Payments still need a fintech revolution

Payment innovation is stifled by a lack of regulation, writes Coadec’s Charlie Mercer.

Image source: Pexels / Ivan Samkov

This week, London gets to show off a jewel in its innovation crown: its fintech sector. There are 24 active fintech unicorns living in the British stable, and last year investments in the sector exceeded 37 billion dollars. London is a hotbed of fintech innovation.

In one critical area of ​​financial services, however, the intersection of the UK’s innovative fintech has so far been limited: payments. To put it bluntly, payments are central to how our economy works, and how much it costs to pay is increasingly important as recent events have conspired to raise prices at a rapid pace.

Since October last year, the average price of sliced ​​bread has risen by more than 8.5 per cent, the price of a 500g tub of margarine has increased by more than 18 per cent and the price of petrol, the main product in today’s crisis, has risen by almost 34 per cent.

While prices are changing, so is the method of payment: Over the past 10 years, the volume of cash payments has fallen by 75 per cent, while the volume of debit card payments has increased by over 200 per cent in the same time period. More than half of all payments made today are on debit or credit cards.

This context is important because behind the scenes, another price has also risen: the “exchange fee”. Mediation fees are paid by companies to the issuer of payment cards when the card is used.

For online payments made by UK cardholders to EU companies, this fee has increased by 475 percent for debit cards and 400 percent for credit cards over the past six months.

Why? This is not due to rising costs: In December 2021, PSR chief Chris Hemsley wrote to the Treasury Select Committee, suggesting that no additional costs were borne by issuers after Brexit.

Instead, we at Coadec tend to agree with Kevin Hollinrake, the leader of the parliamentary group of all parties to Fair Business Banking: this “taste of opportunism”, made possible by Brexit changing Britain’s legal status vis-à-vis the EU, which enables fees to increase, combined with something not entirely in line with the UK payments market.

This is only the latest in a series of fee increases since 2014. Despite regulations introduced in 2015 to limit brokerage fees, the cost of accepting payments in the UK is now 13 per cent higher per transaction than in 2015.

PSR’s Card Acquiring Market Review, which ended earlier this year, was its latest intervention in response to the trend.

The recommendations included POS interoperability and measures to encourage change of purchaser, but these solutions barely scratched the surface. More promising is that during the summer, PSR will carry out two new reviews of card payment fees, which cover both cross-border exchanges and broader scheme fees.

These reviews will enable a more in-depth analysis of the issues. Critically, it is a priority for PSR to ensure that the payments market functions competitively, and they see promoting interbank payments, and specifically payments through open banking services, as an important way to do this. Unlike debit cards, open bank payments have much lower fees, and offer comparable security and ease of use.

Open bank payments have certainly started to rise, with successful API calls up 200 percent year on year until April 2022, now at over 150,000 per day. But this pales in comparison to the over 54 million debit card payments per day in February 2022.

In the meantime, the future of open bank payments is uncertain until the new management framework is agreed at the end of the year. There is no doubt that in order for open bank payments to really take off, the payment market must function efficiently, which is why PSR’s summer reviews are so welcome.

In parallel with this review, and while the work on open bank’s future management is also progressing, it is also important to strengthen open banking operations in the short term. With the first deadline for variable recurring payments approaching the end of July, it will be a good next step to understand how VRP will develop into other financial products, and beyond to payments.

As the dust settles on a turbulent week in politics, the cost of living crisis continues to mean that every penny counts, and unless payment innovation is truly supported, and soon we will all be paying the price.