Innovation in payments: what role do policy and regulation play?

Paul Worthington, Head of Regulatory Affairs at Innovate Finance, speaks about the role policy and regulation play when it comes to payment innovation.

Over the last ten years, payments have played a leading role in the growth of fintech. Global fintech investment data from 2023 suggests this trend shows no sign of slowing down. Each year Innovate Finance publishes a FinTech Investment Landscape, which provides an insight into the overall amount of funding into the sector. The data for 2023 revealed that payments continue to be attractive for investors, with nine megadeals (over USD 100 mln).

There are a number of macro trends that explain the enthusiasm. As Nicole Anderson, Venture Partner at 1835i, explains, ‘consumer trends suggest there is a continued decline in cash usage, while at the same time an increased use of mobile devices for payments, and rising awareness of alternative payment methods’. In addition, another major contributing factor is the role of policy and regulation, and how in different countries local approaches have helped innovation flourish.

Central banks and financial services regulators have traditionally been focused on objectives like financial stability, market integrity, and consumer protection. While these objectives remain priorities, in the last ten years there has been a growing recognition among regulators that fostering innovation can bring about better outcomes for firms and consumers. Former Deputy Governor of the Bank of England, Sir Jon Cunliffe, described the situation for regulators as ‘our job is not to protect bank business models. Banks will have to adjust. Our job is to ensure that if bank business models change, we manage the financial and macroeconomic consequences of that’.

The approach that different countries take to fostering innovation in payments depends on their priorities and goals. In some markets, this is done by national governments, while in other markets central banks play a leading role in developing a strategic direction for the payments ecosystem. A decade into the growth of fintech, a key question going forward is how regulatory approaches will continue to unfold and enable innovation while ensuring the appropriate guardrails, whether for consumer protection, financial stability, or competition purposes. This is the fundamental challenge.

In the UK, the government recently announced that it intends to publish a National Payments Vision (NPV). This will seek to guide industry and regulatory activity by providing direction on the shared outcomes the government seeks to achieve to ensure a world-leading payments ecosystem. In other words, the NPV should ideally create a north star that the industry, regulators, and investors can look to for greater certainty.

The UK isn’t alone in taking a more strategic approach towards payments. Australia published its Strategic Plan for Australia’s Payment System in June 2023, which outlines a number of strategic priorities, including updating the payments regulatory framework, modernising payments infrastructure, and uplifting competition, productivity, and innovation across the economy. This final priority demonstrates the broader impact that innovation in payments can have on the wider economy, through initiatives like Open Banking, or new applications utilising technologies like Artificial Intelligence. The potential benefit of such national visions is that they also provide a framework in which regulators operate, how they look to support innovation, and what the needs of the ecosystem are. Coordination between different domestic regulators is also key in this respect.

In other markets, central banks have taken a leading role in the direction of the payments landscape. The Central Bank of Nigeria (CBN) published its Payments Systems Vision 2025 which seeks to drive digital innovation for payments in the future, such as contactless payments and Open Banking. Elsewhere, in Brazil the Banco Central do Brasil (BCB) launched Pix in 2020, an instant payment scheme that enables its users, individuals, companies, and governmental bodies, to send or receive payment transfers in a few seconds at any time. The impact on the Brazilian payments landscape has been transformative according to Carlos Eduardo Brandt of the BCB, who said in an interview, ‘Pix is now the most used means of payment in Brazil. Even more than the debit, credit card, or any other instrument’. In both these markets innovation has been driven in large part by the regulatory agenda of the central banks. While this may work in some markets, it wouldn’t necessarily work in others.

While policy and regulators have the potential to act as drivers of enabling innovation in payments, in some circumstances regulation must play catch-up to innovation. Stablecoins, and in particular the Libra whitepaper launched by Facebook in 2019, was notable because it highlighted how innovation in the market can force regulators to act. Benoît Cœuré, former Executive Board Member of the European Central Bank, said shortly after the launch that ‘Libra has undoubtedly been a wakeup call for central banks and policymakers’. Since 2019, there has been a wave of regulatory responses to regulate stablecoins, such as the EU’s Markets in Crypto-Assets (MiCA) regulation.

The other main response to Libra from central banks has been the surge in interest in central bank digital currencies (CBDCs). According to the Atlantic Council’s CBDC Tracker, 134 countries and currency unions, representing 98% of global GDP, are exploring a CBDC. Each CBDC project has its own unique features, and the approaches vary based on local market conditions (e.g. promoting financial inclusion or promoting innovation in digital payments). CBDC projects have attracted a lot of interest, but ultimately their success will depend on a clear vision of what they are trying to deliver, and the regulatory framework that enables new types of digital payments to flourish.

Looking ahead, policy and regulation will continue to play a critical role in setting the conditions in which firms operate and seek to innovate. While there have undoubtedly been some positive developments on the part of regulators considering the role of innovation and creating the conditions for new types of payments, it’s important that regulators continue to promote the importance of competition and innovation to maintain the progress seen in recent years. This will be a key trend to watch around the world going forward.

About Paul Worthington

Paul Worthington is the Head of Regulatory Affairs for Innovate Finance. He previously led the Financial Conduct Authority’s Innovation division’s global policy strategy and collaboration with other international regulatory authorities, including the creation of the Global Financial Innovation Network (GFIN). Paul also previously worked for Meta where he led on fintech and digital assets policy across Europe. Paul has over 10 years’ experience working on financial services and fintech-related policy and regulatory issues.

About Innovate Finance

Innovate Finance is the independent industry body that represents and advances the global fintech community in the UK. Innovate Finance’s mission is to accelerate the UK's leading role in the financial services sector by directly supporting the next generation of technology-led innovators.