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Payment Matters: no 5

    • Financial institutions

    13-11-2013

    United Kingdom:

    HM Treasury announces policy on new Payments Systems Regulator

    On 9 October, HM Treasury published its response to feedback received on its March 2013 consultation paper on opening up UK payments.  A new Payment Systems Regulator, to replace the Payments Council will be established by and operate under the FCA.  Its objectives will be to promote competition, innovation and the interests of end-users in UK payment systems.  The new Regulator will have broad powers such as price control, Competition Act powers and powers to impose financial penalties and vary agreements, in respect of all designated domestics payment systems. 

    What this means for you:

    Payment scheme companies and scheme participants will be subject to the new regime if they are so designated by HM Treasury, rather than by a licensing system being implemented as originally proposed.   HM Treasury will designate a payment system if it is satisfied that any deficiencies in or disruption to the operation of that system would be likely to have serious consequences for those who use or who are likely to use the services provided by the system.  The proposals form part of the Financial Services Banking Reform Bill which is currently passing through parliament.  It is expected that the regulator’s powers will come into force in late 2014 and be fully operational in Spring 2015.  We will monitor announcements and report in future publications of Payment Matters

    Payments Council publishes figures on new Current Account Switch Service

    In mid-September 2013, a new bank account switching scheme was implemented allowing customers to move their current account to another bank within seven days. A press release by the Payments Council on 22 October 2013 demonstrates that although 89,000 people took advantage of the service during the first month, indicating a rise in the number of people switching banks this is not that substantial (only around 11%).

    What this means for you:

    The switching initiative is demonstrative of the current industry focus of increasing competition and providing greater choice for customers.  This focus is echoed in the EU as a whole.  By making it easier to switch accounts, payments accounts providers can expect fiercer competition for customers with some UK providers continuing to offer financial incentives to switch and others focussing on customer service or a position of trust within the market.  With many payment cards being attached to UK bank accounts the way that financial institutions treat their cardholders when dealing with card transaction disputes may become a more relevant factor in customers’ choice.

    Bank of Scotland not liable for CHAPS transfer to wrong payee

    In a recent case (Tidal Energy Ltd v Bank of Scotland plc [2013] EWHC 2780 (QB) (13 September 2013)), the Court held that an instruction to make payment through CHAPS was satisfied by funds being sent to and accepted by the receiving bank of the account number and sort code specified, even where the holder of that account was not the beneficiary named in the instruction (the Claimant claimed that they had been the victim of a fraudulent misrepresentation by a third party which intended to divert funds away from the intended recipient).  The Claimant claimed that because the beneficiary name did not match the name on the account, the accepting Bank should have returned the funds.  The terms of the agreement with the customer excluded regulation 75 of the Payment Services Regulations which covers liability for the non-execution or defective execution of a payment transaction.  The Judge commented that had this not been excluded then section 74(2) of the Regulations (which provides that liability of a payment services provider is excluded where the unique identifier provided by the service user is incorrect) would have applied. 

    What this means for you:

    The judgment is helpful for those that receive CHAPS payments as it confirms that there is no obligation to check that the name and account details of the beneficiary match.  However those institutions and companies that send or instruct payments through the CHAPS system should take extra care to ensure that details are entered correctly.  Where payments to a customer are processed through a third party Bank, processers may want to require proof from their customers that the account specified is in the name of the intended beneficiary and/or make customers aware during the instruction process that an error in the beneficiary account details may make the funds irrecoverable at a later date.  Further, in cases where regulation 74(2) would have applied it is worth noting that despite the exclusion of liability, subsection (a) still requires a payment service provider to make reasonable efforts to recover the funds involved in the payment transaction.  Although the costs of such efforts can be passed to the payment service user under subsection (b), payment service providers seeking to rely on the exclusion of liability where the unique identifier provided by the payment service user is incorrect may still not find themselves completely “off the hook”.

    The Bank of England (“BoE”) undergoes a public consultation programme on the introduction of polymer banknotes

    The BoE has started a public consultation on the introduction of polymer banknotes, which ends on 15 November 2013.  The consultation invites feedback for the introduction of the new £5 and £10 banknotes due for release in 2016 and 2017.  It is proposed that the new banknotes will be made from polymer instead of the current cotton based paper.  Polymer is a longer lasting, stronger and waterproof material which also offers greater design capabilities as well as significantly reducing opportunities for counterfeiting.  The BoE envisages long term production cost savings due to the fact the new banknotes will not be damaged as easily, which extends the duration in which they need to be replaced.

    What this means for you:

    Although not directly relevant to the card processing industry, the outcome of the consultation will affect every business and consumer in the UK.  Despite a reduction in the percentage of cash transactions, the production of banknotes is increasing year on year, which suggests there is sufficient demand amongst the public for cash payments.  The new banknotes may boost this demand as the improvements appear to address a number of the publics’ criticisms of current banknotes.  Businesses may wish to consider the cost of investing in new infrastructures or machinery to deal with the new banknotes as well as staff training issues and are invited to comment here before 15 November 2013.  The outcome of the consultation will be announced in December 2013.

    European:

    Council publishes a compromise proposal on Directive on Payment Accounts

    The Council of the EU has published a compromise proposal on the European Commission’s legislative proposal for a Directive on payment accounts.  This Directive continues to focus on the retail banking sector, in particular in respect of increasing transparency, improving the comparability of account fees, simplifying switching between accounts and allowing cross-border access. 

    What this means for you:

    The compromise proposal seeks to exclude payment service providers that operate solely as online e-payment accounts providers which will (under the terms of the proposal) be exempt from the current focus on simplifying processes and increasing transparency which can be seen both in the UK and the EU as a whole.

    Member States may prohibit handling charges without distinguishing between different payment instruments

    In an opinion given to the Oberster Gerichtshof (Supreme Court of Austria), the Advocate General Melchior Wathelet has considered a number of matters relating to the Payment Services Directive 2007 (“PSD”).  The PSD allows member states to prohibit or limit the imposition of charges on customers for the use of a given payment instrument.  Whilst generally such limitations are imposed in respect of the use of credit or debit cards, the Advocate General has taken the view that the directive does not preclude provisions which prohibit levy handling charges without a distinction being drawn between different payment instruments.  The Advocate General also found that the directive applies to mobile phone companies (in this case T-Mobile Austria) rather than just payment service providers.

    What this means for you:

    The Advocate General’s opinion will be considered by the Court of Justice, although is not binding on it. Judgment has yet to be handed down.  However, the case may potentially give member states cause to re-consider whether they wish to implement a more general limitation on levies, as is the case in Austria.

    Regulator says that banks can start with just £1million of capital

    The European Commission has accepted the Prudential Regulation Authority (“PRA”)’s proposal that ‘micro’ banks can be launched so long as they fulfil socially useful functions, such as lending to small business or providing residential mortgages.  This represents an exemption from the general minimum capital funding requirement of £5 million, as part of a drive to create more competition between lenders.

    What this means for you:

    The reduction in capital will widen the potential group of investors able to fund a new bank, without having to seek additional money.  The Bank of England has further simplified the way to set up a bank earlier this year by reducing the authorisation process from 18 months to six months.  This proposal is likely to encourage increased competition in respect of certain products offered in the banking sector, both from new ‘micro’ banks and current institutions who wish to diversify their offering but who would have previously been road-blocked by the minimum funding requirements.   The UK expects to see a flurry of new ‘micro’ banks entering the market as a result.

    EPC invited suggestions for changes to SEPA rulebooks

    The next generation Rulebooks for the Single Euro Payments Area (SEPA) payments schemes, (being the SEPA Credit Transfer and SEPA Direct Debit Rulebooks) will be published in November 2014, to take effect in November 2015.

    What this means for you:

    All stakeholders are provided with the opportunity to suggest changes to the scheme ahead of the new Rulebooks coming into force.  All interested parties should submit suggestions for changes to the European Payments Council Rulebooks by 28 February 2014.  The EPC website providers further information on the format of proposed suggestions.

    Market News

    Firms continue to invest in contactless payments, mobile payments and other alternatives

    Despite perceived customer reluctance to utilise contactless and other alternative payment methods, the market continues to see considerable investment by firms in developing infrastructure, software and hardware in this area.  For example: 

    • Boots UK, in connection with Visa Europe and WorldPay has confirmed that its national roll out of contactless terminals is now complete;  
    • Skrill (an online payments company) has launched a new Mobile App allowing customers to make and receive instant payments from their phone, using a 5 digit PIN, rather than a user-name and password;  
    • MPowa, a payment service which consists of a downloadable mobile phone application and attachable card reader, allowing payments to be made and received, is being launched in the UK; and
    • WorldPay Zinc is launching an application for the iPad.  The service, which is already available for the iPhone and iPod touch, operates by way of a downloadable application and CHIP & Pin keypad.  There is no long-term contract commitments or subscription fees, rather just a 2.75% fee per card payment.

    What this mean for you:

    It is clear that, despite certain concerns and criticisms in the press, the popularity of new payment technologies continues to rise, both with established high street retailers and smaller businesses.  This will ensure that once consumer confidence in the new technologies grows, products to meet the increased demand will already be well established within the market place.  Several established players in the payment processing sector are taking advantage of the opportunities presented by new technologies, although new research undertaken by Streamline (a division of WorldPay) has suggested that it is newer enterprises driving the use of new payment technologies.  They found that 50% of new SMEs are using online and mobile wallets compared to 36% of SMEs over three years old. 

    Contactless payment under fire for fraud risk (again)

    Researchers from the University of Surrey have claimed that they have proved that contactless payment transmissions can successfully be received from distances of up to 80cm, thus fuelling concerns already aired within the media that contactless cards remain susceptible to fraud.

    What this mean for you:

    One in four UK cards already uses contactless technology and the numbers continue to rise every month as old cards expire and are replaced  But for contactless payments to really take off in the UK the industry needs to be able to put consumer’s minds at rest that their payment details, and their funds, are safe.  In ways reminiscent of the early days of Chip and PIN, lazy journalism is leading to scaremongering amongst consumers in respect of fraud risks that are not reflected by the actual user experience. Complaints about mischarging or double charging for contactless payment are relatively uncommon. There is a lot that card issuers and merchants offering contactless payment options will have to do to continue to educate consumers about the security features built into contactless technology.

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