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Welcome to The Payment Expert weekly podcast, brought to you by SBC Media. Each week we analyse the news driving the global payments industry forward; the innovation, the infrastructure, and everything that has to happen to make it all possible.
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Are you giving industry too much power? Are you letting them dictate the direction of travel by having these sandboxes? And I'm not against sandboxes. I think they're great. think they're the necessary perimeter within which we need to test some of these regulations. But if you solely rest your sort of regulatory perimeter around these sandboxes, do you then leave it up to industry? In which case, what is the point of having the regulator in the first place? you Hello and welcome back to the Payment Expert podcast, your source for the latest news, insights and analysis on the payments industry. I'm Lewis Thompson, news editor at Payment Expert and with me today once again is senior journalist Kieran O'Connor and we have with us editor Rachel Kennedy for what I'm assuming is a last hurrah for well before you head off on maternity leave. So thank you both for joining me today. Thanks for having me, Lewis. And yes, I mean, there's still four weeks. You could have me back. There's still time. We'll see. We'll put in the, we'll keep putting in the requests, Kieran. um So last week, while Kieran and Callum were out and about over in Thailand for Money20-20 Asia, over here in the UK was UK FinTech Week, which wrapped up last week too. One of the biggest stories to come out of that was arguably the governments pushed to unify payment regulation, essentially bringing stable coins, tokenized deposits and traditional e-money under the same framework, I suppose, for the first time. The FCA were active as well. They've announced a commitment to explore how regulation adapts to AI agent transactions. They've announced new FCA powers over open banking. confirmation that the PSR was being folded into the FCA, et cetera, et cetera, et cetera. There was a lot going on last week. So today let's get into how it actually looks and what it all means. uh So first impressions both, was there anything different if we look at the UK government announcement that makes it a general turning point to bring together these payment regulations or is it essentially another statement of intent? as it currently stands. I think you've the nail on the head there saying that it's more of a turning point for intent versus actual execution. Because I think they've said that the regime that they've announced is not expected until 2027 anyway. guess it's slightly different because the government have sort of said, we want to bring everything under the same framework. So stable coins, tokenized deposits, e-money under one complete framework rather than treating them separately. Which is a good thing, but then you've got industry participants saying, well, actually, we wouldn't launch a stablecoin right now anyway, because we couldn't under the current framework. it seems like it's more theoretical than practical for a lot of the market. But again, it was only announced last week. We haven't really seen the nitty gritty of what they're planning. There'll be more, I guess, consultation paperwork that comes out in the next couple of weeks, months that the industry will be asked to feed into. So I think it's sort of heading in the right direction. But until we really know where they're looking to kind of segregate out those different policies, it'll be hard to hard to tell. Yeah, I think the main headline here is that it's one framework and sort of one perimeter and one sort of set of rules for digital money. There is, I guess, a political sort of signal in the sense that the UK wants to be the first major market with like a unified digital regime. I it does. all, Kieran. I guess, yeah. But I guess it does sort of feel slightly different to what we've been seeing since like 2021 when they've sort of been consulted on stable coins. Just because you've got the Treasury and the FCA and Bank of England who look to be aligned, which I guess is rare. it sort of quite, it does feel quite big. Yeah. I mean, we'll get onto the nitty gritties, I suppose, a bit later. mean, for my... view, it does seem a little different. mean, if you look at Chris Wallard, he's kind of the appointed SAR of the operation. And that's probably something that's not been done before from the government perspective. I mean, you can look at past failures, maybe the new payments architecture, which was basically shelved as soon as the national payments vision came around. But this one does seem to have a bit more bite in it. When you look at the details of it, I suppose, when you've got stable coins, you've got the tokenized deposits and e-money, are they actually the same problem? they the same regulatory problem or is the government basically forcing different things into the same box? I think you can kind of see why they're grouping them together. Obviously, from a consumer perspective, they all look like digital money. So from the outside looking in, they all look like a very similar product. um But underneath, they are very different with how they interact with the banking system. And I know that the Bank of England have been quite clear that their concern is sort of deposit flight around stable coins. So I think it's worth looking at how they all impact the banking system, but ultimately grouping them under one set of frameworks probably makes sense at this stage. And then maybe further on down the line. As we see the impact that they have on the payment system, you might look to tweak a few things and look more at sort of financial stability and credit creation. So these stable coins can't create credit right now. Banking deposits and tokenized deposits, they behave very similarly to what we've got already. um So I think the risk is that by forcing everything into one framework, you oversimplify those differences, but it's probably a necessary evil right now. Sure. Yeah. I mean, I think Rachel hit the nail on the head there. They're all very similar and you can sort of see why they would sort of put them under one roof. But they do all cover and they do all carry sort of different riff profiles. So, you know, I think it does make sense to put them under one roof, but I wouldn't say that they're putting them in one box. Maybe you could say they're putting them in one room. in three different boxes, if that makes sense. That does make sense and that's probably a good way of looking at it. I suppose if they were in one box, I mean it might create a level of confusion if you're a merchant and you know, digital money compliance might get a bit lost and confused if you're looking at sort of one regulation covering three different prongs as opposed to... of three prongs within one. I think it's obviously how it plays out over the next year or so and what it will look like there too. But I think consensus there guys that it's looking like the right move. Another thing that was announced, I know obviously we've long known that the PSR is going to be folded into the FCA, but that was given an official announcement. What do you guys think about that? Because obviously the PSR has been kind of the interventionist kind of terminator type regulator historically and sort of gone in and shut things down. mean, they're looking at these are a mascot scheme and processing fees and looking to sort of get to the heart of that and stop anything untoward happening. then you've got the FCA on the other hand, who've always been industry collaborative, friendly, let's work with the industry. So how do you think that will look going ahead with the PSR folded into the- into the FCA. I don't think the FCA has ever been called friendly with the industry before, Lewis. You're setting a precedent there. Compared to the PSR, you could argue it's a bit more collaborative. Yeah. No, mean, as you said, sort of PSR, historically more interventionist. um They've stepped in on things around sort of card fees and competition. FCA, meanwhile, tends to be more principle-based. You could, I guess, argue that they've bought more consistency across financial services. um But as you say, it's kind of, I feel like they're already part and parcel of the same agency, right? They announced, I think it was May last year that they were being combined. em And it's been this really slow trickle of them integrating with one another. But now when you see FCA speakers at events, they're kind of speaking under one banner with a sort of slightly different agenda, but still very much sort of parroting that they are one agency. em And I guess from the outside looking in, there's a risk that maybe payments loses some of its dedicated focus at a time when the sector's moving quite quickly. And we've seen misalignment between the FCA and the Bank of England on stable coins, which you may think that in theory would improve with the PSR coming back under the FCA. I just don't know whether that coordination would come at the cost of sort of sharp targeted oversight. Yeah. I mean the PSR have sort of been the more of the activists as you could say of the two, with the FCA being a bit more cautious. I'm really interested to see if the FCA sort of line will change and maybe we'll get more involved and sort of be more on the offensive sort of when it comes to regulations and sort of stepping in. But as we have seen with these regulations on stable coins and digital assets and AI's we're going to talk about later on, it does look... like as a whole, maybe the regulators are stepping back a little bit and letting the industry sort of work things out. So maybe it's looking like the PSR has sort of waved the white flag when it comes to the merge and the sort of taking the FCA's approach. I was going to say, I think it comes down to approach, right? The Bank of England and the FCA, they're a huge advocate of sandboxes where they bring in the industry, test, test, test. And is that not the collaboration that perhaps? I perhaps that's what's needed. But then ultimately, are you giving industry too much power? Are you letting them dictate the direction of travel by having these sandboxes? And I'm not against sandboxes. I think they're great. I think they're the necessary perimeter within which we need to test some of these regulations. But if you solely rest your sort of regulatory perimeter around these sandboxes, do you then leave it up to industry? In which case, what is the point of having the regulator in the first place? Why not just have an industry run sandbox? Yeah, there's almost a case of, there's one thing having a sandbox in a sort of localized controlled environment, but when you actually put it out to the market with different environments and stress tests happening live, can often lead to, or sometimes lead to different results. Let's talk a little bit about stable coins because the Bank of England said it wants to limit individual holdings to £20,000 during transition. I mean, is that guardrail sensible or is it kind of strangling stable corn adoption above having such a high limit? They've almost reversed course on it though, haven't they? Again, from industry pushback, thanks to Coinbase. Because they obviously implemented this cap, which was sort of them worried about shifts in deposits. em And I think it was one of their models that suggested that 20,000 pounds was the right sort of marker that people could still use for everyday payments um around sort of receiving salary, etc. But it wouldn't impact the stability of the banking sector. um And then following industry pushback, we saw Sarah Breeden, I can't remember the name of the other official, but again, in front of the Treasury Select Committee then saying, actually, we are open to other Other methods of maybe restricting deposit flight. um I don't know whether that was driven specifically by Coinbase. We've seen how influential they can be in the US, but there was definitely industry pushback from a lot of academics and other members of the industry around the limit. So maybe it will stay as a temporary safeguard for them. I can't imagine them removing the limit completely. Maybe they will raise it. um But I guess they will have to weigh it up with whether it becomes a barrier to growth in the long term. Yeah, wouldn't want to give attention. I've seen. Oh, go ahead, Karen. I said I was just saying that I wouldn't want to give a Coinbase and too much credit for this because as we spoke on a past podcast, Lewis about them sort of getting involved on the other side of the pond and sort of being given the credit for why the regulators are sort of taking a step back and. and going back to the drawing board. But on this, I think there is a case of people sort of making a problem where there really isn't one at the minute. As you mentioned, Rachel, they've sort of been open and said that they're very flexible to sort of changing this limit. You know, a few months in the line when things start to take off and they're gonna, they'll be open to feedback. And then also just sort of looking at what other markets are doing. I think the European Central Bank has proposed like a 3000 euro cap. And if you put that in comparison to this 20,000, it's huge. So at the minute, I think the UK are sort of in a good position and there isn't really maybe the problem that people are saying there is. Yeah, I mean... me, there is a little tension there. I obviously the treasury are sort of saying that stable coins are going to solve the merchant pain points and deliver liquidity seven days a week, 24-7, but the bank is now saying we need a limit on how much of it actually circulates. there's kind of still, I suppose that there is a tension there, but obviously the limit is not without precedent. so perhaps it's the right cautious approach. we've mentioned obviously looking at a genius in the US and a micro across Europe in the past too, and how they're sort of looking at the stablecoin issue. If the UK, you mentioned earlier, Kieran, is trying to sort of get ahead of stablecoins and be a leader in that market, is it kind of narrowing? mean, could you not argue that the US has already got that dominant position with its US-backed stablecoins already, like, think somewhere around 90 % of the whole? the whole market of stable coins? Yeah, I think sort of genius gives the US a sort of clear path in leading in the stable coins. And I think that was also something that come up last week at money 2020 when we spoke, when we spoke to people in the industry, especially in Asia, a lot of them were sort of talking to us about how there needs to be a push away from this US dominance, but they're not sure how to do it em and how and sort of where that comes from. So there is still a market for the UK to maybe attack and sort of fit into. But if they are going to do it, I think they've got to do it now. And as we're sort of saying, we're still talking about consultations and regulations, what we sort of need to see the action. Yeah, you may get to a point where you end up with a very well designed framework, but it's arrived too little too late. I mean, the industry have already said that it doesn't make sense for them to build sterling denominated or GBP backed. stable coins yet because they can't bring them to market. That's the heart of the issue. I suppose there's only so much time you can spend sandboxing, but if you're already late to market, then it's a bit too late. One of the other big things from last week, which was of course UK FinTech Week, was around agentic AI. We've heard sort of murmurings from this in the last few months, particularly from the FCA. They announced they were sort of going to look at agentic AI in payments. But from a speech from Innovate Finance Global Summit, Jessica Rusu, who's the chief data information and intelligence officer, I believe, if I got the title right, apologies if I haven't, at the FCA, she said, on AI policy, no new rules. So the FCA's position on AI, particularly agentic AI, is that it's going to use the learnings from its AI lab that it's got, it's got a live testing lab. think there's Barclays, Lloyds, Experian, UBS, et cetera, in there. And they're going to use that lab, essentially, which is almost like a sandbox, I suppose, examples of good and poor practice later this year without bringing out any new regulation around it. mean, is the no new rules the right call or are they kind of kicking the issue down down the road, kicking the can down the road as it were. I mean, something's gonna have to change at some point because current regulation assumes that a person is actively authorizing a payment, right? So that's not the case with AI agents. I think it was back in March, did hint, the FCA did hint that they were considering some rule changes might be needed. So I'm not entirely sure how long the rhetoric of no new rules will hold for very long. um But I think they're maybe just covering their backs with agentic commerce. A lot of regulators have sort of just sat back and waited to see how much of an issue this is going to be. And I think it's sensible to run your labs, your sandboxes, see how the industry is interacting with these new forms of technology before you take a stance, because there's no need to introduce new regulation for the sake of it if it's not going to become mainstream. Yeah, just on top of that, I think it's the right call. I think sort of adding rules onto anything to do with AI at the minute would be a bit too soon. The industry is still moving really fast and sort of the tech normally knows where it's going and I understand that sort of creates this risk and when you're regulated the whole mission is to sort of protect consumers and protect users but if they start putting rules on it now it could just harm sort of the UK as a market and as an industry. And then you've also got the political background to that where Keir Starmer and the current Labour government are really pushing for investment. I know they've said a few times that AI is an area where they feel that they can attract a lot of investment. So they want to try and create the best environment for um potential investors. Yeah. So that's a sound argument from you both. The only thing I would say is having looked at it, I think that the Treasury Committee has pushed back a little saying that the current approach sort of gives little practical clarity as to how the existing rules apply to the use of AI. So as and when that kind of pressure lands or if that grows outside of the Treasury Committee remains to be seen. But I think as you were saying, Rachel, the FCA at minute are kind of just holding firm and waiting to see as and when. something is needed. course, Agents.AI regulation is not just endemic to payments. It's endemic to multiple industries as well. So maybe having a look to see how it plays out across different industries is good. But by following that approach, the FCA's policy of sort of going down this lab approach, who's kind of setting the rules? Because if they, if they, know, if they've got Barclays and UBS and they're in this lab testing to find out good results, bad results, and then they're relying on them to report those results, who's kind of setting the good poor practice frameworks really? Is it the regulator? it the industry? Which I think goes back to what you had mentioned earlier, Rochelle. Yeah, I'm going to be known as the person that hates sandboxes, aren't I? No, I mean... There is a place for them. mean, it means that regulation and rules are set and shaped by what firms are actually building and testing, which makes sense. You shouldn't set rules without understanding how they're going to be applied. And it leads to slightly more sort of practical and realistic frameworks. But it also means that firms involved in those tests have a lot of influence. I mean, we've touched on it already that maybe industry has a little bit too much influence at this time. But you could also argue that they have the expertise. They've got the in-house talent. They're probably arguably more educated on a lot of these technology topics versus the regulators. So the regulators have a lot to learn from these cohorts. em But I think where the direction of travel maybe needs to change is who you invite into these sandboxes and laboratory experiments. Like a lot of the time, it's some of the larger, more advanced players. And I think that can skew the direction of travel. Um, so maybe it's looking at finding a balance between who you invite into those sort of experiments and then working out how do you find that balance between collaboration with the industry and the independence of setting those rules as the regulator. you, could you argue then that perhaps the FCA are almost too friendly to the market? They're, too business friendly. You could. Are they too business friendly? I'm just trying to vindicate myself from earlier, after I said they were so friendly to the market. Yeah, I don't know if they're too friendly or they're sort of too scared to sort of impact the market and make a sort of a wrong decision. Yeah, there's nothing worse than setting regulation with too tight a perimeter and then having to roll it back, which no one wants to do. Very true. uh Great stuff, guys. A last question then before we wrap things up. If we look at the UK government and they're looking to bring all these regulations together and the FCA is arguably, as we've suggested, handing it to the industry to make the rules, what does it say about the kind of relationship between the government's aim, which is looking to make things very centralized, one framework, one regulator? and sort of a unified oversight, but then the FCA is making more of a, I suppose, deferential move. No new rules, the industry shapes the guidance. When you've got that tension from government and the FCA, what does it look like for the future of regulation when it comes to payments, finance in the UK? think it just shows that the UK is trying to be as pro-innovation as possible. I think they've understood that on one side you've got the US which is sort of letting the market em create the rules that the regulators set and then on the other side you've got the EU which have been a lot more top down, shall I say, when it comes to regulation em and setting quite uh strict rules. So the UK is trying to find that middle ground where they can bring in as much flexibility as possible. And it does sometimes look like a bit of a split personality where you've got these strict financial stability rules, but then they're also being really flexible on emerging tech. Yeah, Kieran's put it in a much more diplomatic way than I was going to put it in. Give us the undiplomatic way. They're definitely pro innovation, I would agree, but they're also, I think, quite cautious in how they get there. And you could even argue that they're outsourcing some of their work to the industry. in that you've got the FCA sort of taking a very iterative industry led approach with the government saying, actually, we need to have a centralized framework across all bodies. And then you've got sort of industry and eh bodies outside like Innovate Finance sort of saying, we need faster, more coordinated approaches. I think, as Kieran says, you've got quite two distinct lines of thoughts going on. with a sort of centralised strategy but decentralised rulemaking and it's just how they marry them up in practice over the next sort of 12 months. Yeah, absolutely. Well, really fascinating stuff guys. Thank you both for joining me today. If you've been listening or watching this wherever you consume your podcasts and you've got any thoughts on it, please do reach out to us over at paymentexpert.com and if you're not already subscribed to our podcast, make sure to subscribe. wherever you get your podcasts with plenty more insights, analysis coming over the weeks and months ahead. And of course, for the latest news as it happens, head over to the website again, it's paymentexpert.com. We'll see you all next time. you