The Balance of Payment Regulation: Risk vs Disruption
20 July 2016
Much has been written about the FinTech and challenger disruption currently taking place in the payments industry. Non-banking entrants combined with innovations in payment technology and interfaces are changing the way consumers make payments. But behind the scenes a more substantial disruption is taking place; that associated with regulation.
The changing face of payment regulation
Payments play a pivotal role across all industries and regulation in this area has historically been one of risk-based evolution in response to emerging challenges. But something interesting has been happening to payments regulation recently: a migration from traditional risk-based regulation to initiatives which openly encourage and support innovation and competition.
Of particular note is the Bank of England’s review of the Central Bank’s Real Time Gross Settlement System (RTGS) System, its open stance around Distributed Ledger Technology combined with its examination of the policy on access to central settlement accounts. In parallel, the creation of the Payment Systems Regulator (PSR) as an economic regulator (with its core objectives of examining competition, innovation and the needs of the user across the payments industry), is having a deep and far reaching influence on the UK’s payments landscape. For the first time, decisions are being made explicitly in favour of the consumer. This is further reinforced by the PSR’s Payments Strategy Forum which has examined, discussed and suggested solutions for 50 key ‘detriments’ that will remove complex and long standing challenges experienced by the industry. Looking to the EU, the need for Member States to implement the Second Payment Services Directive (PSD2) by January 2018 will introduce a core requirement of permitting Third Party Providers (TTPs) open access to payment accounts and data. This regulation gives innovators the opportunity to revolutionise the way we interact with our banks and manage our financial affairs.
Whatever happened to risk?
PSD2 addresses some existing and potential risks and brings the need for enhanced security controls over customer data access and increased regulation over those TPPs which wish to access it.
Fraud prevention also remains a key focus for regulators and the payments industry. The biggest online bank robbery in history, instigated via third party interfaces, reminded us of the importance of security and maintaining consumer and business confidence in payment systems. Anti-money laundering, sanction checking and other crime reduction measures remain a necessary and permanent part of the payments landscape. The need for ever-tighter controls to offset cyber security threats will continue to increase with time. A recent PwC payments survey highlighted that up to 60% of the operational staff in large clearing banks are involved in processes to combat financial crime - highlighting the huge cost existing companies incur to comply and stay safe. Innovators hope to help solve this problem.
What does this mean for the payments industry?
So, what does the changing balance between traditional and disruptive regulation mean for the payments industry? Existing players in the market with strong risk, control and security systems, flexible IT and perhaps most importantly, a trusted brand, will thrive in the new disrupted environment. Others will find themselves unable to exploit new opportunities and potentially lose out to new and existing competitors.
For new market entrants, clever ideas and products are not enough. Their technical approach to dealing with existing and emerging risk and regulation will be vital. Their systems must be robust enough to cope with regulatory demand, otherwise these challenger organisations will rapidly find that they are the ones being ‘challenged’ a few years down the line.