Modernising Payments Services Regulation: what does it all mean?

The UK Government has just closed consultations on its Modernising Payments Services Regulation. The outcome will have a big impact on the future of Pay by Bank, variable recurring payments (VRP) and agentic commerce.

In our newest AMA, we cover right to access, what's in it for the banks and the next wave of innovation.

Transcript:

[LISA] Hi Jack, thank you for joining us for another TrueLayer AMA. We've brought you here today because the Modernising Payments consultation has just closed. You are obviously our big policy expert. What is it and why is it important?

[JACK] So the consultation is about the future of UK payments regulation. Very important for TrueLayer because we are a payments company, so we are regulated by the current regulation. But it's about ten years old, so it's time for a bit of a refresh. The EU has already updated their version of this regulation.

They've now nearly published PSD3. So the UK is playing catch up a little bit. The payments regulation is really critical for open banking because it's what creates the framework. It's what allows us to exist, basically.

[Lisa] What created our access to that?

[Jack] So, back in around 2016, there were two things going on in The UK. So, we were in the European Union at that point.

So, there was a big EU directive called PSD2. And that said that consumers would have a right to access their payment accounts through third party providers. TrueLayer is one of those third party providers. So, it gave us that role as a third party provider and gave us the right to access payment accounts so that we could initiate payments and we could access data to make use of it for the consumer.

At the same time as PSD2, the UK Competition and Markets Authority had a review of the retail banking market. And this was in the wake of the financial crisis. And they found that there wasn't enough competition in the wake of all the consolidation that had happened after the financial crisis. So they created a remedy which was supposed to open up the market and create competition.

And that was the open banking remedy. And that required the nine biggest banks at the time to create a standards body for Open Banking. Those two things, PSD2 in The EU and the Open Banking remedy, they worked really well together in The UK to create this framework that we have today, where basically, under PSC2, use these open banking standards under the CMA order to create a really well functioning open banking ecosystem.

[Lisa] Okay. So what about the consultation now will make that sort of more sustainable in the long run?

[Jack] The CMA order was a temporary measure. So, it was basically never meant to last forever. And it's lasted eight, nine years, so it's been doing really well. But now, the government is looking at how to put that on a permanent footing. There is a piece of legislation called the Data Use and Access Act, which will basically give the FCA the powers that the CMA had with the open banking order. So it transfers the powers to the FCA and gives the FCA a primary role to oversee open banking.

[Lisa] So obviously, an important part of that is this free access. But if the banks can start charging for that access, obviously, it fundamentally changes the business model of everything around open banking. So what's the alternative where there's that access but also the banks are sort of happier with the setup?

[Jack] Yeah, one of the key questions in the consultation is that. So, currently, under the regulations, we get access to bank APIs. And that is on purpose. That is supposed to be in order to stimulate competition and to create market entry.

And it has done. And we've had steady and strong growth of open banking. The question has been: Is that sustainable? Should the banks recoup some of the cost of maintaining those APIs?

Because they are a bit of infrastructure that the banks have to maintain.

So, TrueLayer, we support a commercial model for open banking. We're a founding member of the UK Payments Initiative. UK Payments Initiative is a body which is creating a commercial scheme. But what UKPI is doing is creating premium APIs.

So, APIs that have functionality that isn't available under the regulations, like variable recurring payments. We absolutely support the development of those premium APIs. We just want the government and the regulator to tread very carefully on the economic model for the existing access. It would be quite disruptive for the whole open banking market if that changed overnight.

We think there should be some parallel running of the free mandated open banking and the premium models.

[Lisa] Is there a risk that these costs get pushed all the way down to the end consumer?

[Jack] Yeah. I mean, the reason that open banking in the first place had this model where TPPs weren't charged was to encourage competition.

The primary way that it does that is it creates a low cost base for third party providers like TrueLayer, meaning that we can then compete very effectively against other payment methods, like card payments. The more costs you add into the mix, the less we'll be able to compete, and the less we'll be able to grow, and the less competitive we will be able to be. Ultimately, that provides less choice for merchants.

They pay more for their existing payment types. And they pass that charge on to consumers in the end.

[Lisa] So, on that, another part for the consumer is the experience of making the payment. Obviously, for open banking, it's much newer than the more traditional payment methods. So we're obviously really obsessed with UX and user experience and how people can get through those flows when they're trying to adopt a new payment method.

Is there anything in the consultation about UX and user experience?

[Jack] Yeah, a huge amount actually, and quite a few different questions that cover this topic. The government is looking at strong customer authentication, which is the process of you proving to your bank who you are, that you undergo whatever payment method you're using. So you'll be familiar when using a card that you sometimes have a step up and you have to go into your bank app and approve it. That's SCA.

And SCA is built into open banking as well. But when they're reforming SCA, Strong Customer Authentication, we really want the government to be mindful of making sure that one payment method doesn't have a better user experience than another. And it's a good opportunity to remove some of the friction that we see in the open banking, strong customer authentication journey. PSD3, which I mentioned earlier, has a lot of emphasis on removing some of the obstacles that exist in some of the open banking user journeys because they ultimately put consumers off from using open banking.

So there are stronger rules. There's a list of obstacles that are prohibited. And also, the regulators in the EU will now have new powers to fine banks for non compliance with the open banking rules.

[Lisa] So all of those changes in that focus on the consumer and the UX experience is already in PSD3. So do you see this consultation are sort of heading in the same direction, or will people start having a different experience in the UK and the EU? Like, how will they work in the same system?

[Jack] There's some divergence going on between the UK and the EU. In the EU, we see a lot of the technical rules being pulled up into the primary legislation, which then gives regulators in different member states more power to enforce them. In The UK, the direction of travel is more towards pushing down the technical rules into the regulator, into the FCA, into their handbook. And that could have real benefits.

So, if rules are in the FCA handbook, then potentially they change quicker and they can respond to market developments quicker and we all know how fast the payments market moves. The FCA could have more ability to enforce the granular rules. But then also, there will be occasions where the FCA might need to make decisions under the framework. And those decisions have historically been the decisions of the Treasury who might take risks or have a bit more political capital to make bold decisions.

So, there are pros and cons with the approach. But ultimately, we want to see the FCA using its new toolkit to ensure that open banking continues to grow in line with the National Payments vision and becomes that driver of ubiquitous account to account payments.

[Lisa] Okay, on to my favourite TrueLayer topic, which is VRPs. So, yeah, tell us a bit about the sort of right to access and how it applies to VRPs.

[Jack] Yeah, so one of the big questions in the consultation is, should the government introduce a right of access to variable recurring payments?

And this is very much in keeping with how the original open banking regulations were created.

They were created to give consumers a right of access to their accounts via third parties. This is basically just finishing the job. Because what we've been able to do up till now is single immediate payments, but not recurring payments. So we haven't been able to compete with card on file or with direct debits.

So this right of access is brilliant. It's really important because although there are commercial schemes that are developing VRP, those are voluntary. So we've seen the big major players, the big banks, join the scheme, and that's fantastic. But there's a long tail of other banks who haven't yet joined the scheme, and we don't know if they will. And this right of access would encourage, well, it would require, all banks to support VRPs. What that means for us is merchants who want to use VRPs, the first question they ask is, 'Are all banks covered by this?' And it's really important that we can say yes, and this right of access would ensure that.

[Lisa] So, of course, all the rage in the payments world right now is agentic. How are we going to crack agentic? Is there anything in the consultation about how we build moving forward?

[Jack] Yep, there's a big question in there about how the UK payments regime should accommodate agentic payments. We're a little bit behind in reforming our payments regime in The UK. We're maybe two or three years behind the EU. But when the EU started developing PSD3, agentic payments didn't exist. And so, PSD3 doesn't really cover agentic payments. So, this is a real opportunity for The UK to acknowledge agentic payments, to support it and to enable it.

And our response is that one of the best ways that you can enable agentic payments is variable recurring payments.

Because it's as if somebody had a premonition of agentic payments when VRP was being developed.

Know, with this payment method, can create a mandate with your bank that acts as a safety net because you can decide how much can be spent in a given period.

So if you are going to let an agent loose on the internet to go and shop for you, at least you know that it can't spend over the amount of money that you've set. So it's a really, good payment method for the agentic world. And another thing that we've been saying is that, obviously, cards Visa, Mastercard they're heavily invested, heavily involved in rolling out agentic payments, and that's great. But do we want a world where you can only pay via an agent, cards?

There needs to be support for alternative payment methods like pay by bank, account to account.

[Lisa] Nice. Okay. So, the consultation closed maybe a week or so ago. What happens next? What's the timeline from now? What's the government doing with all this information that they've taken in?

[Jack] There are some different timelines. So, the VRP that we're rolling out via UK Payments Initiative, that has some dependencies on some of the legislation that the government rolling out. So there's a statutory instrument that needs to be laid.

And we're hoping that that gets laid ASAP towards the end of the year, and that will unlock the next steps for VRP through the commercial scheme. But then there's a much bigger piece of work that the government needs to do to take in all of the feedback that it's got from this consultation, and to start to review and change the payments regulations. And that can take a year or two years. It's a big job.

But in a couple of years, maybe three years, we'll be seeing the benefits of a reformed regime of The UK's version of PSD3.

Hopefully, will have a similar effect that PSD2 did in boosting innovation and growth.

[Lisa] So, final question, because we've talked a lot of policy, a lot of acronyms, a lot of confusing financial stuff, I want you to imagine you're getting in a lift and Lucy Rigby gets in, who's the Economic Secretary to the Treasury, you have thirty seconds in the lift. What do you think is the most important thing for her to know about what we want to contribute to the consultation?

[Jack] Well, focus on the things that can deliver growth. So, on the enabling regulations for innovation and competition. And things like variable recurring payments, that is something that can unlock new innovation, new business models. It can save merchants money.

It can make consumers' lives easier. And I think point two would be: tread carefully when it comes to the existing framework, the Open Banking framework, because it hasn't actually been in place that long. A lot of fintechs out there rely on the current commercial framework. And to change it very quickly would be disruptive, and it wouldn't be in the interests of innovation and competition.

[Lisa] We'll have to get you back when we get our next wave of new, fun information in the policy world. Okay. Thank you, Jack.