Is a byzantine regulatory landscape poised to burden the UK’s prosperous open banking sector? Are Payment Solution Providers (PSPs) equipped to compete in the PayTech era? Whatever the future might have in store, it’s clear that both merchants and consumers have gotten used to nigh-invisible transactions, and traditional payment models must evolve to keep pace.
Like any period of major disruption, innovative opportunities await those who can successfully navigate the ensuing regulatory change.
Home to countless FinTech unicorns, globally revered regulations and favourable investment conditions, the UK’s global-leading payment sector is on the precipice of a new era. Here are the prevailing trends, challenges, and opportunities facing the nation’s PSPs today.
Buy Now Pay Later
The cost-of-living crisis is rising, spurring an important conversation around the safety of borrowers in today’s climate, particularly regarding the buy now pay later payment model (BNPL). An unregulated BNPL framework represents a substantial number of pitfalls, with consumer debt concerns reaching an apex back in February 2022.
The following February, the UK government set out draft legislation to target BNPL firms with the goal of reducing the potential harm to the consumer, symbolic of the wider industry paradigm shift to a consumer-centric future.
At the moment, firms that provide BNPL products don’t typically need authorisation from the Financial Conduct Authority (FCA), as the agreements they provide aren’t regulated.
What might this change mean for PSPs? PSPs that provide a BNPL service may have to:
Review their product compliance in line with the new regulations
Ensure they maintain transparency and communication with their customers
Educate their workforce on the ramifications of the regulatory changes
Limit their late fees
Conduct stringent affordability checks on their customers
Whilst this could lead to increased operating costs in many cases, PSPs that can offer a compliant, consumer-centric service will be the ones who enjoy the most success.
The Digital Pound?
In March 2023, the UK government responded to HM Treasury’s consultation on Crypto asset regulation, confirming its intent to develop an extensive regulatory regime. Many of the changes proposed in the consultation would likely have a wide-reaching impact on the PSP industry, particularly if we see the emergence of a state-backed digital currency (aka, the Digital Pound).
This reality might not be as far away as it first seems, with the Bank of England claiming that ‘a digital pound will likely be needed in the future,’ but it’s currently ‘too early to say.’
What could this look like for PSPs? For starters:
Taller barriers to entry – the more hoops that need jumping through, the less competitive the landscape. One of the proposed regulatory changes, a rule that would require all crypto-asset-providing PSPs to register with the FCA, could result in a highly complex, expensive, and time-consuming process, potentially pricing smaller organisations out of the market (and preventing disrupters from competing)
Innovation Time – the introduction of a digital pound could open up many avenues for innovative new financial products. Alongside cryptocurrency-supported payment platforms, PSPs may want to consider developing risk-mitigation products, educational tools, or even storage services.
Greater Accountability – the changes to the regulatory landscape can be largely attributed to the need for greater accountability in the world of financial services. The safety and well-being of the customer depend on it, symbolised in part by the proposed move to bring cryptoassets inside the scope of the UK’s anti-terrorist financing scheme (PSPs are under this scope currently).
Under Review: PSD2
The review of the European PSD2 (Payment Services Directive) looks set to result in some of the most impactful changes we’re likely to see in the PSP space any time soon.
As the UK attempts to pilot its way through the many, many, many challenges associated with Brexit, it will undoubtedly remain aligned with the EU’s financial services regulations.
As such, the UK will work to ensure that changes to its regulatory framework will align with the review of the PSD2, an intricate ongoing process that may change:
The way PSPs approach the adoption of FinTech, particularly regarding Blockchain and AI.
The way third-party data is handled (perhaps following in the footsteps of the US, which recently introduced final guidance on third-party risk management for banks).
The way that firms implement their authentication methods.
The way PSPs form partnerships. For example, the burgeoning RegTech market is full of potential collaborators that can help PSPs stay ahead of the regulatory changes, and speaking of staying ahead of the changes…
Support from Broadgate
Changes are tough (if not impossible) to cope with if you don’t have the right talent on board. We saw the results of failing to build the right teams back in July when the Consumer Duty Act came into force – many companies lacked the support needed to implement systemic company changes.
At Broadgate, we’re passionate about connecting incredible talent with equally incredible opportunities. If you’re hoping to build out your finance team, contact Broadgate and find out more about our diversity-led recruitment methodology today. We’re here to help.