The UK payments landscape: trends and changes - Interview with PSE Consulting

How would you characterise the UK payments landscape? How would you say the overall payments market is changing? Are specific product innovations emerging? (e.g., notable developments in the UK payments industry in the past years)

The UK continues to be one of the most innovative payments market in the world. We have seen great strides on consumers’ use of a whole range of payment products from Open Banking through to contactless and mobile payments. In particular, we have seen a very substantial expansion in the use of Buy Now Pay Later (BNPL) which now accounts for around 3-5% of online spending. A recent review PSE carried out of the top 100 online retailers in the UK indicated that over 40% of large merchants now offer some form of BNPL, so it is very much part of the mainstream of payments in the UK.

What is the short-term impact of the COVID-19 crisis on payments? What key trends have dominated the payments industry in 2021 and what are the main developments that will impact the payments business in 2022?

COVID as helped accelerate payment trends that were already underway. As William Gibson said “The future is already here – it's just not evenly distributed”. COVID has helped make digital payments a mainstream habit by encouraging consumers who were reticent to use new payment products to give it a try. This could be using contactless on their plastic cards, trying out the wallet in their mobile phone, or simply buying their weekly shopping online. We certainly see these trends continuing in 2022, although I am sure there will be some return into analogue habits as we see consumers and merchants being more willing to handle cash again.

What can you tell us about the growth of new payment forms (including those that use Open Banking technology)?

As discussed, BNPL is set to become a major part of the payments landscape, but one of the biggest changes which consumers will have experienced in the last year has been the increasing prevalence of Strong Customer Authentication (SCA). While there have been justifiable concerns about the implementation of SCA and its impact on consumer payment journeys, we are hopeful that these will work themselves through and we will all benefit from higher levels of confidence for online payments and lower levels of fraud. We are already seeing UK issuers moving away from clunky one time SMS passwords to app-based authentication which provides a much more seamless customer journey particularly on the mobile.

Along similar lines, the rise in the contactless limit to GBP 100 has generated significant press coverage, but I think this is likely just to continue trends we already see in the market, rather than spark anything significantly new or different. For those that already use their smartphones to make payments, the increase in the limits won’t make much difference anyway.

How do you see the role of banks in this moving landscape? What is their approach to innovation?

I have to say that we are increasingly sceptical about high street banks’ ability to provide more than simple plumbing in the payments world. The pace of innovation from the fintech startup community, online merchants and the digital giants is well beyond the ability of most banks to compete. Let’s use BNPL as a good case study. Historically if I wanted to get an unsecured credit facility, I would have gone to a traditional issuer and applied for a credit card. This is likely to take a number of weeks to organise and I would be provided with a credit facility of a couple of thousand pounds. Now the credit offer is made in real-time, at the point of purchase, with each decision made at the level of tens or hundreds of pounds rather than thousands. Bank’s traditional bread and butter has been the provision of credit and the way it is now being offered to consumers is beyond their ability to compete.

How did Open Banking evolve in the UK during the last year? What are your predictions and thoughts on what the next twelve months have in store for the growth trajectory of Open Banking?

Open Banking has certainly come a long way over the last year. As with other aspects of digital payments, we are seeing it beginning to establish a foothold in certain parts of the payments market. We have seen some really great use cases for high value Payment Initiation service such as paying taxes, making investments, repaying credit card bills, or buying a car. We have also seen some great sources of innovation emerging as players have enhanced the core Open Banking service. However, I can’t see it moving the needle in traditional retail payments online or in-store. The current process just works too well, and consumers don’t have much of an incentive to switch.

How is Open Banking revolutionising digital payments? What are consumers and merchants’ attitudes to Open Banking and willingness to use Open Banking solutions?

As discussed above, Open Banking is certainly going to become a regular part of people’s payment experience, particularly as we see it being rolled out by institutions such as HRMC. However, it is likely to remain a niche product that may be used a couple of times a year, rather than one that consumer use ever time they shop online or visit their local shop.

What is your take on the European Payments Initiative? Will it be a sure-fire success?

We have been following discussions on EPI with much interest, as we did for its predecessors such as Monet. It now has considerable political momentum in many European markets, and I am sure it will become an important part of the European payments landscape. I am not sure, however, that I would call it a “sure fire” success at this stage. The bar for innovation is constantly being raised in the payments world and EPI will need to run very hard just to keep up with the pace of change. Where there is a switch from domestic schemes into EPI by large bank issuers no one will have any choice but to start using EPI, but where consumers and merchants are provided with a choice that I am less clear on is medium term outlook. In countries where there is already a dominant domestic payment brand, and banks decide to coordinate migrating their card portfolios into EPI, consumers are not going to be given much of a choice. However, where single issuers move, or consumers are presented with a choice about their payment brands, I am still not clear of EPI’s value proposition. The team who are currently working on the launch product need to make very sure there is a credible MVP that delivers clear value over current alternatives. The plans we have seen are very ambitious, but this wide breadth of service is likely to take a good number of years to achieve.

What prospects do you see for the payments industry in the UK? In your opinion, what changes occurring over the next 5 years will affect the payments market the most? Are you already starting to see medium- and long-term trends for the industry?

We are rather biased on this question I am afraid, being based in the UK! I am optimistic that the UK will continue to remain a hub for global payments innovation. British institutions, regulators and consumers are typically pretty forward-looking when it comes to payments, and I hope that this continues. We expect to see more and more innovation in the digital payments space as payments become embedded in a whole new set of use cases from paying for your electric car to friction-free check-out at supermarkets. We also expect the supplier landscape to continue to change as Banking and Payments-as-a-Service becomes the standard way to deliver regulated account and payments products into consumers’ and businesses’ pockets.

About Chris Jone

Chris has over 17 years experience with PSE Consulting and Accenture.  He specialises in payments innovation, particularly as it relates to mobile, e-commerce and alternative payments. Recent assignments have included the development of processor market entry strategies and M&A advisory.

About PSE Consulting (Payment Systems Europe Limited)

PSE Consulting is one of Europe’s leading payments consulting firms. Established in London in 1991, PSE provides highly regarded expert advice across the payments industry to schemes, processors, transaction gateways, issuers, acquirers, private equity and merchants. PSE is recognised as understanding and shaping innovation in the European payments market by delivering insight to our clients. PSE always focusses on our clients’ customers’ needs, their buying journeys and requirements through our approaches and methodologies. We do not provide hardware or software services or take commissions and therefore provide completely independent advice to our clients.