The Garner Review - Witstock’s Perspective

Summary

The recently published Garner Review of the Future of Payments confirmed several key trends in the payment industry such as a shift to card payments away from cash. Worryingly, it also stated that the UK is slipping down the global table of innovators in payments. These trends are well known to payment industry professionals and regrettably the report has added little to the debate about the way forward for the UK’s payment industry. Calling for a “North Star” to guide the industry is all very well, but with no plan of how to bring the stakeholders together and no certainty that they should go “north”, the report has added little to the challenge of what to do next.

Witstock’s experience of managing change in the payments sector indicates that the only effective way forward for the UK is for retailer and banking stakeholders to come together and define what great looks like for them and their customers. If the sector does not collaborate, it will end up with regulator/government-imposed innovations that satisfy no one and cost a great deal to implement. Collaborating to identify a common set of objectives for payments to create a “shared” vision has happened in the past and must happen now for the sake of the future of payments in the UK.

Background

Witstock’s perspective is informed by participation in the major change programmes that have radically altered the face of payments in the UK and globally over the last 30 years. These include the emergence of EMV global standard via the UKIS Programme, the introduction of contactless payments in mass transport, the early years of commercialising Faster Payments, the account switching programme, the UK NFC Steering Board, PayM, and many international innovation and transformational programmes. Typically, these have been based on industry voluntary collaboration.

Witstock has seen initiatives where collaboration has been less strong including PSD1, PSD2 and Open Banking, Request to Pay, and NPA. These initiatives have been less successful at delivering the benefits and traction that was desired. Typically, these have been based on enforced collaboration by regulators.
Witstock is convinced that collaboration between stakeholders is, ironically and necessarily, the best way to create a competitive and innovative environment. The benefits of UK collaboration go further as Witstock has previously noted. The innovation that led to the global standard EMV, created a body of expertise in the UK that was part of the spur for the rise of the UK Fintech industry.

Government intervention

Ever since the Cruickshank Report, the UK government has taken a more interventionist approach in the payments industry and sought to use regulation to deliver their desire for an innovative, open and competitive sector. This approach has not had the desired results. The more interventionist the government and regulators have become, the less capable the resulting payment infrastructure appears to be, and the product outcomes have been poor.

The New Payments Architecture (NPA) programme has not moved forward as hoped and now seems on hold and in a precarious state. Nor has Open Banking payments moved forward at pace compared to the original plans. Open Banking has not created the open, collaborative and yet competitive market we had all hoped for. Indeed, with the demise of Pay by Bank App (Zapp), PayM, and Request to Pay in recent years, there is a danger that the UK is losing its claim to being a leading innovator in payments.

Innovation needs to solve a problem

Part of the market context that the Garner Review appears to ignore is that the alternative to payment services driven by government diktat, is the highly successful and ubiquitous payment services that already exist in the UK. Cards are now accepted almost everywhere, and volumes of card payments have increased significantly through the pandemic and continue to do so. Cash is also familiar and well understood by consumers and serves a particular need in UK society.
The EMV based card schemes, Visa, MasterCard, American Express et al, are provided by the retail banks to their customers in the certain knowledge that they are the most effective way of supporting their payment needs. The payment companies (or schemes) have spent the last 50 years creating a set of rules, standards, technologies, and an operational base that although not perfect, does a good job covering most market needs. The banks that issue their products have invested a great deal of their time and effort and shareholder resources into the infrastructure that makes them such powerful payment methods and retailers have done the same. There is now very little that the card payments industry cannot deliver in terms of customer needs.
Given that card payments work so well, serve the needs of retail bank customers and are internationally useful, why should the banks be forced to create a parallel capability for marginal use cases that are not financially viable.

Perspective of the Retailer

Of course, the payment card industry is not without its critics. Retailers argue that it’s too expensive and they lack choice. In the past, retailers offered account-based services as individual businesses. It was a normal feature of life to have an account with the local department store or newsagent with settlement in cash or using a bank clearing product such as a cheque.

Given the retailers’ view of the current offerings and their costs, there should be a business case for them to establish a collaborative payment service of their own. When this collaboration has been considered it is quickly realised that the regulatory environment militates against this plan. It’s too hard and too complex and the cost of achieving ubiquitous acceptance is too high to make it viable. It is a measure of how effective regulation and government intervention are that there is no business case for retailers to build this alternative to the card scheme solutions.

So, retailers must work with the card payment industry to improve the card schemes to address their concerns, for example, the need to reduce costs. They do not need a parallel government-imposed alternative payment method that offers no functional advantage, adds additional complexity at point of sale and is costly to implement.

So how should the industry moved forward

Witstock argues that the only effective way forward is for the retailer and banking stakeholders to come together and define what great looks like for payments in the UK for them and those that depend on them. They need to understand the balance to be struck between collaboration and competition. Once these stakeholders have collaborated to define what great looks like then, and only then, government and regulators should consider their part in helping to achieve this outcome whilst preserving the integrity of the national system.

The structures that are formed must be open to all, within reason, to encourage competition. The economics of the clearing infrastructures must become transparent so that all participants can understand the economic case of innovation and the technology must be opened-up and released from dated constraints and architectures. Where legacy technologies act as barriers to innovation and competition they must be opened-up or removed completely.

Conclusion

It is time for banks to serve their customers by working with the retailer community to address their concerns and for the government to return to its role of watching the industry flourish in an open, competitive way with a market driven by innovation. Unless the situation is recovered soon, the UK’s pre-eminent position at the heart of payments innovation globally and its role in fintech will be lost at the cost of valuable jobs and wealth generation.

For more information or to discuss this paper please contact:

Adrian Cannon         adrian.cannon@witstock.com
Chris Moore         chris.moore@witstock.com
Lindsay Roberston    lindsay.robertson@witstock,com