Payments still need a fintech revolution
Payments innovation is stifled by a lack of regulation, writes Charlie Mercer of Coadec.
Image source: Pexels/Ivan Samkov
This week, London unveils a jewel in its crown of innovation: its fintech sector. There are 24 active fintech unicorns residing in UK stables and last year investment in the sector topped $37 billion. London is a hotbed of fintech innovation.
In one critical area of financial services, however, the penetration of innovative UK fintech has so far been limited: payments. To state the obvious, payments are at the heart of how our economy works, and how much it costs to pay is increasingly important as recent events have conspired to drive prices up at a breakneck pace.
Since October last year, the average price of a loaf of sliced bread has increased by more than 8.5%, the price of a 500g tub of margarine has increased by more than 18% and the price of gasoline, the flagship of today’s ubiquitous industry. crisis, increased by almost 34%.
As prices change, so does the method of payment: over the past 10 years, cash payment volume has fallen by 75%, while debit card payment volume has increased by more than 200% over the past 10 years. of the same period. More than half of all payments made today are by debit or credit card.
This context is important because, behind the scenes, another price has also increased: the “interchange fee”. Interchange fees are paid by companies to the issuer of a payment card when the card is used.
For online payments made by UK cardholders to businesses in the EU, these charges have risen by 475% for debit cards and 400% for credit cards over the past six months.
Why? It’s not due to rising costs: in December 2021, PSR chief Chris Hemsley wrote to the Treasury Select Committee suggesting there was no additional cost to issuers post-Brexit .
Instead, at Coadec, we are inclined to agree with Kevin Hollinrake, the chairman of the All Party Parliamentary Group on Fair Business Banking: it “smells like opportunism”, made possible by Brexit changing the legal status of the UK vs. EU, allowing capping fees on the upside, combined with something that’s not quite right with the UK payments market.
This is just the latest in a series of fee increases since 2014. Despite regulations introduced in 2015 to cap interchange fees, the cost of accepting payments in the UK is now 13% higher per transaction than in 2015.
PSR’s Card Acquiring Market Review, which concluded earlier this year, was its latest intervention in response to the trend.
Recommendations included point-of-sale interoperability and measures to encourage buyer switching, but these solutions only scratched the surface. More promisingly, over the summer, the PSR will conduct two new reviews of card payment fees, covering both cross-border interchange fees and broader system fees.
These reviews will allow for a more in-depth analysis of the issues at stake. Above all, ensuring that the payments market operates in a competitive manner is a priority for the PSR, and they consider the promotion of interbank payments, and in particular payments through of open banking, as an essential means of achieving this. Unlike debit cards, open bank payments have much lower fees and offer comparable security and ease of use.
Open banking payments have certainly started to climb, with successful API calls up 200% year-over-year through April 2022, now at over 150,000 per day. But that pales in comparison to the more than 54 million debit card payments per day in February 2022.
Meanwhile, the future of open banking payments remains uncertain until the new governance framework is agreed at the end of the year. What is beyond doubt is that for open banking payments to truly take off, the payments market must operate efficiently, and that is why the PSR Summer Reviews are welcome.
Alongside this review, and as work on the future governance of open banking also progresses, it is also important to consolidate open banking in the near term. With the first deadline for variable recurring payments approaching the end of July, understanding how VRP will evolve into other financial products, and beyond into payments, would be a good next step.
As the dust settles on a tumultuous week in politics, the cost of living crisis continues to mean that every penny counts, and unless payments innovation is truly sustained, and soon, we will all be paying. the price.