Future of Payment Review – who will pay?

Future of Payment review published in 2023 on behalf of the UK Government, reflected the complexity of the current environment in the UK for instant payment. The review is clear that the UK needs to move to the next generation of instant payment with timely and accurate information. However, who will pay for that move?

The Future of Payment Review’s identified that the “UK Government would like instant payments to consumers free of fees”. If the consumer is to have instant payments free at the point of use, who then will pay for the costs of ensuring a modern, safe, secure faster payment system and infrastructure? The UK Government could look to India for an answer, in that India has secured major economic gains through such infrastructure where:

• Consumers and business saved $67-88bn in transaction fee related costs.

• 50 million merchants accept UPI payments vs. 8 million cards.

• There has been an increased tax compliance. 

As a result, instant payments can increase country’s GNP 1 to 2%. The UK GNP 2023 was £2.27 trillion and 1% growth earns £0.023 ($0.029) trillion.

Payment methods are changing rapidly.

Faster Payments arrived in 2008 to help the UK Government support moving money to SMEs quickly. In 2021, despite 3,000 companies signing the Code, poor payment practices remain rife. £23.4 billion of late invoices are owed to firms across Britain [1].

Since 2021 contactless debit card and Faster Payments replaced cash and cheques. Cash is making a recovery from 15% in 2021 to 19% in 2023 all payment transactions. Cheques continue to decline, now just 1% payments.

Bank Account Fees cover payment fees.

The basic consumer account, which is free, does result in no fees being charged for payments. To counter this Bank/PSPs have evolved a subscription model offering increasing value for fees £5 to £25 per month. 

Bank Account Type - Monthly Fee

Basic/Standard - £0 

Plus - £5 to £8

Premium - £8 to £18

Platinum - £18 to £25+

The issue for many new Bank/PSPs is the initial free Standard banking option attracted millions of customers. The goal now is to upgrade these customers to pay monthly subscriptions.

Role of payment information adds value in managing financials.

New Instant Payments Systems bring payments with rich information as standard. This creates opportunities for consumers and businesses to better manage their finances. The older systems often restrict On-Line Banking to 18 characters per field.  

As Walter Wriston, former Citibank Chair, stated:

“Information about money is almost as important as money itself.”

Revenue Generating Opportunities

Enhanced Bank Account Management.

Open Banking, led by the UK, is flourishing in UK and EU, bringing access to a consumers’ bank accounts. A third party, with the owners’ permission can recommend and give positive changes in the account balances instantly.  For example, of sweeping cash from bank account to bank account, each bank can charge a different interest rate for overdrafts. By making a simple switch of £500 from 38% account to a 18% account saves £8.33/month. 

UK consumers lose billions a year in missed savings opportunities. For example, moving £1,000 from 1% to 5%. Interest accounts earns an extra £3.34 per month. 

Savings rate on banking accounts

Higher Standard of Fraud Protection.

PSR introduction of verification of the payer and payee information are presented back to the consumers as either “good to go” or “please verify your payment instructions”. Should consumers “click the button to pay” without reverifying the payment, EU makes it clear if it is a scam the responsibility lies with the consumer.

PSR mandatory changes in October 2024 make bank/PSPs reimburse scams 100%. The money is divided evenly, 50/50 between the payer and payee. UK Finance 2023 reports financial an extra £160 million from the 20 payee banks and a further £152 million from 9 out 14 payor banks. 

By reducing APP fraud, the millions saved could be used to:

• Keeping the customers’ information current.

• Providing data roadmap through the legacy systems to meet real time decisions.

• Stopping Mule networks where scammed money flows through a number of bank accounts before going to another country.

As over 70% of scams originate from social media platforms, the owners of these platforms need incentives to address fraudulent activities. The EU fine of up to 10% worldwide revenue is working to correct non-compliant behaviour. Without any action, the response to a scammed customer is inevitability “speak to your bank”. 

Higher Quality of International Instant Payments at a Profit.

The move to international Payments is going ahead. Each country needs to verify the actual owner of the Bank Account. The IBAN (International Bank Account Number) only directs the payment to an account but does not define the account owner. The finances are: 

• An international payment can carry a transaction fee – often a minimum of £5.

• In changing currencies margins are 0.5 to 3% depending on currency stability.

• With Cryptocurrency, up to 5% of the amount is taken as a fee.

• Remittance fees average 7%: Instant international payments can be 30%+ cheaper. 

Summary  

Instant payments, data standards and Open Banking working to meet market needs:

• Countries would like instant/digital payments economic and tax gains. 

• Consumers and businesses use and like to send and receive instant payments.

• Payments over mobile phones are increasing and becoming the new norm.

The good news is the review has added HM Treasury to oversee the payment process and their activities are paid for by UK Government. Bank/PSPs contributions to the regulatory agencies’ expenses may not rise as much as before.

Social media companies should contribute towards instant payments next generation. This gives consumers and merchants more choice on the type of payment being used. Pay by Bank Account as an alternative to credit card encourages competition. Once the speed of making an instant payment meets the point of sale device of less than three seconds then Pay by Bank becomes a viable option. Consumers like and use instant payments increasing financial wellbeing.

Contribution could work for the cost involved of delivering the new Faster Payment system. All parties involved, including the UK Government, paying for this much needed transformation. Once complete, the UK’s Future of Payments would be profitable and world leading.

Thanks John

[1] https://www.gov.uk/gov.uk/government/news/government-tackles-late-payments-to-small-firms-to-project-jobs