All aboard the digital express
Ruth Wandhöfer explains the way UK payments are being reshaped by new technology, infrastructure changes and a huge rise in e-commerce
Payments are fundamental to financial services but have been taken for granted – until now. Now they are disrupting and reshaping banking. Sound far-fetched? Well, we’ve been experiencing a rollercoaster 12 months when it comes to payments. The pandemic brought an overnight change in the way payments are made. In the UK, many people were able to switch to online and contactless payments and banks lifted the per transaction amounts for “tap and go” to £45. But the Covid-19 crisis also exposed the divide between rich and poor. It made clear that more measures would be needed to support financial inclusion, especially as we have boarded a digitisation fast train.
On the fast track
Open banking in the UK and the second Payment Services Directive in the EU ushered in account-based payment opportunities for consumers. They can now move away from paying with credit and debit cards, which are expensive for merchants, to paying directly from their accounts. That makes the third-party payment providers, who facilitate direct payment, potentially important. We are in the middle of an e-commerce explosion, with almost everything being ordered online. If consumers can get lower prices by cutting out card intermediaries, that shift is obviously not far-fetched. We are seeing a rise in account information services, which help users to understand better where they pay, how much and for what. But account information won’t just be about saving money. It will also support financial education and help people move away from budgeting with physical cash.
“We are in the middle of an e-commerce explosion, with almost everything being ordered online“
A new destination
Big changes in payments are not just at the retail level. 2020 was when central bank digital currencies started to gain traction. That was also one year after the first announcement of the launch of Libra, Facebook’s plans for a digital currency, now called Diem.
China was the first out of the blocks with a digital currency, after five years of development, when it launched a pilot last summer. The European Central Bank (ECB) has also recently issued a consultation on a digital euro and plans to decide on the next steps this year – though I provided it with a blueprint for a digital euro in 2017 (one of my PhD papers). Plans for digital payments are wide-ranging. Several central banks have experimented with new solutions, such as distributed ledger technology, with a view to boosting the liquidity of interbank payments via central banks. Others are looking for retail payment alternatives that could support financial inclusion, particularly in today’s pandemic-ridden times.
Private initiatives, such as Diem, may find life harder. It is expected to launch this year, two years after its first white paper. Now it has a view to also function as a distribution engine for central bank digital currencies, once these are issued. That could be fraught. Regulators are taking an increasingly tough line on big tech companies. Still, given the network effect of Facebook’s billions of users, any online payments service it offers is one to watch.
On top of this, and this is one for the bankers in the audience, we are looking at a massive payments infrastructure change in the UK. Retail payment systems (Bacs and faster payments) are merging into one platform – the New Payments Architecture Programme – with easy access via an open application programming interface-based architecture. At the same time, the Bank of England’s Real Time Gross Settlement service is going through a renewal process. All of this is accompanied by a collective migration to the ISO 20022 messaging standard. This will keep many minds focused, or even agitated, over the next year(s) as the complexity, cost and risk of these two parallel projects continue to bite.
The last word must go to Brexit. Since 2007, the UK has been an integral part of the Single Euro Payments Area. This came with the benefit of the two Payment Services Directives. That has meant that payments travel in full across borders, fees are transparent and kept in check fairly. It’s not yet clear how this arrangement might change. Worst case assumptions imply big fee increases for payments between the UK and the EU. Let’s hope that’s one prediction that won’t come true.