Preparing for the UK’s Future of Payments: Top predictions and priorities for banks

The U.K. Payments industry is facing a singular moment: the declining use of cash, the rise of Open Banking and API-based capabilities, new digital payment initiation methods, a growing impact of fraud, and Big Tech establishing themselves as Payment Service Providers. This is happening at a time when banks are experiencing change fatigue, with a vast number of Payments-related change initiatives in-flight, customer expectations increasing, all while operations remain under pressure to maintain risk controls and increase efficiency.

In July 2023, the Chancellor of the Exchequer announced the launch of an independent review into the Future of Payments, along with plans for new legislation to allow for reform and innovation within the UK Payments sector. The review’s broad objective “to ensure that the UK maintains a world-leading payments environment” originated with an admirable purpose and resulted in high-level findings and recommendations in three main areas: consumer experience, Open Banking, and regulatory oversight.

Here, our UK Payments Practice Lead, Jacob Rider, addresses these findings and discusses what banks must do to remain competitive and compliant throughout this period of change.

Consumer Experience

Optimising the consumer experience is a key focus for the UK Payments sector. Governing bodies and firms must consider how to improve the experience of in-person, online, and person-to-person payments to satisfy changing consumer needs.

The UK has a leading consumer experience for paying in-person and online, driven by high card adoption, contactless payments, and digital wallets. Although speed and familiarity are consistently the most important factors when deciding a payment method, consumer preferences are changing, with more demand for features like spending trackers, rewards, privacy, and the option to spread cost. These shifts mean customers are increasingly moving to digital payment methods over cash.

Customers are increasingly moving to digital payment methods over cash.

As technology and Big Tech companies continue enabling seamless and personalised payment experiences,Payments will become even more embedded and less visible in the future. This will have implications for security, resilience, consumer protection, regulation, and the wider economy. This is a shift we have also seen in our corporate banking clients, with a rise in friction-reducing projects such as Confirmation of Payee (CoP).

To enhance the consumer experience even further, we see the next big move being the development of an Open Banking alternative payment journey, which would give both consumers and retailers more choice and lower costs. However, it is important to note that for banks to truly be able to innovate their consumer payments experience, they need to be guided by outcome-based regulations rather than detailed (and limiting) requirements.

Open Banking

The UK is one of the market leaders in terms of Open Banking development, which offers many opportunities to innovate the Payments landscape. However, there are several issues to iron out before it can be leveraged to its full potential.

The main barriers to encouraging wider adoption of Open Banking in the UK include a lack of awareness, regulatory uncertainty, and the consumer protection gap; the latter referring to the lack of dispute resolution or third-party liability (both of which credit cards provide), which increases the potential consequences of fraud and makes Open Banking harder to trust.

Overcoming these barriers would position Open Banking as a favourable alternative to the current clunky person-person payments system. The lengthy process of entering account numbers and sort codes in the UK means initiating a payment takes 70-80 seconds, compared to countries such as Sweden and India where the process is more streamlined and takes only 10-20 seconds. The review’s recommendation is for the UK to leverage Open Banking to improve this process, notably through mobile numbers or QR codes rather than a third-party app (like the failed PayM system).

Open Banking offers a digital alternative to credit card schemes that would bring a range of potential benefits for consumers and merchants.

In addition, Open Banking offers a digital alternative to credit card schemes that would bring a range of potential benefits for consumers and merchants, such as lower costs and faster settlement. Aligning the new Consumer Duty with existing payment structures to create a sustainable and unified commercial model for Open Banking will foster innovation, boost consumer protection, increase scope for investment, and ultimately contribute to a competitive Payments ecosystem in the UK.

Regulatory Oversight

The UK currently has a dedicated Payment Systems Regulator (PSR) combined with a landscape congested with multiple standards, regulations, and priorities, so oversight and alignment on how to tackle fraud and scams is a top priority.

For many banks, the volume and weight of regulatory requirements mean that the need to comply can often hinder their efforts to innovate. Plus, competing with FinTech firms who have experienced increased investment funding and exponential growth in recent years makes this an even greater concern. However, despite the rising dominance of FinTech firms, the regulatory burden still falls far heavier on traditional banks, so this imbalance needs to be addressed.

The volume and weight of regulatory requirements mean that the need to comply can often hinder bank’s efforts to innovate.

For example, banks carry a responsibility to reimburse customers who have been victim of fraud, meaning they need to have strong KYC and AML processes in place. However, it is also recognised that the customer must carry some of the risk, especially when they have ignored red flags, which  has the knock-on effect of increased friction on the payments process. To tackle this, the recommendation is that the PSR carries out a formal review of the new fraud and scam regulations a year after full, international comparisons.

The key objective should be to align and prioritise regulatory initiatives with clear and agreed outcomes. This will allow greater oversight for firms, regulatory bodies, and the government and allow the industry to alleviate the regulatory burden while accelerating growth and entrepreneurship. To stay ahead of the curve, firms need to adopt a pragmatic but agile approach to ensure they can adapt and thrive in the face of uncertainty and change.

To stay ahead of the curve, firms need to adopt a pragmatic but agile approach.

Conclusion

The U.K. needs clearly defined, guiding principles and accountability to simplify and progress the well-developed but needlessly complicated payments landscape. As such, the review’s primary recommendation is that the government develops a long-term national payments strategy to bring clarity and coherence to the U.K. Payments landscape. When this vision and strategy are defined, it will likely result in further change affecting regulation, directives, standards, technology, and operational ways of working. This will require banks to allocate resources to delivering projects in an environment where, while Payments may be the underlying capability for revenue-generating products and services, Payments change return-on-investment and business case building is difficult as a singularity.

It is clear that the industry is trending towards instant, frictionless, transparent, and cost-effective payments – supported by regulation.

It is clear that the industry is trending towards instant, frictionless, transparent, and cost-effective payments – supported by regulation – and continued effort and investment is required to stay ahead of the curve.

How can Projective Group help?

Committing to delivering change is an investment in a bank’s future ability to remain competitive and compliant. From our experience, we know that the dividends of a well-executed Payments change implementation far outweigh the initial investment. Banks that incorporate the Future of Payments outcomes into their change portfolios today – with planning to avoid scope clash and effective resource allocation – will be prepared for the payments landscape of tomorrow.

Projective Group are the financial services focused consultancy with a dedicated Payments Practice that specialises in delivering long-term value through Payments change related initiatives. Our expertise in addressing new technology and transaction innovation helps our clients become proactive rather than reactive with regards to Open Banking and Instant Payments. We excel in regulation, innovation, market infrastructure, and core banking, making us a trusted partner for clients in the ever-changing Payments sector.

For more information on how we can help you deliver successful Payments change initiatives, you can get in touch with us here.

About Projective Group

Established in 2006, Projective Group is a leading Financial Services change specialist.

We are recognised within the industry as a complete solutions provider, partnering with clients in Financial Services to provide resolutions that are both holistic and pragmatic.  We have evolved to become a trusted partner for companies that want to thrive and prosper in an ever-changing Financial Services landscape.