Accourt Payments Specialists » Payment Systems

Payment Systems Regulator begins £75 trillion UK payment industry oversight

Alex Rolfe — Thu, 26 Mar 2015 11:40:32 +0000

On April 1^st,, in what will be a landmark date for UK financial regulation, The Payment Systems Regulator (PSR), the new economic regulator for payment systems, has confirmed how it will regulate the industry. It has also published a policy work programme setting out priorities for the year ahead.

The PSR’s aim is to make payment systems work well for the people and organisations

that use them, and deliver greater choice, innovation and competition – according to Leaprate.com.

Payment systems let people pay a deposit on a house, withdraw money from a cash machine, transfer money via smartphone, receive salaries into bank accounts, and much more. They are vital to the UK’s financial system and process in the region of 21 billion transactions worth around £75 trillion a year.

“Today marks a new start for payment systems. Our approach will bring change to the industry, injecting competition and innovation where it is needed most, and will put the interests of the people and businesses that use payment systems front and centre,” comments Hannah Nixon, managing director of the Payment Systems Regulator.

“True, long lasting change will be difficult, but we have the powers and the people to make it happen. Our challenge now – the challenge we share with industry – is to work together to deliver it.”

Today’s publication confirms the three ‘pillars’ of the new PSR’s work:

A new and inclusive strategy setting process that really involves users of these systems for the first time. This will be done by setting up a Payments Strategy Forum to develop a long term vision for how payment systems should develop and identify priority areas for the industry to work together where appropriate to deliver this vision;
Increasing transparency around how decisions are made, and who is making them. We will shine a light on the control and governance of payment systems, challenge payment system operators to explain how they have listened to people and organisations that use payment systems, and check that operators are really taking payment systems in a direction that meets people’s needs; and
Improving the way people and businesses gain access to a payment system – whether directly or indirectly – to be clearer and fairer and in a way that fosters innovative and competitive solutions for customers using payment systems.

As well as confirming its final policy, the PSR has published draft terms of reference for two market reviews and announced a card payment systems programme of work. The two market reviews will look at ownership and competitiveness of infrastructure provision; and the supply of indirect access to payment systems. This work will help the PSR gather important evidence to help it make robust decisions that make a real difference to those who use payment systems.

The PSR’s agenda complements work by the Financial Conduct Authority and the Competition and Markets Authority to deliver a more competitive banking industry in the best interests of consumers and the economy.

The new watchdog, whose upcoming launch was first announced in the spring of 2014, has been putting the final touches to its organization before the official start of operations. In January 2015, the regulator added three senior executives – Carole Begent, Mark Falcon and Louise Buckley to its ranks.

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UK shuns cash as cards dominate payment market

Alex Rolfe — Thu, 12 Mar 2015 12:31:46 +0000

The way we pay for everything is changing, with more digital transactions than ever before. But how close are we to the tipping point?

This weekend saw the end of cash as Britain’s dominant method of payment, and you probably didn’t even notice.Supposedly March 8 was the date on which transactions made be via credit, debit and other cashless methods would finally outstrip those made by cash – according to an article in The Telegraph.

In fact, there’s no way to tell when this exact point happened: it could have been Sunday, or it could have been at the end of last year. But for years the Payments Council has been predicting it by the end of 2015 at the latest.

The number of cash transactions will drop to just under 13 billion by 2023, while the number of cashless transactions – including cheques, credit cards, debit cards, contactless cards, direct debits, and standing orders – will rise to over 27 billion.

If you strip out large companies and focus only on individual consumers, it will take a little longer – happening in 2017 rather than 2015 – but the winds of change are only blowing in one direction.

Of course, it’s important to understand that these figures are in terms of volume,i.e. the raw number of individual transactions carried out. The value of cashless payments was already far larger than that of cash, because they’re used for much bigger transactions.

One reason the difference is so huge is because these numbers include payments made via CHAPS – the system used by big companies and even the Bank of England to shift around their vast sums of money.

Yet even if you restrict the figures only to retail – high street shops, online merchants, and all of that – the tipping point in terms of value was passed long ago.

According to the UK Cards Association, credit cards and debit cards surpassed cash in terms of value more than a decade ago, in December 2003. They now account for more than 75% of the retail sales.

Still, measuring by value isn’t actually very useful. I might make fifty small purchases with cash – say, bottles of milk at £1 each – and one large purchase with a cheque. That wouldn’t mean I did most of my shopping with cheques or that cheques were my dominant method of payment.

Change – for two reasons

The first is the rise of alternate payment methods. Paypal’s users exchangedmore than £30bn in 2014, up from £18bn the previous year, and this week Barclays will start allowing people to send money to each other using only their Twitter handles.

The most significant rival for cash’s crown is contactless payment, which is starting to sweep up some of the low-value transactions which would previously have been done with cash.

These are a small part of the picture for now, but they’re growing fast; the UKCA thinks that in two years’ time they’ll make up 6% of all card transactions.

That red line on the chart is the average value of a cash transaction last year –but it’s falling, from £11.43 in 2009 to £9.47 in 2014. And as you can see on the chart, the average contactless transaction is creeping up to meet it. Cash is being relegated to smaller and smaller sums.

Not everybody is happy with that. A study in the USA suggests that contactless cards make people more likely to buy things in the first place, because beeping it on a pad is so much easier than reaching into your pocket and counting out the change.

Another study found that contactless card transactions can be intercepted using off-the-shelf technology from as much as 60 centimeters away.

But the other factor is that we’re also using our old-fashioned credit and debit cards to pay for smaller things.

Over the last few years, the average value of a card transaction has been slowly dropping, as these statistics from the UKCA make clear:

Why? According to Richard Koch, the UKCA’s policy director, it’s a mixture of card technology getting cheaper and shops’ technology getting better.

Firstly, there has been a general fall in the price of card readers and card transactions – meaning local corner shops which formerly only took cash are now more likely to offer chip and PIN services too.

Then there’s the advent of self-checkout terminals. “There’s a very high proportion of card usage at them,” says Mr Koch, “and some terminals are designed not to take cash at all.” Not taking cash makes them easier to maintain, and cheaper for their owners.

Obviously, the internet shopping revolution plays its part. The UKCA says e-commerce is rising by 13% every year because people are buying online what they might previously buy with cash.

Finally, people are now lumping what would once have been multiple cash payments together as one digital payment. Mr Koch gives the example of his children, who pay for their school lunches with a card that he tops up in batches of £20 or £30 every week.

Another example would be Netflix – which replaces rented videos with a single subscription charge – and, of course, Transport For London’s Oyster card, which replaces daily paper tickets with longer-term top-up fees. Mr Koch actuallly predicts two million fewer transactions in 2017 than there were in 2014 because of payments being amalgamated in this way.

All of this creates a kind of spiral effect, because once people become more used to using their cards, they’re less likely to carry cash. And once they stop carrying cash, retailers have to invest in card readers if they want to sell what they’ve got.

In twenty years’ time, cash could be a minority system, used regularly only by a small hardcore of people, and infrequently by everyone else. Some new technology will emerge to handle low-value transactions.

Until then, cherish the feeling of copper and zinc in your palm while you can.

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Can we trust cryptocurrencies?

Alex Rolfe — Tue, 24 Feb 2015 17:01:31 +0000

It is a truth universally acknowledged, that a currency system seeking successful adoption must be in want of trust. Trust that a representation of value, such as a paper note, is backed by real value or a genuine obligation to repay; trust that those representations will be accepted by others as such; and trust that the representations of value are not counterfeit.

Early currencies were actual coins made of precious metals, which people trusted to have an intrinsic

Can we trust Cryptocurrencies?

value that they could use to obtain goods or services. Today, most countries use fiat currencies which have no intrinsic value and are not tied to any physical value such as precious metals. Instead, fiat currencies are backed by government guarantee – entirely lacking in physicality and intrinsic value, fiat currency demands ultimate trust.

The identity of those involved in a transaction (and the ability to verify such identity) is invariably a key component of this trust equation. In order for the fiat currency system to function, the currency issuer and each of the key players in a payment chain must be trustworthy to ensure that the currency is not counterfeit and that the currency will not be stolen before reaching its final destination.

But in the deliberately anonymous world of cryptocurrencies, where value is established by algorithms and verified by the electronic transfer of data, how can trust be established without proof of identity? In light of the widely reported vulnerability of e-wallets, can we ever truly establish the same trust in cryptocurrencies that we have in our own fiat ones today?

The answer perhaps lies in an appreciation that the trust deficit will only be met once there is sufficient confidence in the technology which underpins the currency and the key market players in cryptocurrency transactions are held to a high level of accountability. In fiat transactions today, “money” must pass through many hands before reaching its final destination. When you pay for your shopping with a credit card, your personal details are collected by the shop, transmitted to their acquiring bank that then transmits your details again to your card issuing bank. After initial approval, these details are transmitted along this chain once more before the funds are actually released.

This chain demonstrates a number of potential points for a security breach. Despite this, society generally trusts in the system because the banks and payment processors are regulated and we can feel secure in knowing that the parties involved are required to enforce a high level of security. Even if a breach occurs, we know that the parties involved will be held accountable and trust that we as participants will have the opportunity for redress.

Cryptocurrencies, on the other hand, are entirely decentralised and value passes directly from payer to payee. Quite clearly, there are far fewer potential points for a security breach along the Bitcoin payment chain that solely consists of a payer and a payee. There has also never been a recognised security breach or defrauding of the actual Bitcoin ledger, known as the Blockchain, to date. The Blockchain is considered to be extremely secure as it publically records every transaction that is ever made.

For a system that seems to be so secure in its technology to be plagued with instances of hacking and fraud (most recently the hack of the popular Chinese Bitcoin exchange Bter), the real trust issue lies with the gatekeepers between cryptocurrencies and their traditional fiat relations.

Cryptocurrency-related businesses that act as interfaces with fiat currencies, such as exchanges and payment processors, are largely unregulated by any regulator worldwide. They have also been the generators of the largest reported hacks to date, causing widespread mistrust in the system and extreme volatility in cryptocurrency pricing. However, this mistrust stems from the lack of accountability of the cryptocurrency-related businesses that are able to operate without any required disclosure of identity or location.

To condemn cryptocurrencies as a whole based on the poor security of a few rogue market players would be tantamount to condemning a fiat currency because of a few bank thefts. If currency is stolen from a bank, its security is increased. Consequently, when a cryptocurrency exchange is compromised, it should follow that the solution should be increasing the security of exchanges. However, unless and until the loss falls on the exchange, there is no incentive on the exchange to change its behaviour.

Indeed, it is only when the behavioural and organisational standards are enforced by industry or national regulators that the collective conduct and security of the cryptocurrency industry will be elevated. When responsible conduct of participants is required, confidence in the market will follow. It is therefore in the best interests of most cryptocurrency-related businesses to support the push for regulation and instil trust in the wider currency platform.

It is only by learning how to play this trust game effectively that cryptocurrencies have any real shot at viability: if consumers feel able to trust in the industry that has thus far been plagued by hacks and security breaches, cryptocurrencies could even revolutionise the way we live.

It should therefore be a truth universally acknowledged that a cryptocurrency exchange in possession of fortunes, must be in want of good regulation.

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