Banking without barriers: how changes to the payments industry affect your business

Payments are at the heart of commerce: every business makes and receives payments and wants to do so reliably, promptly and without excessive administrative burdens or costs. The payments sector is evolving rapidly due to advances in technology and legislative developments. These changes will impact profoundly on the way we pay and are paid for things.

How do we currently pay?

According to Payments UK^[1], businesses made 3.9 billion payments in 2015, mostly to individuals (such as salaries). Bacs Direct Credit remains the most used payment system among businesses, processing 2.2 billion payments in 2015, but an increasing number of small businesses are using the Faster Payments Service (FPS) due to its near-instantaneous functionality and universal reach. CHAPS payments are still the norm for large corporates and financial institutions transferring significant amounts:  £68.4 trillion was moved via CHAPS in 2015 (90% of the total value of payments made, although only 0.01% by volume).

Of the 34.3 billion payments made in 2015 by UK consumers, 4.9 billion were regular bill payments to business and 29.3 billion were “spontaneous” spending. Traditionally, cash has been king but increasingly, consumers are paying by debit and credit/charge cards, particularly for low value transactions: their usage grew 10% and 9% respectively in 2015, primarily due to the wider distribution of contactless terminals and cards. Debit cards are forecast to overtake cash as the most used method of payment in the UK by 2021.

Changes driven by new technology

Some of the highest profile new payment products have responded to consumer-led demand for greater speed and convenience as technology evolves.

• Contactless payments: contactless payments divide into those using the plastic card itself, and those (such as Apple Pay) where the card is “provisioned” into a device and used virtually. One billion contactless payments were made in the UK in 2015 (a 330% increase on 2014), on more than 300,000 contactless terminals. For many businesses, the focus has been on rolling out terminals and training staff. However, contactless technology also offers supply chain opportunities and scope to develop new wearable technologies which incorporate payment functionalities.
• Smartphones: all high street banks offer mobile banking to varying degrees, but businesses are also embracing mobile payments. Large numbers now accept debit and credit card payments on mobile devices; and many large IT, telecoms and payments firms have launched products enabling consumers to make payments via their mobiles (including to other mobiles).
• “Light banking”: asincreasing numbers of customers (both consumers and businesses) have mobile wallets, e-money providers are developing
  products which enable those mobile wallets to be used in ways which replicate the features of more traditional bank accounts, in particular, enabling access to card schemes (such as Visa and Mastercard) and payment schemes (such as Bacs and FPS). 

New technology is also impacting on the delivery of other banking services.

• High street banks (Nationwide, for example) are offering video banking to customers in remote locations or who cannot travel to larger branches.
• Increasingly, banks are collaborating with newcomers in order to bring products to market faster. Santander recently partnered with Kabbage to provide working capital solutions for small businesses.
• Online-only banks, such as Atom, are growing in prominence.

Legislative developments

Since 2015, interchange fees (paid by banks to each other when a payment is made by card) have been capped^[2]. Most businesses have seen changes to their merchant acquiring agreements and (hopefully) some reduction in card transaction costs. Businesses are also required to display clear, prominent signage if they do not accept all cards and from 2018, merchants will not be permitted to surcharge any card which is subject to the interchange fee cap.

A recent change^[3] has allowed UK banks to accept an electronic image of a cheque, instead of the physical cheque. Barclays and Lloyds have already begun cheque imaging trials. Most businesses and consumers will find they receive funds sooner: they will no longer need to travel to a branch (nor be constrained by opening hours) in order to pay in cheques; and once paid in, digital cheques will move through clearing faster. Mobile phone companies hope this will provide further impetus for “sticky” users to upgrade to smartphones in order to pay in cheques.

The biggest changes in the payments sector will come from the implementation of “PSD2”^[4]. This European Directive will come into force in January 2018 and businesses will see changes to their agreements with banks and other payment providers towards the end of next year in order to ensure compliance. However, PSD2 will have a far greater impact for certain types of business, with significant changes to who is regulated and how payment services must be delivered.

• Changes to who is regulated: PSD2 will extend the regulatory umbrella to cover new players in the payments sector by:
  • Introducing new categories of “payment service”: businesses providing account information services or who initiate payments on behalf of others may be providing a payment service under PSD2, and be required to comply with payments regulation (at the moment they are mostly outside scope). Some businesses are clearly providing these services at present, but others such as accounting practices, wealth managers, credit reference agencies and suppliers of merchant analysis tools may also be caught under PSD2. 
  • Changing the exemptions available: currently, providers of a payment service may fall outside the scope of regulation if they can rely on an exemption. PSD2 will be tightening many of the existing exemptions in order to ensure greater consistency of application across the EEA. For example, web-based platforms, which currently pass a payment from a service user to a service provider, may no longer be able to rely on the “commercial agent” exemption once PSD2 comes into force. Similarly, some gift cards may no longer qualify under the “limited network” exemption once PSD2 is implemented. 

Businesses that currently provide one of the new payment services or who are currently relying on an exemption should be seeking advice sooner rather than later in order to be compliant by January 2018.

• Changes to how payment services must be delivered: even for existing participants in the sector, PSD2 will bring about some substantial changes. The most obvious are that PSD2 will apply (in varying degrees) to:
  • all payment transactions where either the payer or the payee is in the EEA (the existing regulations have only limited application where one party is located overseas); and
  • payment transactions in any currency (currently, only EEA currencies are affected).

These changes mean that large numbers of transactions which are currently not affected by payments legislation will become subject to the rules in PSD2 regarding how payments business is conducted. Some businesses with overseas operations may find that their banks substantially change the terms and conditions applying to their accounts as a result.

Conclusion

These are busy times in the payments sector, but ones which offer great opportunities for businesses to develop new products, to reach new markets and to reduce friction and costs in their payments chain.

These materials are written and provided for general information purposes only. They are not intended and should not be used as a substitute for taking legal advice. Specific legal advice should be taken before acting on any of the topics covered.

[1] “2016 – UK Payments Markets Summary: a summary of recent and emerging developments and forecasts for all forms of payment“.

[2] Broadly, the caps are at 0.2% for debit card transactions and 0.3% for credit card payments: Regulation (EU) 2015/751 of the European Parliament and of the Council of 29 April 2015 on interchange fees for card-based payment transactions

[3] Section 13, Small Business, Enterprise and Employment Act 2015

[4] The second Directive on payment services in the internal market ((EU) 2015/2366)