Where will UK Payments be in the next 10 years?
The United Kingdom played a pioneering role in real-time payments with the introduction of the Faster Payment Scheme in 2008. However, since then, both as a nation and as a member of the G7, we appear to have deviated from our path when it comes to all matters related to payments. I am drawing my opinion based on the recently published Future of Payments Review, (Nov’23)1. For customers and businesses who are end-users of payment services in the UK, a clear ask is a need for an account-to-account payment infrastructure as an alternative to cards.
The Nation & Payments
Current data shows that the UK holds the 9th position globally for per capita account-to-account transfers, but projections suggest a slip to the 17th place by 2027. The value of payments (~£107tn) going through our National Payment infrastructure was ~44 times our GDP in 2022.
There is no doubt that initiatives such as UPI (Unified Payments Interface, the Indian Instant Payment System) have greatly contributed to the expansion of India's GDP after 2016. Firstly, by saving $67-80bn2 in card fees and infrastructure costs. Secondly, by providing a better user experience and faster cash transfers, particularly for small and medium-sized businesses. The government has created value and generated more tax revenue for the exchequer. However, it’s important to note that speed of payment flow alone doesn’t lead to an increased GDP per capita.
Given the UK’s current landscape with 1200 fintech companies attracting $40billion investment and growing at +40%, it's a valid question to ask why there isn't a digital alternative to traditional payment cards for merchants? To contribute to the growth of the UK economy as we transition to Industry 4.0, new ways of working and new industries will shape the future, and we will need a resilient and robust payment infrastructure to support this.
The Role of Banks in Payments
Banks are critical users and distributors of payment services. They are regulated organizations and are accountable for decision-making, because of their fiduciary responsibility. Therefore, people trust banks and trust is central to the success of a bank. Banks normally have a clear point of view on how to manage their card-based payments and non-card-based payments estate.
Banks encounter two distinct challenges when it comes to transforming or modernizing payment services. Firstly, there is a limited IT budget, as ~75% is allocated to fixed maintenance costs3 or allocated to regulatory payment compliance. Secondly, there is a lack of financial incentive to promote A2A/Open-Banking alternatives to cards. Today, banks’ income from issuing/managing cards is more compelling and more assured than the alternatives. Currently the top 3 priorities for UK Financial Services firms are Open Banking, the New Payments Architecture (under review by HM Treasury), and the Central Bank Digital Currency (CBDC). The review1 suggests that it will take at least 5 years and a total cost of between £10bn and £20bn to deliver this payments roadmap.
Banks will ask – what is the ROI on these three projects, that are still in their infancy? If payment infrastructure is crucial to the economy, shouldn’t HM Treasury and the Bank of England have a more direct oversight on how we build and support such infrastructure? With examples like FedNow/USA, UPI/India, and TIPS/Europe one can see that there is the political will to consider payment infrastructure as critical to the nation/state.
Yesterday’s GDP was running on bricks and mortar railway-tracks, the future flow of GDP will be on digital payment rails. Banks should focus on their core services rather than funding co-operative style shared services, with ambiguous future benefits. Retail and corporate customers’ expectations of payment services is to have them faster, cheaper, and more secure. The importance of a UK national payment infrastructure was confirmed by a recent listing on The National Risk Registry. Our infrastructure needs to be resilient, and the current set-up of our payment schemes make them vulnerable.
Navigating the Intersection of Fintech, Big tech, and Payments
There are blurred lines on where a fintech starts and ends in terms of relevance and scope. The trend of big tech companies entering the financial services space comes as no surprise, especially with the proliferation of payment wallet services like Apple Pay, Google Pay, and PayPal. These tech giants have a clear advantage due to their proximity to end-users, which only serves to further solidify their position in the market. Whoever is closest to the real wallet, has the quickest access to the digital wallet. It is presumed that technology companies will partner with banks, rather than deliver full-fledged banking services themselves. The Apple and Goldman Sachs alliance of 20194 for cards is a good example. We now understand Apple wants to wind this down and may go direct to the consumer5. To remain relevant, any market requires robust competition that provides consumers with choices. The fintech industry has great potential, but it is important to note that many of these companies may lack sufficient initial capital to make a significant impact, particularly in the context of costly capital. In contrast, big tech companies operate on a different scale. They have the resources to compete with established players. It is worth mentioning that Apple has already implemented A2A in the US, and it is only a matter of time before Europe gains access to it. Nevertheless, it is essential to address the question of how regulators can ensure that the rules of engagement are fair for all players.
Finally, to ensure the United Kingdom continues to thrive as a central hub for financial services, it is imperative to have a robust and modern payment infrastructure. This is a vision that requires strong commitment to innovation, and we must all collaborate to bring this vision to life. By working together and prioritizing this important issue, we can build a payment infrastructure that meets the needs of our citizens and businesses and serves as an example of our commitment to innovation. As the review1 quoted “If capital and liquidity are the heart and lungs of the financial ecosystem, payments are the central nervous system”
1 https://www.gov.uk/government/publications/future-of-payments-review-2023
2 https://www.weforum.org/agenda/2023/06/india-unified-payment-interface-impact/
3 https://a16z.com/every-company-will-be-a-fintech-company/
4 https://www.ft.com/content/efb5d4b3-5071-41ab-b12c-8e074b2d820d
Srideep Mitra
As a Finastra Payment lead, Srideep challenges leaders in financial institutions with horizon scanning of upcoming payment changes and helps them to improve operational resilience. He has spent the last +18 years in the enterprise software business enabling organizations to reduce risk and improve...
