Tax cuts, R&D and pension reform were hotly anticipated by the UK tech sector in the Autumn Statement. For the fintech and payments space, the focus was also on the much-awaited publication of the Future of Payments Review. Led by Joe Garner, the report explored the ‘good news’ and the ‘trouble brewing’ for UK payments and set the base for a National Payments Vision next year.
However, the report did not provide any realistic answers to how (or when) UK small businesses can begin to benefit from innovation.
Despite concluding that UK payments are, to use the author’s own words, in a “good place”, one of the key findings of the report is that the dependency on cards, and the associated costs, has led to dissatisfaction from merchants who long for alternatives. The report points to open banking and the work being developed by the Joint Regulatory Oversight Committee (JROC) as the silver bullet for merchant grievances.
While this is being presented as the solution, it won’t be. At least not until merchants, and SMEs especially, get a say in the payment methods they accept, and industry incentives are fairly aligned. Otherwise, UK small businesses will continue to be stuck between the JROC and a “good place”.
The report’s logic is simple. The UK is almost unique in the fact that it lacks an alternative to cards, unlike Brazil’s Pix, India’s UPI, or Sweden’s Swish. The government should prioritise fostering the open banking industry to rise to this challenge, which requires developing a ‘sustainable’ commercial model. In this scenario, consumers will have more choice over how to pay and merchants will have more choice in how they get paid. These added choices will lead to a healthier payments landscape for both end-users.
While the ambition of fostering an account-to-account alternative to cards is welcomed and necessary, the report – like multiple other payment strategies before it – doesn’t seem to recognise who actually calls the shots in UK payments. This recognition is crucial for the development of any coherent National Payments Vision such as the one the report recommends the government devise.
Open banking isn’t a silver bullet
To do so, the first step is to understand who really has the choice when a payment is made. The dominance of cards in the UK means the major card schemes have become ‘must-take’ payment methods for small businesses. Whatever the cost of these cards, merchants must continue accepting them, if not, they risk losing business to a competitor.
This is especially true for small businesses that don’t have the bargaining power to negotiate lower rates with the schemes (unlike, say, ecommerce giants) or convince their customers to use a different payment method than the one they prefer to pay with.
The result is that merchants, as price-takers, exert little to no competitive pressure on the payment method utilised at point-of-sale. Just as this problem wasn’t solved by introducing new smaller schemes or BNPL providers as alternatives, it won’t be resolved by simply adding open banking into the mix. Merchants will continue to accept cards and incur the cost, while also having to accept open banking if enough customers request it.
More options don’t mean more choice – or more efficiency.
There is also a deeper issue at play. The main beneficiaries of cards are also the main gatekeepers to the adoption of any alternative. Account providers (mostly banks) benefit from card fees which are paid for by merchants. Account providers therefore lack the incentive to support open banking payments at retail unless they can benefit as much, or more, than they do from cards.
This is why the customer journey for open banking is still much worse than cards, and why we haven’t seen any substitution of cards for account-to-account payments at point of sale – despite the heavy regulatory support.
Stalemate between merchants and banks
Indeed, the report’s solution is creating a “sustainable” financial model that encourages banks to support open banking. But that inevitably risks eroding the savings merchants would enjoy from open banking compared to cards – which brings us back to square one.
So, merchants don’t like cards because they are too expensive, and banks don’t like open banking because it’s too cheap. The report doesn’t have an answer on how to break this stalemate, nor does it seem to recognise its existence.
In my view, the first step must be addressing the issues in the card market. The PSR’s Card-Acquiring Market Review has partially contributed to this, but its ongoing card fees investigations can finally tackle this issue head-on.
If properly supported by the government, they can help us break this stalemate by addressing the distorted incentives of incumbents and giving merchants meaningful choice over digital payments via measures such as Least Cost Routing introduced by regulators in other jurisdictions.
Ultimately, any National Payments Vision shouldn’t commit the mistake of focusing too much on future innovation as the silver bullet, neglecting the decades-old dynamics which have prevailed in the payment system.
There is immediate action we can take to create a more level playing field – but right now, we continue to miss a trick.
Leonardo Azevedo Mitchell is head of public affairs at Teya.