Our industry spotlight series was born out of a desire to help in-house lawyers with their horizon scanning and assessing the potential risks heading their way. Each post focuses on a specific sector, providing companies and their lawyers with quick summaries of some of the challenges heading their way.
This next post focuses on Payment Services and was carefully curated by one of our experts, Shoosmiths principal associate Thomas Morrison.
Covid-19: Challenges for the payment services sector
Financial services firms, like other sectors, have had to address unexpected challenges raised by Covid-19. Key areas of focus have been on Government-mandated payment deferrals on mortgages and unsecured lending, and business loan schemes with Government-backed guarantees. In the meantime, payment services providers (PSPs) ranging from banks and building societies to fintech start-ups have also had to manage the relentless march of payment services regulation (PSR), whilst adapting their services to support customers during the pandemic.
2020 was already looking like a busy year for PSPs. April saw new requirements under the EU Cross Border Payment Regulation come into effect. In May, the Payment Systems Regulator’s Call for Input on competition and innovation in the UK’s new payments architecture (which would change UK domestic interbank clearing and settlement of payments) closed. Also in May, the Competition and Markets Authority published an approved roadmap for Open Banking, which includes new refund and recurring payment functionality.
The need to support customers making payments during the pandemic has resulted in more change. On 1 April, the contactless card payment limit increased from £30 to £45, to allow more transactions at a physically safe distance. Lockdown has also caused a surge of home deliveries, and much greater reliance on e-commerce card transactions where, at present, no recognised SCA-compliant process exists. These activities put more pressure on PSPs to make sure they have adequate systems in place to support higher transaction volumes, including fraud monitoring and SCA-compliant processes where appropriate.
The FCA has recognised these stresses. It has extended the closing dates on various consultations, including on operational resilience, and the Call for Input on Open Finance (the next-stage evolution of Open Banking to cover the likes of savings, loans, mortgages and investments). Most recently, the FCA has expressed concern about the financial strength of smaller PSPs, particularly fintechs who may be unprofitable in the early stages of their business. This resulted in a two-week consultation on new, temporary guidance aimed at strengthening risk management arrangements and requirements for safeguarding customers’ funds. The consultation closed on 12 June and the new guidance is expected to come into effect at the end of June.
What is evident is that continued PSR development represents an additional stressor for PSPs, at a time when their focus is on Covid-19. Small and mid-size PSPs have rechannelled finite financial, IT and operational resource to support Covid-19 measures, draining development projects of time and budget. This drain is likely to continue for some time in certain sectors, particularly firms who support mortgage books and will continue to be subject to the Government measures on payment deferrals until the end of 2020. As we go into the second half of 2020 and a reawakening economy, some PSPs face important questions:
- Will they have the resources to spare, for developing their payment services and products?
- With 2021 bringing its own implementation challenges in other areas (e.g. operational resilience), will this mean development is postponed further?
- Will the effect be that those firms who have not yet become SCA compliant fall further behind those who already have?
- Will this have a chilling effect on competition and diversity in payment services?
Covid-19 presents significant challenges not only for PSPs, but for regulators who must walk the fine line between promoting innovation and customer protection, and ensuring that PSPs’ business remain viable in this difficult time.
About the author:
Thomas Morrison is a retail financial services and regulatory lawyer with over 22 years of experience gained in Edinburgh and London, both in private practice and in-house at a major UK bank and an international private bank.
Thomas advises on all areas of retail and SME financial services law, including payment services, current and savings accounts, cash management solutions and client money, personal loans and overdrafts, mortgage lending, credit cards, charge cards and store cards, retail regulatory compliance and more. His clients include household name banks and building societies, fintech companies and private, specialized and challenger banks.