In April 2022, the Payment Systems Regulator (PSR) released a report aimed at understanding the potential barriers of adopting digital payments, and identifying solutions that can be implemented by firms and regulators.
The regulator's main priority is to unlock the possibilities of open banking payment services, and providing customers with greater visibility and control over their day-to-day retail transactions. The PSR has outlined its intentions to engage with the payments industry to enable greater access to digital payments and move payment services forward.
The report primarily highlights open banking, the system of allowing access and control of consumer banking and financial accounts through third-party applications, as the area of digital payments that has the most potential in promoting innovation and competition in the payments market. While open banking payments are becoming more common within firms, it's still a low amount compared with other payment methods. Making it more accessible will be key to expansion.
The PSR believes that if open banking were more accessible, it would have benefits for consumers, such as usability, while still creating competition among payment services to enable further developments. Although progress is being made, both payment service providers (PSPs) and regulators need to do more to incentivise digital payments and make it more available.
Open banking also provides a safer and more effective way to make transactions. If implemented correctly, it could have substantial benefits across the industry by reducing the risk of fraud and creating a shared space between PSPs and their customers. There is still a lack of awareness surrounding open banking, however, with many consumers choosing to avoid digital payments.
To take advantage of the benefits, businesses need to ensure that they have effective open banking solutions in place and clear oversight of how it operates so that it aligns with the needs of their consumers – and encourages them to embrace new methods of payments.
One of the main obstacles to digital payment adoption is the lack of awareness and understanding of digital payment options among businesses. Also, many consumers are used to forms of payment transactions, such as cash in hand, and may view digital payment methods as complex and unreliable in comparison.
The PSR has acknowledged that new payment methods are likely to confuse certain consumers, such as those who have a limited awareness of developments in the payment industry or who are not yet familiar with the open banking retail experience.
Resolving this will require firms to build a familiarity around digital payments within their business and raise awareness of the benefits. They'll need to build confidence among customers and encourage the use of new forms of payments by making it is a beneficial way to make payments in future. Helping consumers navigate the payment landscape and make considered choices around their transactions will also build a stronger relationship between consumer and provider.
Lack of access to digital payment methods may also be preventing customers from switching to payment methods. The Lloyds Essential Digital Skills Framework 2021 found that 20-25% of adults lack the necessary skills required to do a digital transaction and are unfamiliar with the tools needed to transfer their money.
Possible reasons for this include having inadequate broadband service or affordability issues, which makes digital payments impossible. To be effective, partaking in open banking requires a baseline of access to technology and Wi-Fi. Making it more viable will require finding a way to include those who are currently excluded and providing easier methods of digital payments.
To justify the decision to adopt digital payments, PSPs also need to make sure they are meeting the requirements of their consumers. A core barrier outlined in the PSR report is the failure to meet the needs of businesses who rely on cash payments to monitor their income, as cash makes it easier to budget. Existing forms of digital payments, such as bank transfers and mobile payments, may take days or weeks to complete a single transaction. This can provide an unreliable form of payment for businesses, especially smaller ones, who can't rely on delayed transactions to effectively run their enterprise. Existing methods don't provide business owners with enough tools to manage their cashflow and balances effectively, which can make the transition to digital payments a tough sell.
When it comes to making informed decisions about managing payments, business owners need information and tools that aren’t time consuming or difficult to manoeuvre. They need access to better data that allows them to clearly understand what their specific payments are related to, and more metrics to help them manage their income and run their business smoothly. In turn, this information should help them improve their day-to-day operations, analyse their sales patterns more effectively and improve the overall customer payment journey.
As regulators look to implement more digital payment requirements, PSPs will need to improve the way they engage with their consumers. Firms should ideally look to find ways to provide an easy entry point through their services that encourages digital engagement and effective methods of payments for their customers.
For more information on payments, open banking and updates on relevant regulation, contact Paul Olukoya or Terry Taylor.