26th February 2025

Payments is now an area in which the public policy agenda dominates

The National Payments Vision Committee and Vision Engagement Group are now in place as the forum within which the future of payments in the UK will be decided, in a process being curated by the Bank of England.

In 2024 we had the ‘Future of Payments’ review, deliberating and consulting, being curated by HM Treasury and then passing its findings out as the National Payments Vision.

From 2015-7 we had the Payment Strategy Forum, operating under an identical mandate and being curated by the Payment Systems Regulator.

In between we had the Digital Payments Initiative, curated by the Payment Systems Regulator, which passed its findings on to Open Banking.

We had the Competition and Markets Authority, which curated Open Banking, and then passed that parcel on to a JROC (Joint Regulatory Oversight Committee), who have now opined that one or two bodies need to be created for them to pass their files on to.

In each process a public sector body sets the agenda, and private sector bodies dance attendance. At each transition point the level of public sector body is elevated, until now it cannot go any further – there is no body more senior than HM Treasury and the Bank of England.

What happened?

Nothing happened. We never got a New Payments Architecture. Authorised Push Payment Fraud has not been solved. New entrants cannot get bank accounts or access to payment systems. Card fees are as high as they ever were. Face-to-face banking services have been largely withdrawn.

The Bank of England’s RTGS/CHAPS service has just about gotten itself onto ISO20022 XML, with several outages along the way.

What new products and services have been launched? Contactless, and err…

How many seminars, roundtables, offsites, user group meetings, advisory board meetings and similar have occurred? How many sets of minutes, agendas, action lists, terms of reference and similar have been duly drafted, circulated, commented upon, revised, adopted, distributed, filed?

A zombie activity – hardly an industry

We recently wrote about Open Banking as not being a genuine business but a prime example of state-directed activity, where private sector players are invited to invest in an activity that has public policy objectives. The investment case that was built around Open Banking has attracted hundreds of players, but into an activity, not into a business.

The Open Banking model is being adopted in UK payments as a whole, through the National Payments Vision process, and indeed it is being adopted across the entire UK economy under titles such as ‘borrowing for investment’, the National Wealth Fund, a ‘decade of national renewal’, and the Industrial Strategy Advisory Council. Public policy objectives determine the direction-of-travel.

The public sector will be taking an ever stronger hand in determining what UK payments is meant to do, what public policy objectives it is supposed to meet, what the services are, what data formats are used, what the business processes look like and so on. This is part-and-parcel of the growth of a third area of the economy beyond the ‘public’ and ‘private’ sectors, which we can call the ‘state-directed’ sector.

With the ‘public’ sector already being around 40% of the economy, it is not unthinkable that the ‘state-directed’ sector could grow to 30%, with UK payments (and its offshoot Open Banking) being part of that. That would push the size of the private sector down to 30%, the same size as it was in the Soviet Union. The private sector ceases to be the economy’s engine: it is at best an inconvenient trailer.

In such an economy – which tends also towards being highly regulated and punitively taxed – genuine competition reduces, innovation dries up, services become homogenized, the price of the services tends towards being free, wealth creation goes into reverse.

How services are now developed in UK payments

Service development is decided via quangos or through officially-sanctioned working groups (such as the Payment Systems Regulator’s Panel and its Digital Payments Initiative): everyone appears to be onside including customers (who are represented by trade bodies, pressure groups, private individuals who built a CV of being on several panels…), but no customers were genuinely consulted.

The service does not move forward – it becomes ossified and commoditized.

The process is also monopolistic – no new or alternative services can be developed outside of the state-directed process: it is too high a risk to the sponsor of such a service that the state-directed process might expand into that market space or somehow spoil the new service’s potential.

That does not mean that new or alternative services are developed inside the state-directed process either. Stagnation occurs, with a proliferation of ‘me-too’ offerings using existing tools and techniques and undifferentiated from one another in terms of feature-and-function.

This permafrost effect has been even better assured in the EU where all payment services must already be conducted in the ISO20022 XML data format, and be vetted by the appropriate groups over a long period before a new service can be launched: none ever is. Lead-time-to-market is elongated so as to undermine the business case for the new service, and competitors are given an advance view of the service in adequate time to replicate it, slow it down, or block it.

Single Euro Payments Area as a model

The Single Euro Payments Area (SEPA) service is the same as it was at the time of its launch in 2008/9, other than where change has been enforced by the imposition of further public policy objectives.

The SEPA market model was for a collaborative space in which ‘core and basic’ services would be designed in committees, and then for ‘value-added’ services to be designed and launched in the competitive space by individual market actors, without there being a clash between the two – a concept know as ‘interoperability’. This was likened to the ‘core and basic’ services being the rails, and the ‘value-added’ services being the trains that run on them. It has turned out that the ‘core and basic’ services were both the rails and the trains.

The central committee for SEPA is the European Payment Council, and there are further committees in each member state to manage the practical deployment of the SEPA schemes in their territory.

The EU’s governing authorities were dissatisfied with the level of voluntary take-up of the SEPA schemes between their launch in 2008/9 and 2012: the SEPA schemes has not sold themselves in their own right as better in terms of feature-and-function than the many legacy schemes whose replacement with the unitary Pan-European schemes (for Credit Transfer, Direct Debit, and Business-to-Business Direct Debit) was the public policy objective of SEPA.

This impasse led to the SEPA Migration End Date Regulation EU 260 of 2012, which mandated the closure of the legacy schemes and the migration of all traffic to the SEPA ones. There could be no coalescence of legacy and SEPA schemes: the former had to be killed off to furnish the market space for the latter, even though the SEPA schemes lacked the full feature-and-function of the legacy ones.

Major changes since then – for instance the making-mandatory of the SEPA Instant Credit Transfer Service or the implementation of Verification of Payee – have been triggered by further EU legal instruments.

No new payment schemes have developed, not least because of the protectionist entry barrier erected in 260/2012 that a new scheme had to enjoy adoption by the majority of Payment Service Providers in the majority of member states on the day of its launch. Failing that, it was illegal. Needless to say, no payment scheme can possibly achieve such a high jump on its first day.

The SEPA schemes – and ISO20022 XML – enjoy a de facto monopoly, but frozen in time like a zombie, unless and until EU governing authorities decide to send another charge through the schemes with their regulatory electrodes.

Role of ISO20022 XML in cementing ossification

The SEPA schemes are defined in ISO20022 XML and 260/2012 mandates that all but a few actions need to be undertaken in this data format. One is that an individual payment (which normally means a high-value one) can be initiated using a different data format, although all euro payments are cleared and settled in ISO20022 XML, now that the EU’s high-value payment systems migrated to it.

ISO20022 XML has not proven itself capable of enabling competition: it has brought about an environment where a low common denominator is established, and in a marketplace where revenues were already low. There is no financial incentive to get involved with SEPA payments in and of themselves, like a US bank might decide to handle Fedwire and CHIPS payments because of the revenue potential.

ISO20022 has become a sub-industry in its own right, supposedly focused on the collaborative space, but impinging on and shrinking the competitive space:

• Despite supposedly being extensible, ISO20022 XML has resolved into a book of structured messages like the predecessor SWIFT FIN message set, in which any message has limitations on the number and usage of its fields, if not on their individual capacity;
• The ISO20022 process imposes a given methodology of message development, registration and maintenance, which is based on compliance with UNIFI standards at every stage: that cannot fail but to limit the possible scope of services, as well as to:
  • Impose a given lead time;
  • Reveal a certain amount of what is planned to possible competitors;
  • Increase cost of entry;
• A requirement for a completely new field must go all the way through the ISO20022 process and be accommodated into the base definitions before any market actor can use it;
• Using existing fields for proprietary purposes is only viable to the extent that existing services that are widely used do not already use that same field;
• A market actor that adopted an existing-but-vacant field for proprietary purposes runs a high risk:
  • That the field will subsequently be enclosed in a future version of the SEPA scheme that is open-to-all and mandatory-for-all, possibly caused by new regulation;
  • That the version you invested in will not be the one that is made mandatory. You did not just waste your investment money on what you built, you have to pay to deconstruct it and build the mandatory version in its place, and migrate all your customers from your version onto the mandatory one;
• In practice the only feature-and-function that has been developed outside the ‘core-and-basic’ schemes has been done by the committees in each member state: they have replicated in ISO20022 XML the feature-and-function they enjoyed in their legacy schemes that 260/2012 ordered them to decommission, and they have used available fields, other than the ones earmarked for the ‘core-and-basic’ schemes, to do it:
  • Denting ‘interoperability’ in practice;
  • Collectively putting a marker on almost every available field in ISO20022 XML;
  • Virtually eliminating the viability of any market actor developing a proprietary service in that member state;
  • Absolutely eliminating the viability for a market actor to develop a Pan-European  proprietary service.

ISO20022 is a straitjacket, albeit in size XXXML. Its ubiquitous adoption for UK payments is proposed on the basis that it will support dynamism, competition, new services and so on, but set against the experience of the SEPA Area it is hard to see how those contentions can be sustained.

Summary and conclusions

Payments is now in the hands of the state, and it will be directed in line with public policy objectives. We already had a taste of that through Payment Strategy Forum, which delivered nothing of value.

We also have a clear model for it in terms of what has happened in the Single Euro Payments Area, and in how the adoption of ISO20022 XML has slowed developments, hindered the development of new services, and set the SEPA schemes in stone, except for when a new EU legal instrument is passed.

That promises to be the future for UK payments now that the process for the National Payments Vision has been established.