credentials when shopping online.

In response, the government says that the FCA will review the detailed technical standards under the SCA regime which derive from the EU’s rulebook. This review will be part of the wider programme to repeal and replace retained EU law to create a smarter regulatory framework for the UK. When it comes to SCA, the aim would be to replace existing standards with a more outcomes-based approach. The FCA will also reconsider contactless limits.

Making Open Banking sustainable

According to the report, the only digital alternative to card payments is a “clunky” bank transfer process. Developing Open Banking would give retailers more choice. To help it scale the report recommends making sure Open Banking is put on a sustainable commercial footing. It also advocates introducing some form of purchase protection, clarifying liability standards and setting up a dispute resolution capability for Open Banking payments.

The government says that it will put forward legislation on Open Banking next year. The aim would be to establish a new regulatory framework which requires more firms to participate in a commercial model for Open Banking. Consumer protection measures would also be included within this framework.

Setting a vision for payments

The report laments the lack of a clear, agreed-upon vision for the future of UK payments. Without this “North Star”, the multiple major initiatives that are underway risk being disjointed. As a result, the report’s primary recommendation is for the government to develop a National Payments Vision and Strategy. Among other things, this strategy would help coordinate initiatives such as Open Banking, the New Payments Architecture, the potential introduction of digital pound and work on a digital ID for payments.

In response, the government says it will publish a National Payments Vision next year. This would consider the priorities for UK payments, including the New Payments Architecture.

Other recommendations of note

• Review APP fraud rules: The Payment Systems Regulator is introducing a mandatory reimbursement regime for authorised push payment fraud. The report calls on the PSR to review the costs and benefits of these rules a year after implementation.
• More cooperation to combat financial crime: The report notes that frauds and scams are the single largest category of crime in the UK. It suggests a public/private partnership which focuses on prevention.
• Reduce complexity for fintechs: Feedback from fintech firms was that the volume and weight of regulation holds back growth. The report asks HM Treasury to review whether regulatory burdens are appropriate for smaller firms. One suggestion is for the government and regulators to provide a streamlined version of their regulatory initiatives grid for fintech.

Background

In July 2023 HM Treasury tasked former Nationwide head Joe Garner with reviewing the future of payments in the UK. The review was announced as part of HM Treasury’s Mansion House Reforms.

The report was published on the same day as the 2023 autumn statement in which the Chancellor welcomed the review and said that the government is acting to implement the review’s core recommendations, including repealing the prescriptive SCA rules.