Engagement between industry and regulators is key to navigating the ever-shifting world of finance. In Stephen Wright’s view, this engagement needs to be stepped up.
The Head of Regulation and Standards at NatWest’s Bank of APIs shares his opinions on developments within regulation, fintech and payments, and the convergence between these fields.
Synchronisation needed for payments’ growth
The UK’s regulatory network is anything but limited. Finance alone is overseen by a plethora of regulatory organisations – with the Financial Conduct Authority (FCA), the Payments Systems Regulator (PSR), the Prudential Regulatory Authority (PRA) and the Bank of England (BofE) all playing their part.
These regulators all focus on varying areas. For example, the BofE has been exploring the benefits of a digital pound of late, the PSR is ushering in new rules around fraud reimbursement, and the FCA is interested in innovation and technology. Payments firms find themselves operating in a diverging regulatory landscape.
“There needs to be synchronisation between regulators,” Wright remarks. “If I take an example, if you’ve got the PSR talking about New Payments Architecture, and the BofE talking about the digital pound, and they’re both talking about the same 10-15 year horizon, how does one fit with the other?
“They both provide immediate payments and are two different solutions, but the industry can’t afford to do both in the same time period. They’re going to have to come together and it might be that the New Payments Architecture is going to lay the underlying rails for the digital pound.
“You’re going to see more coordination and given the sheer amount of change people are asking for, it needs to be sequenced and prioritised.”
Taking a look over some of the biggest talking points in UK payments over the past year or so, there is one standout topic. Open Banking has dominated discussions at various levels, as seen on the floors and conference rooms of the Pay360 conference where Payment Expert met with Wright.
Perhaps the most significant example of regulatory attention Open Banking has received is the Future of Payments Review. Joe Garner’s review of Britain’s payments infrastructure highlighted filling gaps in Open Banking regulation as critical, particularly in areas such as consumer protection.
This is a sentiment Wright agrees with wholeheartedly. He continues: “Ultimately, if you want account-to-account payments to be a compelling competitor to cards, then you need to have a compelling customer experience and value proposition. You need to have something around consumer protection.
“With contactless you understand how it works and that engages trust. You’ve got to solve use cases. At the moment with Open Banking, three quarters of payments are for paying the tax bill, paying the credit card bill, and topping up the secondary current account. Those are fairly simplistic low risk use cases.
“When you start getting into e-commerce payments, subscription payments, and eventually point-of-sale – which is 10 years away – you need a more sustainable economic model so that all parts of the value chain invest.
“Ultimately, you need to create a scheme around this, because that’s the only way you can achieve those outcomes.”
Smart Data essential for UK leadership
Both the UK’s political leadership and payments industry have prioritised securing and maintaining the country’s leadership position in Open Banking. In Wright’s view, deep standardisation has contributed heavily to the UK’s standing.
He also cites how enabling fintechs to connect to banks using conformant and performant APIs led to “far higher adoption”, compared to the more fragmented approach in Europe. Other countries are making their own inroads, however.
Wright adds: “We also had more fintechs thinking about how to use this data compared to Australia, but in other parts of the world they are potentially going to overtake. If you look at Europe, they are pushing through Open Finance and digital markets legislation. They’ve learned from fragmentation and are going for more standardisation.
“In Australia, they introduced the principles of data symmetry. If you consume data you have to provide data. That changes the dynamics. UPI in India and Pix in Brazil, these have been very much regulatory driven. In India account opening and tax were prime drivers for the government.”
Australia and India are often cited as the UK’s biggest Open Banking competitors – in a speech at Pay360, John Penrose MP specifically cited these two nations. Building on this, Wright also points to the US as a country making strong progress.
The country’s Open Finance network, the Financial Data Exchange (FDX), has over 265 members, ranging from banks to Big Tech firms like Apple. Wright acknowledges that the US is taking a lead in standardisation.
To keep its leadership position, the UK should focus on its data economy and the benefits of regulatory standardisation for small businesses and customers. The government’s Data Protection and Digital Information (DPDI) Bill will be critical to this, he argues.
“Moving to Smart Data is a prerequisite and needs to keep going. If we want to be successful in this market, we need to solve interoperability of data standards. They need to be interoperable with energy, with finance, etc. This is how consumers benefit because if you have fragmentation it is harder to use the data.”
Looking back at the topic of regulatory synchronisation, Bank of APIs’ regulatory lead expects the Joint Regulatory Oversight Committee (JROC) to have a positive impact on collaboration. After all, the Committee was established to foster greater regulatory cooperation on Open Banking.
On the other hand, Open Banking is still a relatively new and an emerging area of fintech and payments. By extension, JROC is also a relatively new entity, having been established in April last year.
Wright notes regulatory collaboration is still a new task for JROC, and all the individual regulators still have their own governance to consider. Joint regulatory governance and industry coordination will be essential for the UK’s authorities to drive financial innovation forward.
“How can you ensure there is coordination across these stakeholders – users, retailers, wallet providers?” Wright continues.
“It needs to be stepped up. If you get the regulatory coordination, things tend to happen faster. If you look at change in payments, most of it is regulatory or industry standards driven.”
The most recent legislative changes on payments occurred in 2017, these being the Payments Services Regulations and Open Banking CMA Order. With legislative changes rarely occurring, regulatory resolutions, even if just small tweaks, instead have the biggest impact.
This can include consultations by HM Treasury or the FCA, for example. Another case would be the introduction of new standards, like ISO20022. Aside from these tweaks, regulatory discussion, rather than legislative evolution, has been more influential in how the UK payments framework has developed, Wright says.
“We’re making a distinction between things mandated in legislation and desired by regulators,” he continues. “The legislation hasn’t changed, but the noises around what the regulators mandate on the back of the legislation have seen changes in priorities.
“Look at the Future of Payments Review, one of the highlights was the volume of regulatory change, that it hadn’t been prioritised and sequenced, but that is driven by regulators and not parliamentary legislation.”
Prioritising the customer
Since it is regulation and not legislation which drives change in payments, finance and banking firms must ensure communication with regulators is strictly maintained. Keeping up engagement with the industry is also viewed as pivotal.
This ensures that stakeholders are aware of developments and what is shaping debate, Wright explains. Firms need to be wary of future developments and make educated guesses based upon regulatory and industry engagement with respect to future investment plans.
“There’s so much talk that it is fairly easy to understand what’s likely to happen and what has challenges,” he says. “There are some things you can be certain on, some that are 50/50, and some that are unlikely. You need to be engaged with the industry and regulators.”
Regardless of the potential for regulatory and legislative change, there is an overriding factor Wright believes should underpin how banking and financial services providers approach the market, and innovation.
“The key thing is to make customer needs a priority and focus on use cases, and that is what innovation is all about. Regulation can provide a framework but it can’t deliver innovation which a competitive market can with commercial incentives,” he asserts.
