Payments, Banking & FinTech Roundup: May 2021

It’s been another eventful month in the industry, with new research, updates to regulations, and a Government focus on FinTech.

Things have been just as busy at Banking Circle, and we’re pleased to announce that we’re already handling 6% of European B2C e-commerce payments, just a year on from receiving our Banking Licence. Having processed €155bn of payments volume in 2020, we’re targeting €250 billion run-rate annual payment volumes and 100 million annual bank transfers by the end of 2021.

We’re also proud to be joining the P27 initiative as a front-runner bank to support the consolidation of the currently fragmented Nordics payments ecosystem, working to reduce the cost and time currently experienced in domestic and cross border payments to and from these countries.

Moving over to the DACH region, Banking Circle recently launched a German-language whitepaper exploring the opportunities for banks in Germany, Austria and Switzerland, which all have growing FinTech scenes.

We also held our second Knowledge Circle webinar ‘Weathering the data storm: hype and reality of launching AI in AML’, taking a look at what makes AI so useful, what teams need to get started, and how large organisations can address the data conundrum. Watch it on demand here.

Here are some other important stories from the industry you may have missed this month:

EU calls for tighter FinTech legislation for Lithuania

In the wake of the Finolita/Wirecard scandal, which saw the Finolita investigation uncover the payments company’s involvement in channelling funds from the now insolvent Wirecard Bank, policymakers have claimed the incident should be a “wake up call” for FinTech regulators in the country.

More agile supervision and regulation is being requested both at the central bank and the financial crime investigation service, with fears that regulators are struggling to keep up with fast-moving, innovative businesses.

Read more on that here.

Deadline for Strong Customer Authentication extended

The FCA has extended its deadline for implementing Strong Customer Authentication (SCA) for e-commerce transactions, by six months, to 14 March 2022.

The extension on the new rules, being introduced to enhance the security of payments and limit fraud, has been put in place to minimise disruption to merchants and consumers. The body had previously agreed to provide firms with extra time to implement SCA for card-based e-commerce transactions in response to concerns about industry readiness, as well as an additional six month extension due to the pandemic.

The FCA has stated that by the 14 March 2022 deadline, it expects “full compliance for e-commerce transactions”, but is urging firms to continue to take robust action in the meantime to reduce fraud risk.

ATM use increases by almost a fifth as lockdown restrictions ease

Data from the UK’s main ATM network, LINK, has revealed that cash machine transactions across Britain have increased by 18% since 12 April 2021, with a total of £3.6 billion withdrawn.

Over the past year, LINK has been conducting research on cash use under lockdown restrictions, with 65% of people claiming they had used cash in the past two weeks, compared to 53% in January. Consumers were most likely to use cash at convenience stores, supermarkets, and paying friends and family.

Almost a quarter (23%) stated they had wished to pay for something in cash but ended up having to use a card. 12% did not make a purchase as cash was no longer accepted where they were.

With many transactions shifting to digital payments as a result of the pandemic, this data prompts the question of whether cash will make a comeback.

FinTech Scotland developing 10 year roadmap for growth of sector

The independent body is developing a decade-long research and innovation roadmap to support the growth of Scotland’s digital economy as well as the FinTech industry across the UK.

Priority areas of innovation include financial inclusions, net zero, and wellbeing, and the roadmap also covers topics such as aligning research strengths and capabilities with innovation priorities, influencing future government innovation strategies, and building Scotland’s reputation for FinTech innovation both nationally and internationally.

The roadmap, which is being developed in collaboration with the Global Open Finance Centre of Excellence (GOFCoE), implements a recommendation highlighted in the recent Kalifa FinTech Sector Review, which highlighted Scotland’s opportunity to build on its position as the second largest FinTech cluster in the UK, through strategic research and innovation.

FinTech Scotland and Global Open Finance Centre of Excellence (GOFCoE) have appointed Whitecap Consulting to progress the initiative.

Read more about the roadmap here.

The FCA calls on EMIs to ensure customers understand how their money is protected

The Financial Conduct Authority has written to CEOs of electronic money institutions (EMIs) with concerns that these firms are comparing their services to traditional bank accounts without adequately disclosing the differences in protections between e-money accounts and bank accounts, particularly with relation to the Financial Services Compensation Scheme (FSCS).

The regulator has stated that e-money firms must write to their customers by 30 June 2021, in a communication separate from any other messaging, to remind them of how their money is protected through safeguarding, and that the FSCS does not apply.

Director General of the Emerging Payments Association, Tony Craddock, however, has claimed this is a backwards step. Through a post on LinkedIn, he explained why he feels the FCA has let the emerging payments sector down, and predicts that the letter is likely to “destabilise the e-money sector.”

Craddock believes this obligation will require time, cost and effort for the EMIs, and may scare smaller customers away from “cost-effective, flexible and secure prepaid accounts.”

European Central Bank castigates banks over instant payment fees

Speaking at a payments forum hosted by Finland’s central bank, the European Central Bank warned that charges levied by banks for instant payments are proving a barrier to uptake, with the private sector in particular, “lagging behind.”

The cost for service providers of using Target Instant Payments Settlement Service (TIPS) is just €0.002 per instant payment transaction, but instant payments are occasionally offered to consumers for as much as €1 per transaction.

ECB board member, Fabio Panetta, said this “must change” and that prices should be “neither excessive nor hidden to consumers”, as the key to instant payments is making sure they are cheap and easy to use.

BIS publishes working paper on the future of digital currencies

The Bank for International Settlements has published a paper on ‘The digitalization of money’, which predicts the unbundling of money.

Fiat money is expected to have three sets of functions; acting as a store of value, a medium of exchange, and a unit of account. However, as seen by cryptocurrencies, some digital currencies may provide the store of value function and others might be used as a medium of exchange for payments, which is where the conclusion over unbundling is reached.

The paper also explores the possibility of a re-bundling happening with different functionality, for example for data gathering or social networking sites.

Draft of the financial markets and insolvency Regulations 2021 put to Parliament

A draft version of the Financial Markets and Insolvency (Transitional Provision) (EU Exit) (Amendment) Regulations 2021 (2021 Regulations) has been laid before Parliament, alongside a draft explanatory memorandum.

The purpose of the new regulations is to amend a temporary designation regime (TDR) created by the Financial Markets and Insolvency (Amendment and Transitional Provision) (EU Exit) Regulations 2019 (SI 2019/341), which relates to the Financial Markets and Insolvency (Settlement Finality) Regulations 1999 (SI 1999/2979).

Temporary designation is being extended by an extra two years in situations where a system operator has notified the designating authority before IP completion day but has not made an application under section 3(1) of the SFRs within the six month period that began on IP completion day. Rather than immediately losing settlement finality protections under the TDR, systems will retain protections for up to 30 months following the end of the transition period.

Digital ID discussed in the House of Lords

On 20 May 2021, Lord Holmes of Richmond MBE asked about the Government’s plans for a distributed digital identification protocol, with Baroness Barran confirming that the next iteration of the Draft Trust framework would be published in the summer and that digital ID legislation would be consulted on this year.

In a recent report, the Financial Conduct Authority (FCA) expressed that digital ID would be of significant help to the greater adoption of Open Finance, with possible benefits going beyond economic gains. A trusted and effective government-issued central digital ID has the potential to enable and empower individuals who are excluded from exercising their citizen rights and accessing basic financial services.

In order to be successful however, it does need better focus and coordination. The independent Kalifa Review of UK Fintech highlighted the need for a coalition on digital ID to avoid misunderstanding and confusion about competing standards.