A decade ago, cash was the most used transaction method in the UK, smartphones with banking apps were only starting to emerge and contactless payments were in their infancy.
Today, the physical to digital shift, accelerated by the pandemic, has resulted in millions of consumers claiming they no longer use or need cash or cheques.
Fintechs are leading the charge towards convenience and security for users, helping businesses to make, manage and reconcile their payments simultaneously and raising the bar for user experiences and a new payments architecture developed by the industry, and the Payment Systems Regulator is set to revolutionise innovation and competition.
While customer demand and the advance of technology have played their part, regulators – the Bank of England (BoE), the Financial Conduct Authority (FCA), the Competition and Markets Authority (CMA) and the Payment Systems Regulator (PSR) – have driven significant change. And, importantly, they continue to push for greater changes that benefit individuals, businesses and, by extension, the whole economy.
Work is under way on a multi-year programme to renew the UK’s real-time gross settlement (RTGS) system. This complements recent changes allowing non-bank payment firms to open settlement accounts at the BoE. This has resulted in direct access to the Faster Payments system increasing in the past decade, from seven direct participants to 26. And Confirmation of Payee has been introduced by the six largest UK banking groups, allowing a bank account number and sort code to be checked against the name for the account before funds are paid.
But it is perhaps in five notable areas that most affect clients of financial institutions where the more exciting developments are happening.
1. Open banking – If Europe is the greenhouse for Open Banking, the UK is the incubator. Driven by the CMA and fulfilling requirements under Payment Services Directive 2 (PSD2), this mandates standardised application programming interfaces (APIs) that allow consumers and businesses to securely share their account data, initiate payments with regulated third-party providers and open up new propositions that have been difficult to develop before (for instance, accounting invoicing software to speed up and automate invoice management). This offers consumers the means to pay merchants online directly from their accounts using Faster Payments. All of which will simplify the payment process, lower costs and offer merchants a faster way to be paid.
The CMA plans additional functionality that goes beyond the PSD2 blueprint for refunds and regular purchases from the same merchant, alongside new consumer protections to stimulate wider take-up of open banking. Policymakers in other geographies do not currently have formal or compulsory programmes and, while supportive, have limited themselves to introducing a range of measures to promote and accelerate the take-up of data-sharing frameworks (Asia) or to allow market forces to set the agenda (the US).
2. Cross-border payments – Recent years have seen the development of instant payment infrastructures in several countries and regions. This is particularly the case in Europe, with TARGET Instant Payment Settlement (TIPS) – TARGET being the eurozone’s real-time gross settlement system. The economic and social developments that can result from instant payments are attracting attention from governments and are increasingly being placed at the centre of regional and national initiatives. With more than $77 trillion transferred through SWIFT in 2019, the G20 has commissioned a series of studies to better understand the frictions, challenges and opportunities in managing cross-border payments. NatWest will review the final report (October 2020) to interpret the impacts.
3. Request to pay – This new messaging framework aims to complement existing payments infrastructure and give billers the ability to request payment rather than simply sending an invoice. For each request, customers pay in full, pay in part, ask for more time, communicate with the biller or decline to pay. This framework is available to organisations that will be able to incorporate it into their apps and services, and will sit alongside existing bill payment methods.
4. M&A activity – The global market continues to experience increased M&A activity – for instance, between Worldpay and FIS, and Visa and Plaid – as payments globally and in the UK specifically become a hotbed of fintech activity. Innovation is now moving from front end to back office processes as disruption driven by banking/payments as a service becomes technically and economically possible, with new entrants able to operate (or offer challengers the means to compete) in cross-border payments.
5. ISO 20022 – In payments, nothing that stands still stands the test of time. The PSR and the industry are working to streamline and modernise with a new core clearing and settlement infrastructure to take over Bacs payments, Faster Payments and, potentially, cheque payments. This will enable the creation of third-party ‘customer overlay services’, leading to new payments products and services.
Central to this will be the migration to ISO 20022, a new standardised data format that will prioritise richness of data over message size and operational constraints, and enable the financial industry to be faster, more open and always available. ISO 20022 will lead to more detailed and better-structured reference data, improved end user customer experience, and richer analytics to improve compliance and help address financial crime.
Globally, customer overlay services built on the rails of early ISO 20022 adopters offer firms additional remittance information to aid transaction reconciliation (linked to QR codes), better straight-through processing and significant exception investigation cost savings. Over time, as customers experience bespoke services from the data banks held, ISO 20022 will drive a virtuous cycle of improvements.
While cash is diminishing, the future will be one of less cash, not cashless. Consumers are increasingly happy to use smart devices and digital wallets to pay as they explore how to make their financial lives safer and simpler. This is reflected by some core milestones observed in 2019:
New payment firms are transforming the payments landscape to provide new services and functionality. For instance, fintechs have developed a contactless point-of-sale system that allows shoppers to tap their cards, or smartphone on smartphone, to make a payment. Some merchants have gone further, introducing their own in-store payment applications that allow customers to scan food as they shop, avoiding the checkout altogether, or trialling technology that charges you based on the product you pick up in store.
While cryptoassets are not widely used as a form of payment, this too is changing. Globally, banks are considering the potential of government-backed central bank digital currencies as a means of payment, and in March 2020 the BoE published a consultation paper, Central Bank Digital Currency: Opportunities, Challenges And Design, setting out how it can take a lead in central bank digital currencies.
As non-card payment methods enter and transform the payments landscape, they bring risks, such as where the end user does not understand the protections that apply or for activities that fall outside of regulation. But these changes also mean significant benefits for end users, including more choice, lower transaction costs and improved security and convenience.
The pandemic has changed the way payments are made globally. The migration from physical to digital payments, in part fuelled by the fear of contact and contamination, continues to be the direction of travel. But the pick-up in cash use that followed the easing of lockdowns suggests more time is needed to understand if these behavioural adjustments represent a step change, or something more short term. And will this herald the demise of physical payment types as transactions migrate from tap to in-app?
NatWest touches one in four UK payments. This vantage point leads us to embrace the value in the industry joining forces to support standardisation and interoperability between payments systems, taking more friction out of the payments process while increasing the protections for all users. This is a huge, shifting agenda, but it’s also an exciting time for the payments market.
James Waud is head of large corporate transaction services and FI coverage at NatWest
