Future of Payments Review released by HM Treasury

December 1, 2023

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As part of yesterday’s 2023 Autumn Statement, the Future of Payments Review was published. Commissioned by HM Treasury and led by Joe Garner, the review provides a number of recommendations on the next steps for the UK to successfully deliver a world leading retail payments ecosystem.

In making these recommendations, the Review was asked to answer three specific questions:

What are the most important consumer retail payment journeys both today and in the next 5 years? For example, paying a friend, paying a bill, paying businesses for goods and services, in the UK or internationally etc.
For these journeys today, how does the UK consumer experience for individuals and businesses compare to other leading countries? This is to be assessed for the quality of experience and security as well as cost.
Looking at the in-flight plans and initiatives across the payments landscape, how likely are they to deliver world leading payment journeys for UK consumers?

The UK Payments industry is often regarded as world-class, with a mature, stable and resilient infrastructure underpinning a relatively advanced digital customer experience. The UK has the 5^th highest proportion of adults who have a bank account, 95% of adults have a debit card (compared with 51% of the global average) and we are the biggest market of penetration for Apple Pay globally. However, the industry is evolving at a rapid pace. 86% of payments were digital in 2022, compared with 44% in 2012. Payments fraud is increasing rapidly, now representing 41% of crime in the UK. And Amazon (not a bank) reports one of the lowest fraud rates in the industry. This digital transformation, alongside some structural challenges, market complexity and new technologies mean that we need to act now to capitalise on the economic growth potential of payments and ensure that the UK does not fall behind^.1

Key Themes from the Future of Payments Review

The primary recommendation is that the Government develops a National Payments Vision and Strategy. The Review team concluded that the current payments landscape in the UK is congested with multiple major in-flight industry initiatives and a multi-regulator environment, without a clear and agreed outcome or desired future state in the long term. The vision and strategy should dictate high level guidance on relative priorities, so regulators and the industry can become more aligned in their delivery, with an overall simplification of the current landscape.

The criticality of payments to consumers and the British economy, the billions of pounds already invested across the industry to enhance UK payments infrastructure, and the highly interdependent nature of the payments ecosystem all justify a coherent and holistic view. Such a unified strategy will ultimately drive efficiency, enable a quicker route to modernisation, drive revenue growth for participants and will continue to promote the UK as one of the leading markets for payments innovation and investment in the world.

Open Banking, fraud, digital customer experiences and alignment of regulatory change initiatives all featured prominently as key areas of focus to enable the future of payments:

Open Banking

Open Banking is considered a top priority, offering both the potential to improve the P2P experience and representing an alternative to card payments in the UK. The UK has the opportunity to build on the great foundation established by the CMA Order and Open Banking Implementation Entity to mobilise the ecosystem, with urgent focus now needed to solve the outstanding challenges that pose a barrier to scale. The current economic model is not sustainable, with open access ensuring no incentive for firms to drive, invest and support it, and no margin that could be allocated to funding consumer protection. A dispute resolution mechanism, as the minimum requirement for consumer protection in open banking, and seamless user interface that integrates ubiquitously into consumer mobile apps are two additional areas where development is required. Conclusions 4-7 from the review prioritise the activities required to make open banking a reality.

Fraud

The Review acknowledges the rising incidence of payments fraud, promoting a greater focus on prevention, rather than recourse. In an attempt to prevent fraud at the source, it calls for a wider coalition of stakeholders to collaborate, bringing big tech, telecommunications firms, sending and receiving banks, TPPS and governments together to develop solutions. Reflecting much of the sentiment in the industry, it also raises concerns about the potential adverse outcomes of new APP fraud rules – the possibility of firms increasing payments friction, first party fraud, restriction of fintech investment, potential financial exclusion and potential abuse of the rules in an open banking ecosystem that doesn’t have alternative consumer protection frameworks. Specific next steps are outlined in conclusion 8.

Digital Customer Experiences

UK consumers already experience one of the best journeys in the world when it comes to digital payments. The convenience, availability, universal acceptance, protection and product innovations that consumers experience for in-store and e-commerce payments with their debit card, credit card or digital wallet is second to none. Incremental changes to the regulations around secure customer authentication will further enhance these experiences for consumers. Nonetheless, without a ubiquitous account to account mobile app the UK is at risk of falling behind in the domain of person to person payments. The role of open banking and Big Tech platforms in this domain will continue to grow – they will increasingly deliver smooth customer experiences that in some situations may disintermediate consumers’ relationship with their bank. This shift influence in the customer journey from traditional financial institutions to merchants, fintechs and technology platforms presents significant opportunity for innovation, but must be balanced with consideration of resilience, performance and regulatory accountability. Conclusions 1-3 outline the areas of change required to maintain and enhance consumer purchasing journeys in the UK.

Alignment of Regulation and Central Initiatives

There are multiple payments industry initiatives currently underway – the New Payments Architecture, Open Banking, RTGS Renewal, Regulated Liabilities Network and the Digital Pound to name just a few. Each of these programmes are driving innovation and progress to UK payments, and, in isolation are logical investments. However, the high volume of competing priorities is causing change fatigue, stretched investment budgets and potentially contributes to operational risk. UK Finance estimate that the total cost to deliver the payments roadmap over the next 5 years is between £10-20bn, estimating that firms allocate 91% of their change budgets to regulatory projects. KPMG’s Payments Modernisation 2023 report reiterates this – having interviewed more than 50 UK financial institutions this year, 84% already have a payments modernisation programme underway, consuming significant time and resources. More than two thirds of respondents say these programmes are driven by both changing customer expectations and regulatory requirements. There is a need to clearly articulate the desired outcomes of each initiative, and better understand the dependencies and joint opportunities between initiatives.

The UK benefits from a strong regulatory framework, but efficiency and innovation in payments could be improved with greater alignment and coordination between regulators themselves. The weight and complexity of the current regulatory landscape can be a hindrance to growth and can be difficult to navigate – particularly for smaller fintechs. A more agile, engaged way of working between the different regulators (and between regulators and industry) would support an aligned, national vision. Here, the ecosystem would benefit from the different parties leveraging their respective strengths – regulators focusing on competition and stability, while industry participants can bring expertise in technology, product and commercialisation to jointly solve the pressing challenges in the market. This alignment is the core driver of a National Payments Vision & Strategy, with particulars outlined in conclusions 9-10.

The Review did not detail specifics around implementation, timelines or scope, but did provide some guiding principles. The focus of the strategy should be the industry topics where ambiguity or complexity poses a challenge today:

The importance of resilience and safety relative to customer convenience
The degree to which there should be competition ‘for’ the market at the infrastructure level relative to competition ‘in’ the market for the consumer experience
The degree to which our national payments infrastructure should be open internationally, relative to domestic alternatives
The roles of respective regulators and industry bodies
The allocation of responsibilities for tackling fraud and financial crime, including high level principles of liability
The resolution of questions of interoperability between initiatives
The role to take a position regarding digital ID for payments
Clear guiding principles for the National Payments Vision & Strategy should include safety, simplification, coordination of activities, responsiveness (to innovation), inclusivity (to build broad alignment on priorities) and accountability to drive progress.

10 recommendations to support a National Vision and Strategy for Payments

Underpinning the National Payments Vision & Strategy, Joe Garner and his team outlined a series of specific conclusions, taking into account how payments are likely to be made in the future, and the next steps required to set the UK industry up for success in realising this future opportunity:

Consumer Experience Conclusions
1	Consumer spending in person	The UK consumer experience of making payments is generally quick, easy, free and reliable. But there is scope for improvement and future proofing. HM Treasury should leverage the post-Brexit opportunity and the emergence of The Smarter Regulatory Framework to remove the PSD-based technical standards that restrict customer experience – specifically rules relating to Secure Customer Authentication. These should be replaced with outcomes-based guidance that afford flexibility of implementation and allow firms to innovate to achieve the regulatory outcome. Promoting the growth and scale of open banking will also contribute to enhancements in the in-person spending journey.
2	Consumer spending online	As above, replacement of prescriptive, PSD rules with outcomes-based guidance should be prioritised. Digital wallets are gaining such a significant share of payments volume globally, that the Review also calls for government consideration of having such dependence and openness to international players.
3	Addressing digital and financial exclusion	The correlation between digital inclusion and financial inclusion must be closely monitored going forward. Going further than the current Access to Cash regime, the Review calls for consideration of digitally excluded groups getting access to the best deals and most convenient payment methods. For example, the report cited instances of consumers paying £300 more for an energy bill when they pay on receipt of the invoice, rather than direct debit. Including digital exclusion within the FCA Financial Lives Survey, greater adoption of Request to Pay and industry innovation challenges that promote financially inclusive solutions were all suggested as potential options. The UK can also learn from other countries that are leveraging digital solutions to tackle financial exclusion, rather than the risk of digital solutions creating financial exclusion.
Open Banking Conclusions
4	Addressing the consumer protection gap	The Review calls for at least a basic level of purchase protections, a dispute mechanism and clarity on liability to be prioritised by HM Treasury, JROC and participants. The current consumer protection landscape is complex and fragmented across the Consumer Rights Act, Section 75, APP Fraud regime, Direct Debit guarantees, Payment Services Directive and Consumer Duty, albeit with an urgent gap relating to open banking payments.
5	Improving person to person payments	Open banking was deemed the best path forward to improve person to person payments in the UK, albeit a recommendation reliant on enhanced consumer protection, an engaging and digital user interface and a sustainable new commercial model. Lessons learned from the failed deployment of PayM in the UK, and successful implementation of P2P payment applications globally indicate some clear success criteria that the industry should consider – ubiquitous reach, commercial sustainability, embedding into the customer journey and use of an alias / proxy or national identifier to remove the need of populating lengthy sort code and account numbers. There are potential opportunities for the industry and Government to work more closely with Big Tech providers on this topic.
6	Providing payments choice to retailers and merchants	While the user experience, consumer protections and pace of innovation is thriving within the cards ecosystem, there is significant dissatisfaction amongst merchants across the UK at perceived high acceptance costs on card transactions. And while the merchant acceptance fees in the UK do not appear materially out of line with international comparisons, the UK stands out as the only country in Europe that doesn’t have a digital alternative to the card schemes. In order to ensure competition and greater merchant choice, the PSR must continue the review into interchange pricing and the government must accelerate work to solve the consumer protection, user interface and commercial model gaps that are currently hindering open banking adoption.
7	Making the commercial arrangements sustainable	Any shift from a compliance driven, to commercially driven open banking ecosystem will only be possible by introducing a sustainable commercial model. The Review calls on the JROC working groups to go further and faster in developing a new commercial model. Specifically, recommendations included the need to bring all open banking services under a commercial remit, suggesting the current dual pricing model (with open access for mandated APIs, and premium pricing for commercial APIs) could detrimentally impact end-users, with fee-paying merchants disincentivised from offering the most valuable propositions to their customers. Potential economic models raised suggest firms could either be allowed to recoup the cost of providing the infrastructure, fund a level of consumer protection, and / or make a small profit margin. The ability for firms to charge could be linked with minimising fraud rates or improved performance and should remain under the card cost threshold. Any changes to bank incentives must be balanced against fintech accessibility and innovation.
Regulatory Oversight and Alignment Conclusions
8	Tackling fraud and scams	Specific recommendations were tabled to review, and potentially enhance, the existing APP Scam rules. A formal cost / benefit analysis of the new requirements should be conducted after 12 months of implementation, focusing on any adverse consequences of the regime – for example, any additional friction firms are introducing to the customer journey, increases in first party fraud or shifting fraud to other ‘non-bank’ rails outside of the regime (eg crypto). The review calls for greater public/private partnership to tackle crime at its source.
9	Streamlining the environment for fintech opportunities	The scale-up of many digital payments firms has been one of the great UK fintech success stories. Continuing to prioritise the recommendations from the Kalifa Review and simplifying the regulatory burden on fintechs would create significant opportunities for continued growth and investment. Specifically, publication of a streamlined version of the Regulatory Initiative Grid (which highlights only those initiatives that are of critical importance to Fintechs) and clarity on the application of some existing regulations to fintechs (such as APP rules, AML checks, EMI interest payments and EMI central bank deposits) would help small firms to prioritise and operationalise.
10	Aligning and prioritising regulatory and industry initiatives	Whilst UK regulators are deemed highly effective compared to international counterparts, particularly with a dedicated Payments Systems Regulator, the landscape is congested with overlapping mandates and competing priorities. The national vision and strategy for payments will drive alignment, supported by specific actions to be taken in the short term: Leverage HMT Letters of Remit to provide a strategic steer of the government’s priorities, and encourage all regulators to reduce their requirements of the industry by an ambition of 10% in 2024 Ensure cross-board representation across the various regulatory bodies Enhance the Regulatory Memorandum of Understanding between the PSR, Bank of England and FCA Strengthen senior industry representation on relevant bodies

KPMG’s analysis of the Future of Payments Review

Highlighting six positive take aways from the Review

From our experience working with governments, central payment scheme operators and banks around the world, we concur with Joe Garner’s assessment of the common international success factors for a holistic, forward looking and stable payments ecosystem: A strong vision, industry collaboration, commercial sustainability and trust (which comes through brand, resilience and security). This Review sets out a sensible and comprehensive set of recommendations to set up our industry for successful innovation in payments, and ensure the UK remains at the forefront of customer experience, stability and investment around the world.

There are six specific areas to highlight as particularly positive outcomes from the Review:

Payments and open banking have been positioned centre stage in this Autumn Statement and the Government’s strategic direction for the country. The Review highlights the criticality of payments (as the ‘central nervous system’) for the progress of every aspect of the UK economy, GDP growth and attractiveness of the UK for international investment.
This Review focuses on the bigger picture and strategic opportunities for the industry, rather than the future direction of the individual in-flight initiatives or regulations. Such a comprehensive approach helps to look at the interdependencies across the different programmes and identify the macro-economic opportunities and threats affecting the industry.
Joe Garner and his team must be commended on the breadth of engagement undertaken in this Review, consulting more than 150 firms including large and small FIs, fintechs, big tech, telco, consumer groups, regulators, merchants and trade associations. The traditional, narrower remit of regulators to specifically consider payments infrastructure and financial institutions has caused some challenges keeping pace with the evolving payments landscape. This Review represents the first time that parts of the consumer experience value chain that are adjacent to payments – social media, big tech, telco, retail merchants – are brought into the conversation. There is more to be done, but this is a step in the right direction to bring a broad church of stakeholders into the net to drive forward the transformation required for long term success.
The Review articulates outcomes based, rather than overly prescriptive objectives. This is important to ensure the suitability and sustainability of the recommendations over the long terms. It also provides the flexibility to cater for the nuances that individual firms, stakeholders and regulators of different sizes and objectives will have in absorbing and implementing the recommendations. Promotion of ‘outcomes’ is consistent throughout the report and is reflected in the recommendations around Secure Customer Authentication, APP fraud, engagement with Big Tech platforms and the overall implementation approach for the National Vision & Strategy.
Recommendations are grounded in the context of the UK market. Too often review papers defer too much to the lessons learned from other markets, without considering the practical application, different dynamics, regulations and geo-political context of the UK. The recommendations provided in this Review align with the broader strategic direction of the UK government, and leverage our existing strengths in terms of high card penetration and digital maturity. International comparisons to PIX in Brazil, the UPI in India or the Swish in Sweden are all helpful, but should remain guiding principles.
Whilst looking to the future, the Review doesn’t forget the fundamental building blocks that are required for successful functioning of the payments system. Topics like resilience, reliability, security and control are critical, and must not be underestimated. A greater focus on future strategic resilience and data protection are welcome additions to this list of foundational enablers.

Although there are always some areas where further work will be needed

Digital ID was not within the scope of this paper. However, it must be highlighted that Digital ID capabilities could be the enabler for many of the recommendations raised in the Review. With 31% of respondents raising the topic, and cited examples of successful implementations in other markets, we support the call from Joe Garner and his team for Government direction on this topic.
For many firms, embedded payments and open finance represent the opportunity to commercialise their investment in open banking technology, and develop innovative customer solutions beyond banking. Some use cases were cited, however the value of embedded payments comes from the underlying data architecture, leveraging other industries beyond banking and dependent on the delivery of the Digital Information & Data Protection Bill. Whilst any Open Finance / Data initiatives would have to follow the open banking priorities outlined in the Review, it is important that the work done to enhance Open Banking does not restrict future innovation, and provides the foundation for a thriving ‘open everything’ economy
Some stakeholders across the industry would have been expecting this Review to go further in terms of prescriptive regulatory changes, ecosystem ways of working, or prioritising the various industry initiatives underway.

What does this mean for the industry? And what comes next?

There will inevitably be a collective pause in the immediate term, as the industry digests the implications and direction of this Review. Delivery of the Review is an important milestone, however the Government now has significant decisions to make, and a vast body of work to develop a tangible plan for implementation. There remains no formal regulatory impetus for firms to take proactive action in progressing these recommendations, and the onus will fall to the government, regulators and the industry to collective work together to drive action.

Yet it does provide strategic direction and a view on the aligned priorities for the industry. To make the most of this opportunity, firms should also be looking to streamline and align their payments business. All firms will have multiple regulatory or industry transformations underway, with a significant investment and resource burden internally. There is an opportunity to mirror this national alignment, and join up outcomes across data, pricing, product, resource etc under an aligned change programme. Rationalising cost could better balance compliance activities with strategic change, enabling some repurposing of investment to value-adding initiatives.

This Review has the potential to revolutionise the UK Payments ecosystem and set the industry on course for a world-class future. The publication of this Review provides the first step towards clarity on the industry direction and provides an opportunity for you to reset your strategy. This represents a strategic imperative for you as you look to grow your payments volume, develop new products and streamline your regulatory change programmes.

KPMG can support you with your response, not only to manage the practical implementations required from this Review, but to deliver on its potential to promote payments as a primary growth enabler in your business. Get in touch to understand more.

^1.All statistics and figures have been taken from the Future of Payments Review published on 22 November 2023.