UK payment sector urged to develop system to bypass dominant card networks

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The UK should develop ways to challenge the dominance of the big card networks and is “at risk of falling behind” other countries unless it builds an alternative to its “clunky” Faster Payment Service, according to a government-commissioned review into the competitiveness of the sector.

The report, led by former Nationwide chief executive Joe Garner, called on the payment sector to use open banking technology to create new routes between customers’ bank accounts and retailers that would bypass card intermediaries to challenge the dominance of the Visa and Mastercard networks.

“When we talk and listen to merchants and retailers, they say things like, we feel trapped because we have to take card payments,” said Garner, adding that giving retailers the option to charge without using a card network would create a “healthier” market, especially as the use of cash was falling.

The findings, which were published on Wednesday alongside the chancellor’s Autumn Statement, come as card networks are facing a probe by the UK Payment Systems Regulator into cross-border interchange fees. Mastercard and Visa together accounted for 99 per cent of all debit and credit card payments in the UK in 2021, according to the watchdog.

Garner’s report recommends creating a similar consumer protection mechanism for open banking to the card networks’ so-called chargeback system, which allows a customer to claim a refund via their card issuer if they did not receive a good or service.

The report also urged the payment sector to use open banking technology to bypass the traditional method of transferring money, which requires customers to enter sort codes and account numbers, mirroring initiatives in Brazil, Sweden and India.

The report said the widely used Faster Payment Service in the UK takes between 70 and 80 seconds on average to process a transaction. Alternative methods in Brazil, India and Sweden, which bypass the need for sort codes and account numbers, allow users to send money in under 30 seconds.

“The UK is kind of OK today [at account-to-account payments] but if we don’t innovate, we will start to fall behind,” said Garner.

He described the push by big tech companies into the sector as a potential “inflection point” that made the need for a national payments strategy even more urgent.

The use of digital wallets, including Google Pay and Apple Pay, has grown rapidly, accounting for 10 per cent of UK retail payments. Open banking technology, which Apple is experimenting with, would allow digital wallets to display account balances and risk making some customer interactions with their bank “obsolete”, the report said.

In separate statements, Visa and Mastercard welcomed the recommendations and said they supported innovation and would work with the government.

PayUK, which operates the Faster Payment Service, also welcomed the review, adding that innovation in digital payments was “vital for businesses and consumers” and that it was developing a new payment architecture for that reason.