Payments View - November 2022

This year’s penultimate Payments View includes updates on the FCA’s work on Big Tech, the Consumer Duty and Open Finance, interesting commentary on Account-to-Account payments and the PSR’s next steps on its market review of card fees. In a new section focusing on the EU we also hear from our Dutch colleagues on recent updates in the Netherlands.

If any of the topics below spark further questions, please don’t hesitate to reach out to us.

As you might imagine, we have had a number of questions related to the ongoing issues with FTX – if this topic is of interest, you can find more details in the next version of Crypto View.

Before we start: Payments Reviewer – call for market testing participants

Following the successful launch of our Crypto Reviewer platform we have been approached by a number of clients to develop something similar for payments and e-money. We are currently conducting a market testing exercise to gauge wider interest for such a product and also the types of content which it would be useful to cover. If you are interested in participating in this exercise, being a beta tester for the platform and accessing preferential subscription rates please get in touch.

FCA focusing on the impact of Big Tech on the financial services industry

The FCA has begun examining the increasing role of Big Tech in the financial services industry because of the way that these companies have, in the words of the FCA, “demonstrated their potential to disrupt established markets, drive innovation and reduce costs for consumers” alongside concern that their entry into markets may lead to longer-term competition issues. The FCA hosted a webinar discussion on the topic on 28 November which you can listen to here.

The FCA has also released a Discussion Paper (DP22/5) that aims to stimulate discussion on the impact of Big Tech’s involvement in financial services, including payments. The sectors in the paper were chosen because of their importance to consumers’ financial lives and the potential competition impact Big Tech firms' entry and expansion could have on them. Following feedback, the FCA plans to publish a Feedback Statement in the first half of 2023, setting out its response and how they will develop their regulatory approach.

Generally, the FCA identify five key themes emerging:

1. Potential for Big Tech firms to enhance the overall value of ecosystems through innovative propositions, for example, Google Pay and Apple Pay.

2. In the short term, a partnership-based model is likely to continue to be the dominant entry strategy for Big Tech firms. In the longer term Big Tech may compete more directly with existing firms, bring more activities in-house or expand their services through M&A.

3. Once momentum builds, the FCA expects to see significant market changes occurring quickly as Big Tech’s ‘ecosystem business models’ mean that entry into one financial services market will create opportunities for expansion into complementary areas.

4. The FCA sees short-term benefits to consumers as a result of innovation, improved quality, and reduced prices of financial products and services through increased competition.

5. In the longer term, there is a risk that the competition benefits could be eroded if these firms can create and exploit entrenched market power to harm healthy competition and worsen consumer outcomes.

Specifically on payments, the FCA notes that the sector has been the natural starting point for Big Tech firms entering financial services in many jurisdictions to date, including the UK. The most plausible entry strategies in the short-term are suggested as:

• Moving beyond their existing offering (such as digital wallets) to provide more services across the card schemes and capture more of the value chain (such as Apple’s ‘Tap to Pay’ in the US).
• Facilitating the adoption of non-card payment systems to compete with the card schemes directly (specifically proposing that crypto assets or digital currencies may be used as a widespread means of payment).
• Widening the scope beyond retail payment products and offering services such as peer to peer transfers.

We expect this to be a key focus of the FCA and regulators across the EU in the coming months (as we alluded to in last month’s edition with the European Digital Markets Act), so if you have any questions or concerns about the points raised please do not hesitate to get in touch.

FCA hosts payments and banking focused Consumer Duty webinar

In the session the FCA provided a broad overview of the Consumer Duty as it specifically impacts the banking and payments sectors – a recording can be found here. Some of the key takeaways for the industry were that:

• Boards need to be “as interested in outcomes as they are on profit and loss”. This was a key point of the webinar and the FCA noted that it would be backed up “by supervision and enforcement as is needed”.
• Implementation plans should look to show deliverability (i.e. is the firm confident that they can meet the deadline) and substance (i.e. has the firm engaged with the ‘step change’ that will be required in implementing the Duty).
• On support for consumers, the FCA are concerned about inadequate resourcing, poorly designed or prematurely launched digital channels, and any ‘excessive reliance’ on chat bots (particularly if these are inadequate for most customer needs or do not pass consumers on to actual human beings). The point was made multiple times that consumers can be ‘digitally savvy’, but still encounter personal difficulties in accessing digital platforms and so ‘online only’ is unlikely to always be appropriate.
• On the treatment of business customers by firms, price and value is of particular importance. FCA research on business current accounts has shown that complex terms and opaque fees can lead to SME’s being unclear on what they are paying and if they should switch.
• The FCA will be writing to the industry on their review of implementation plans and sending a Dear CEO letter to certain payments firms.
• On financial crime the FCA is aware of consumer accounts being frozen for extended periods of time and a mismatch between the speed of onboarding and the speed of investigating frozen accounts. Specifically on APP fraud, the FCA is working with the PSR on its recent consultation (covered in last month’s edition) and that these new rules on compensation will sit alongside the Duty. Note we have had a number of conversations with firms on the PSR’s consultation since our October edition and would be happy to discuss this with you.

The ‘single biggest things that firms can do right now’ were noted as:

• Consider what good outcomes, foreseeable harm and data actually look like for the firm’s customers.
• Use the live discussions on cost of living and other industry transformations to proactively address the Duty.
• Understand that it is never too late to start implementing the Duty if the firm is behind the FCA’s timetable.

More information can be found on our Consumer Duty hub. If you would like our support with the implementation of Consumer Duty, please do reach out or complete the form on our website.

PSR speech on A2A for Open Banking Expo

The speech focused on the key areas required to develop account-to-account payments (A2A) as part of the next phase of Open Banking. The PSR sees A2A developing further to become a “realistic alternative for a wide range of payments”, but is cognisant that, at present, A2A is less suitable for retail transactions than many other payment methods.

Unlocking the potential of A2A was noted as an opportunity to “build something that doesn’t inherit the assumptions of the past” and which may provide a “sustainable alternative” to other forms of payment. In working towards this, the Open Banking JROC have asked the SWG to consider a number of points on the use of A2A in retail transactions and are focused around A2A’s:

• Functional capability, which is key in addressing the practical concerns that retail transactions raise in the development of A2A. The SWG have been asked to explore the additional functionality that A2A would need to fulfil expectations for transactions covering e-commerce, subscription payments, and physical point-of-sale transactions.
• Effective dispute process, as the retail context introduces factors which add risk (such as the quality of goods and services sold, the delivery timeframe for those goods and services, and counterparty risk related to the retailer). Here the SWG has been asked to explore a number of scenarios to see if improvements could be made to minimise risk and resolve disputes effectively.
• Access and reliability, where the SWG has been asked to assess what additional developments are needed to better suit the needs of consumers and retailers. The PSR expects that A2A’s further development will initially be based on existing Open Banking and payment infrastructures, particularly Faster Payments, and its successor.
• Competitive pricing, where replicating the current card interchange fee for A2A payments “may not deliver better outcomes, for either the retailer or the consumer”. Mr Hemsley noted that there could be the need for regulatory intervention to support good outcomes in this space, such as setting specific charges or using their regulatory powers (but he confirmed that a consultation would take place before any such action).

A2A is obviously a developing area and Mr Hemsley’s speech acts as a useful companion piece to the PSRs wider series of ‘Thought Pieces’ (which we have covered in previous editions).

Next steps in PSR market reviews into card fees

The PSR has outlined the next stages of its two market reviews into card fees – one on scheme and processing fees, and one on cross-border interchange fees. Having finalised its plans to improve card services and choice for businesses, the regulator is now going further by looking in detail at the levels, structure and types of scheme and processing fees.

• For scheme and processing fees the focus will be on seeking further detailed information and insights, including from businesses. The PSR expects to publish an interim report in Q4 of 2023 and a final report (which would include any proposed remedies) in Q2 of 2024.
• For cross-border interchange fees, the PSR is looking to understand the reason for certain post-Brexit fee increases as well as engage with businesses to better understand how the increases are impacting them. The PSR expects to publish a report setting out its interim conclusions by Q3 2023 and its final report in Q4 in 2023.

The PSR has confirmed that if during its investigations it finds evidence of harm to users or negative impacts on competition or innovation, it will “act swiftly” to take steps to remedy this.

If you had any questions about the PSR’s work in this area, please do not hesitate to reach out.

EU Commission proposes to accelerate the rollout of instant payments in euro

Moving briefly over to Europe, where the EU Commission has adopted proposals to make instant payment in euro available to all citizens and businesses holding a bank account in EEA countries. The proposals amend the 2012 Regulation on the Single Euro Payments Regulation (SEPA) with the aim of making instant payments universally available and affordable. Currently, two thirds of EU payments service providers offer euro instant payments and only 11% of transfers are made this way.

Beyond the practical effects on consumers, the proposals would also harmonise sanctions screening for all instant payment providers. The Commission’s intension is to increase trust in euro payments and make sanctions screening more efficient – at present they say that a huge, 99.8% of cross-border euro instant payments are wrongly rejected because of inefficient sanctions screening. The proposals would, therefore, introduce (1) an obligation on providers to verify the match between the bank account number (IBAN) and the name of the beneficiary provided by the payer and (2) a procedure whereby payment service providers will verify at least daily their clients against EU sanctions lists, instead of screening all transactions one by one.

Certain jurisdiction are already ahead of the rest of the EU, with almost all main payments processed as instant payments. Our Dutch colleagues (kindly contributing below) note that Dutch banks are already fully reachable for instant payments, to and from all other banks in Europe that support them

A Q&A can be found here and you can read our Luxembourg colleague’s article on the topic here. Please do get in contact with any of our European colleagues if you had specific concerns on scope or implementation timetables.

EU Insights – the Netherlands

There have also been plenty of payments updates this month from our Dutch colleagues, who you reach out to with any further questions here.

• BNPL – On 22 November 2022, the Dutch Authority for the Financial Markets (AFM) published a report (only available in Dutch) on BNPL agreements. Among others, the AFM discussed the risks related to such BNPL agreements and states that it welcomes the proposed amendments to the CCD that may bring BNPL arrangements within regulatory scope.

• Banking Reference Portal – On 16 November 2022, the Dutch Ministry of Finance launched a public consultation (only available in Dutch) on amendments to the decree regarding the Banking Reference Portal (Besluit verwijzingsportaal bankgegevens). The consultation period ends on 28 December 2022.

  Banks and other payment service providers (including EMIs and PSPs) offering accounts with a Dutch IBAN, and banks providing safe custody services in the Netherlands are required to register with this Portal.

  The draft decree introduces the following:

  • access to balance and transaction data – Investigation services will be enabled to use the Portal to request balance and transaction data, instead of having to request this data manually (which is currently the case). This will only be enabled for requests submitted to banks that have at least 2.5 million account holders. The decree further fleshes out the concepts of balance and transaction data, and expands the lists of authorities that are permitted to access this data.

  • an expansion of the set of identifying data that can be requested via the Portal.

  • the use of the Portal for obtaining data on missing persons that evaded the enforcement / execution of mandatory care.

  • the possibility for the Dutch Tax Authorities to use the data available in the Portal to determine its collection strategy, if claiming payments is still an available option.

  • expansion of the Dutch Central Bank’s supervisory tasks.

• DORA – As you may be aware, the EU Council has adopted the DORA aiming to harmonise key digital operational requirements. DORA will apply to a broad range of firms (including PSPs, EMIs and V/CASPs) and so please do get in touch if you had any questions.

Update on the FSMB: Bill passes committee stage

There have been plenty of updates as the Financial Services and Markets Bill (FSMB) progresses through the committee and report stages, including on:

• Intervention powers. HM Treasury have confirmed that the government no longer intends to proceed with a proposal to provide HM Treasury with a public interest intervention power in respect of financial services regulators. The government says they are of the view that the existing provisions in the FSMB are currently sufficient, but that they will keep the matter under review and return to the issue if it emerges that the regulatory framework is not able to fully support the government's vision for the UK's financial services sector.
• Stablecoin consultation. The Bank of England have confirmed in a speech on DeFi that it intends to consult in early 2023 on the regulatory framework that will apply to stablecoin wallets and payments systems that accompany them under the FSMB. The consultation will cover how the coin-holders' claims on the stablecoin issuer and wallets should be structured to deliver redemption in line with commercial bank money and the requirements for corporate structure, governance, accountability and transparency necessary to meet existing standards in other parts of the financial system.
• Cryptoassets. Finally, recent additions to the FSMB mean that cryptoassets have moved towards being included within the regulatory perimeter. Details and further updates can of course be found in Crypto View.

News Flash

• The FSB have published their final report on Developing the Implementation Approach for the Cross-Border Payments Targets which provides an update on the FSB’s development of this framework, initially set out in an interim report, published in July 2022.
• The Open Banking Expo took place late last month with an overview of the highlights (on Open Banking’ progress, SME finance, VRPs, and the cost of living) being available here). Also on Open Banking, Charlotte Crosswell OBE (Chair and Trustee of the OBIE) has confirmed that she will step down from her role in January next year with a recruitment process for her replacement intended to start soon.
• The IMF have published a working paper on instant payments, providing technical analysis on the role played by regulators in promoting instant payments and identify instances of significant payment instrument substitution across 12 advanced and emerging market economies.
• The deadline to submit feedback on CP22/4 (which proposes huge changes in addressing APP fraud) was 25 November – our overview of these changes can be found here.
• The PSR hosted a roundtable discussion earlier this month on its ongoing review of its penalty policies, covering senior management awareness, the use of revenue to determine any penalty and the scope of ‘deliberate and reckless’ compliance failures.
• The Wolfsberg Group published an updated version of its financial crime principles for correspondent banking. The updated principles provide banks and other entities who have correspondent relationships with guidance and best practices.
• The FCA is looking for panel members to join its new Innovation Advisory Group to deepen its “engagement with the industry and inform the FCA’s forward-looking work programme”. Applicants should email a CV and brief cover letter to the Innovation Advisory Group mailbox no later than 1 December 2022.
• The FCA have published a summary of key findings from their Financial Lives Survey 2022 providing insights on vulnerability and financial resilience relevant to the rising cost of living. The full results will be published in early 2023.
• Twitter has registered with the US Treasury as a payments processor, according to filings reported on by the FT, with Elon Musk setting out a long-term vision to bring payments to Twitter as part of transforming the social network into a WeChat-style “everything app”.