Payments Tech Is Changing, So the U.K. Changes Regulators

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Technology is rapidly changing payments, turning it into something that more closely resembles a layered ecosystem like an electrical grid than a traditional financial service.

That evolution has regulators in different countries scrambling to ensure the rapid changes serve the public good. A new regulator in the U.K. may be on to something by including staff that has more experience in utilities, public transportation, the internet and other open public services than in the payments industry.

The Financial Conduct Authority (FCA), the U.K.’s financial regulatory body, has created the Payment Systems Regulator (PSR), a separate entity to regulate the payments industry. The group members' divergent career paths suggest a favorable view toward movements that democratize access to payments.

Hannah Nixon, the FCA's appointee to lead the new group, spent six years as senior partner at the Office of Gas and Electricity Markets (Ofgem) and three years as head of regulatory economics at the Office of Rail Regulation. Like the London Underground and the city’s electrical grid, payment systems must be reliable and 24/7, said Nixon. But reliability is only one factor. “The way people spend, move and manage their money is constantly changing and payment systems need to keep pace with that,” she said.

Nixon's experience regulating utilities should come in handy as different ways to access the payment rails emerge and potentially work against each other.

The financial industry frequently discuss ways to add scale and efficiency to payments, similar to the utilities industry. Newer payments companies tend to tout a base layer of payments provided at no cost, acting more like a public good. It’s a position shared by an increasing number of more established entities, such as the British government, which in the early 2000s mandated the Faster Payments System. The banks allow nearly all U.K. consumers access to the rails to send real-time person-to-person payments without cost.  

After her appointment, Nixon appointed Mark Falcon to serve on the new group as well. Falcon was previously head of economic regulation at Hutchison 3G, a mobile phone network and broadband internet provider. This is especially important as more commerce moves online and more consumers use their mobile device, be it a tablet or a smartphone to shop and buy. According to Statista, 7.8 billion pounds of retail sales will be initiated through a smartphone in the U.K. in 2018, nearly doubling from its 2014 prediction. In 2014, Statista predicted that mobile commerce would account for 18% of total online commerce but the results haven't come in yet. Plus, Falcon’s prior experience is relevant as mobile network operators war with startups to find a place to add value in mobile payments, as well as pursue financial inclusion through efforts such as mobile money platform, M-PESA.

Nixon additionally appointed Louise Buckley, who helped organizations with reputation management at Stracey Wheeler Consulting, and Carole Begent from the Competition and Markets Authority, a government agency that promotes competition for the benefit of consumers.

Amelia Fletcher, a professor of competition policy at the University of East Anglia who prior was the chief economist at the Office of Fair Trading is on the PSR's board. And also on the board is Christopher Woolard, who was previously the group director at the Office of Communications, a U.K. governmental regulatory body for broadcasting, telecommunications and postal industries.

The PSR is beginning an in-depth look at the U.K's Faster Payment system and the bank-owned company that manages it, VocaLink. Some in the U.K. have complained that the system has challenged innovation, since startups have a high regulatory and relationship barrier to meet before they can build on the Faster Payments rails.

The PSR's expertise in competition policy can help inform standards for payment systems, which are run by private companies but use government-built interbank networks to provision electronic transfer systems, said Bill Maurer, professor of anthropology at the University of California Irvine.

“Maybe it’s OK to let people pay more for moving value faster across the rails,” Maurer said, ambivalently.

While proponents of net neutrality argue against tying fees to internet speed, the model is already taking off in the payments industry. Exclusive payment networks are using both social and financial means to tier access.

For example, alternative payments provider, Ashe Pay charges a monthly fee—$1 for consumers and $10 for merchants—for access to its prepaid payment network which eradicates both transaction fees and chargebacks. Flooz, a French person-to-person payment platform, has erected a steep social barrier to entry. Only consumers that get invited by the company itself or by existing users can transact on the Venmo-like platform.

The establishment of the PSR is “a recognition that payment systems are essentially a form of financial infrastructure and innovation in finance requires competitive access to such infrastructure,” said Lui Smyth, U.K. lead at CoinJar, a Bitcoin exchange and consumer services provider that was founded in Australia. Smyth is the one-man show that leads CoinJar’s European expansion from Level 39, London’s largest tech incubator at Canary Wharf. While Bitcoin has its own set of rails, Smyth is making a statement about bank’s inaptitude to work with Bitcoin businesses. By not banking cryptocurrency startups, financial institutions are inadvertently (or some might say knowingly) keeping them down and out of the market.

The metaphor between payments and the railroads (which has been used for decades) has bubbled to the surface again as the industry fleshes out the difference between Bitcoin the payment rail and bitcoin the currency.

The industry frequently discusses how revolutionary blockchain technology is without bitcoin, but these two things are difficult to separate. While another blockchain could be built without a cryptocurrency token, for a decentralized system to work, there must be an incentive for distributed entities to provide the work. Bitcoin, the currency, incentivizes miners to input computing power and foot the high electricity bill.

For the past several years, the industry has been “collapsing the [currency] token into the rail,” making them inseparable, said Maurer. Although he doesn't think this is necessarily a bad thing, it is a trend to watch for foul play.

The growth of loyalty points is another example of the industry cementing a payment instrument to a rail. Loyalty points are private tokens that must be used within a closed system. And while many larger companies are partnering to allow customers to spend points on more sites--Amex Points can be used to purchase items on for example—Maurer said, this could pose a problem in the future. Providers could lock people into a certain system, allowing them to only transact within that system or shunt consumers into relationships with specific merchants.

While establishing a team to regulate payment systems that lacks payment systems experience comes with a substantial amount of risk, the U.K. has developed a team that aligns with the changing perception of money and payments.

There’s definitely a divide between regulators and fintech startups, said Elias Haase, founder of bitsilk, a six-year-old software development company based in London.

Entrepreneurs are risk takers, whereas, regulators tend to be more conservative and cautious because of the hard time they get for both action and inaction. “If [regulators] approve a technology and people lose their savings then they will get the blame,” Haase said. “If they are too slow to approve new technology they will be blamed for protecting monopolies and suppressing potentially profitable markets.”

But the makeup and the initial consultation of PSR is promising, Haase said.

Even before publishing its proposed roadmap for regulation in November, the PSR held more than 170 meetings and met with 75 organizations, said Nixon. In December, a formal consultation was attended by more than 200 people and eight roundtable sessions were held to give all the stakeholders a chance to speak to the group.

“I’m a strong believer that the best type of regulation is made by working together with industry so this is very much a model we will look to continue,” Nixon said. “It’s important that we give everybody a chance to have their say and bring them along with us on this journey.”

Nixon declined to name any organizations or stakeholders the PSR spoke with. But the regulator will not only oversee small tech startups but also large, internationally-recognized banks and payment providers.

“It’s something we’re seeing more and more all over the world is more regulatory engagement, with regulators actively soliciting input from the industry” said Karen Gifford, head of compliance at Ripple Labs, a cryptocurrency startup led by serial financial services entrepreneur, Chris Larsen. “Over the last several years, there’s been much more outreach on the part of regulators.”

The U.S. has also moved to regulate payments startups with a light touch so as not to stifle innovation. High profile regulator, Benjamin Lawsky, superintendent of the New York State Department of Financial Services has even moved to institute a transitional license, an on-ramp for payments startups including those that operate in Bitcoin.

Regulators that oversee payments are becoming aware of how technology is eliminating inefficiencies in the payment system, opening access to a greater public that hasn't traditionally been a part of the economy. But these technologies also act quite different than the payment methods of the past, so more diverse regulatory thought is necessary, which the U.K. seems to be taking the lead in.

Bailey Reutzel is a reporter at PaymentsSource.


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