joint study, Ofcom and the UK's new Payment Systems Regulator have explored the reasons for limited innovation in the UK payment services market, sounding the alarm over the potential impact of PSD2. But the study does not thoroughly explore the most recent proposals, which would make the situation worse than officials seem to appreciate.
The study confirms that most of the innovation is facing retail customers and relies on the existing payments infrastructure.
Various factors act as a barrier to the scale and pace of innovation seen in other technology sectors. There is a low tolerance for system failures, naturally, but the resulting high security and resilience requirements make systems more rigid and less open to the usual market forces of present in other IT sectors. New entrants also find it hard to break through the network effects that support existing payment methods (e.g. cards). Investment is further constrained by significant uncertainty around regulation and technological standards. Finally, the interests of consumers, merchants, telcos and financial institutions are not aligned in the types of services being offered - in essence we're seeing an attempted 'land grab' by competing institutions at customers' expense.
It is critical that the European Council considers this report as it finalises the proposals for PSD2, which would make this situation worse. Equally, however, it is a pity that this study was not able to more thoroughly explore the potential impact of those proposals.
Let's hope for some more joined up thinking in the weeks to come!