Fintech: a look at the latest developments and disruption
The Payment Services Regulator (PSR) continues to build momentum in examining and reforming the rapidly evolving payment services sector.
The PSR’s stated aim is to promote competition and the PSR has adopted multiple strategies to achieve that.
Most recently the PSR’s Interim Report in February recommended that VocaLink’s dominance should be reviewed. VocaLink plays a key role in over 90% of all UK salary payments and 70% of amenity bill payments. The PSR proposed that the stakes held by Barclays, HSBC, Lloyds, RBS and Santander in VocaLink be reduced from the combined 85% level at which they currently stand. In doing so, the PSR believes that this will create space in which challenger banks and disruptive fintech companies can operate to help drive developments. Ultimately, this is an attempt to loosen the control of the payment system by the major banks.
In the meantime Faster Payments (which has the major banks as participants) continues to promote its ‘New Access Model’, and argues that in doing so it is already encouraging competition. Currently, settlements are made at regular times each day. As part of its New Access Model, in order to offer real-time payments, Faster Payments is proposing a new pre-funded settlement system, which would require all payment service providers (PSPs) participating in Faster Payments to have a segregated, pre-paid account to cover the value of their net transactions. The independent chairman of Faster Payments reports that three challenger banks have committed to join the scheme. At a time when private equity giant KKR reported large write-downs in First Data, the US payments services processor, the evolution of payment services could not be more pressing.
An alternative to using pre-paid accounts to make real-time payments is the use of digital currency and blockchain. Blockchain is the database where irreversible ledger entries would be made pursuant to a payment. It creates these in near real-time to show the sum as having moved between the transferor’s and transferee’s accounts, and is able to validate transactions without requiring a third party institution. Blockchain has the potential to replace years old back-office payment processing legacy systems of banks that can take hours or days to process a payment.
Those technologies have the potential to lead to significant changes to payment processing. Despite bitcoin and blockchain initially being created to compete with banks, it is the banks which are now looking at how the technology can be used to reduce both the time and cost of processing payment transactions, and the Bank of England (and other central banks) are considering how this would work in practice.
Billions of dollars have been invested in fintech technologies, presenting a very real threat to the pre-eminence of the large banks. The Financial Conduct Authority (FCA) recently launched the regulatory sandbox as part of Project Innovate with the intention of bringing disruptors into the fold and to assist them with identifying and addressing potential regulatory issues. The disruptors are facing increasing regulatory scrutiny but the FCA intends to help them, reducing a possible barrier to market entry and again threatening the position of established financial services providers.
Rather than fight the disruptors the banks are now looking at how they can co-operate and develop new ways of servicing their customers in order to be part of the next iteration of convergence with mobile payments, which is a key growth area. A prime recent example is Curve, a well-backed London-based start-up. Curve will issue a physical card backed by MasterCard, who itself is eying the debit card market, which will cover all of the other physical cards a consumer may have. Via the app, the consumer selects which card they wish to use for a payment and then the Curve card does the rest. It flattens the market. For example, American Express cards can be used on the MasterCard platform, foreign exchange transactions are potentially cheaper and it can be used as a swipe, contactless, chip-and-pin or ATM card. The app allows customers to see their transactions in real time, in the same way as Apple Pay.
The fintech revolution is driven by the opportunity to make life easier for both businesses and consumers. Technology will only be used if it solves a problem and makes a process more efficient. People may not even be sure they have this ‘problem’ in the first place so essentially these solutions often meet a previously unmet and unknown need. For consumers, the offering typically needs to be on the mobile platform. Curve has this top-of-mind – reducing the amount of plastic in a consumer’s pocket, yet recognising that cards remain the main payment conduit for now, and expanding the usability of those cards whilst building the technology on a mobile platform.
Excepting a minority, most consumers do not care what technology underpins their transactions. For them, the direct user experience is the priority. That experience is comprised of a number of factors, such as usability, convenience and cost. Consumers are concerned about security but typically only when something has gone ‘wrong’. Ordinarily they will not enquire if the underlying technology for their transactions is based on a distributed ledger or otherwise. It is a slightly different story for crypto-currencies. Consumers remain unsure of digital currencies, with the man on the street only just getting to grips with the idea that bitcoin and blockchain are two different things. Consumers will not be giving up cards just yet, nor will there be an imminent mass movement away from established currencies and the brands in which they have considerable goodwill.
What does the future hold?
There will be continued and significant changes in the payment services sector, eventually the most disruptive of these is likely to be the use of digital currency and blockchain. More immediately the current trends are increasing competition in mobile payment and more generally in the payments sector. This will be characterised by an increased number of PSPs entering the market as a result of efforts to open up the payments industry and consequently an improvement in innovation and competition between PSPs.