Payments innovation is stifled by a lack of regulation, writes Coadec's Charlie Mercer.
This week London gets to show off a jewel in its innovation crown: its fintech sector. There are 24 active fintech unicorns residing in the UK stables and last year investment in the sector surpassed $37bn. London is a hotbed of fintech innovation.
In one critical area of financial services, however, cut through of the UK’s innovative fintechs has so far been limited: payments. To state the obvious, payments are central to the functioning of our economy, and how much it costs to pay is increasingly important as recent events have conspired to increase prices at a rampant pace.
Since October last year, the average price of a sliced loaf of bread has risen by over 8.5 per cent, the price of a 500g tub of margarine has increased by over 18 per cent and the price of petrol, the protagonist product in today’s omni-crisis, is up by nearly 34 per cent.
While prices are changing, the method of payment is too: over the last 10 years, the volume of cash payments has fallen by 75 per cent, while the volume of debit card payments has increased by over 200 per cent in the same time period. Over half of all payments made today are on debit or credit cards.
This context is important because, behind the scenes, another price has also risen: the “interchange fee”. Interchange fees are paid by businesses to the issuer of a payment card when the card is used.
For online payments made by UK cardholders to EU businesses, this fee has increased by 475 per cent for debit cards and 400 per cent for credit cards over the last six months.
Why? It’s not due to increasing costs: In December 2021, PSR chief Chris Hemsley wrote to the Treasury Select Committee suggesting there was no additional cost borne by issuers post Brexit.
Instead, at Coadec we’re inclined to agree with Kevin Hollinrake, the chair of the all-party parliamentary group on Fair Business Banking: this “smacks of opportunism”, made possible by Brexit changing the UK’s legal status relative to the EU, enabling caps on fees to rise, combined with something not quite being right with the UK payments market.
This is just the latest in a string of fee rises since 2014. Despite regulations introduced in 2015 to cap interchange fees, the cost of accepting payments in the UK is now 13 per cent higher per transaction than in 2015.
The PSR’s Card Acquiring Market Review, which concluded earlier this year, was its latest intervention in response to the trend.
Recommendations included POS interoperability and measures to encourage acquirer switching, but these solutions barely scratched the surface. More promisingly, over the summer the PSR will conduct two new reviews into card payment fees, covering both cross-border interchange and broader scheme fees.
These reviews will enable a more in-depth analysis of the issues at play. Critically, ensuring the payments market is functioning competitively is a priority for the PSR, and they see promoting interbank payments, and specifically payments through open banking, as a key way to do this. Unlike debit cards, open banking payments carry much lower fees, and offer comparable security and ease of use.
Open banking payments have certainly started to climb, with successful API calls up 200 per cent year on year to April 2022, now at over 150k a day. But this pales in comparison to the over 54m debit card payments per day in February 2022.
Meanwhile, the future of open banking payments remains uncertain until the new governance framework is agreed at the end of the year. What is not in doubt is that in order for open banking payments to truly take flight, the payments market must be working effectively, and that is why the PSR’s summer reviews are so welcome.
In tandem with this review, and while the work on open banking’s future governance also progresses, it’s also important to shore up open banking in the short term. With the first deadline for variable recurring payments approaching at the end of July, understanding how VRP will progress to other financial products, and beyond to payments, would be a good next step.
As the dust settles on a tumultuous week in politics, the cost of living crisis continues to mean every penny counts, and unless payments innovation is truly supported, and soon, we’ll all pay the price.