Covid taught us to get digital, quick, and the payments industry has responded fast. Now, as we look ahead, it’s a good time to take stock and think about some of the wider political discussions that are likely to dominate in 2022, as well as some of the
new regulations being shaped that will impact the European payments industry going forward. Certainly, we will see discussions around PSD3 and the battle to become ISO 20022 compliant rumble on. Other key topics of debate over the next 12 months will include:
digital identity, CBDCs and the drive towards open finance. My five areas to watch include:
1. Regulation
Regulation is set to evolve in 2022, particularly in regard to the EU’s Retail Payments Strategy. Following the review of PSD2, we need to ready ourselves for the next step and prepare for PSD3. This year will see political conversations take place which
will involve negotiating and lobbying around what PSD3 will eventually look like. The ECB is pushing the agenda and it is likely that PSD3 will include a requirement for pan-European immediate payments. This is important at a time when we’re seeing a drive
to real-time payments globally, with preparations also underway for FedNow instant payments in the US. In addition, external factors like digital identity and the Digital Operational Resilience Act – or DORA – will start to crystalise, allowing us to understand
the potential impact on the payments industry.
The financial services industry requires legal and regulatory certainty with a foreseeable horizon to be able to invest, innovate and deploy new payments products and services. Joining resources and efforts at EU level, while avoiding fragmentation between
member states and adhering to single market principles, could help to shape a policy agenda on payments that will enable the industry to provide world-leading solutions for the benefit of society.
2. Digital identity
In 2022, digital identity will become a major theme across Europe and beyond. The ability to digitally identify the payment sender and receiver may be politically sensitive for some but is nevertheless a key step for the payments industry.
We are already seeing this technology being used in applications like the NHS app, where your identity details are saved and can be used to travel and show proof of vaccination status. This enables both sides to trust the data that is sent and received.
In addition, the upcoming DORA legislation will tell businesses they must have security, safety and resilience plans in place. In turn, technology and payments regulators are advising that the first place to start with security and safety is with payments.
The European Commission is reviewing the current regulatory system concerning electronic identification (eID). For instance, the Commission suggests that service providers in areas such as the financial sector, for services such as the onboarding of credit
cards, which require the use of strong user authentication (SUA), should use the European digital identity framework for identification and authentication, and the European Digital Identity Wallet (EDIW). This should help improve the security of the ecosystem
and help drive down fraud.
We’ll hear many discussions around digital resilience and ID as the DORA regulation takes shape. Digital identity will also be needed to support the necessary KYC checks around remittance payments across the world, adding an extra level of security to help
reduce the risk of financial crime. A key challenge will be how banks can handle this cost effectively, without the consumer incurring higher fees.
3. Crypto and Central Bank Digital Currencies
Regulators are waking up to the risks associated with bitcoin and other cryptocurrencies. With valuations fluctuating drastically, 2022 will see more regulations being implemented around the world to protect consumers. CBDCs are being positioned to act as
a secure replacement for FIAT currencies.
The reality of data mining and the associated energy usage and costs are important factors influencing governments to move away from volatile, algorithm-backed cryptocurrencies towards central bank-backed alternatives. Governments want digital currencies
to be within their control which is why the ECB will be actively exploring CBDCs over the next year and considering the implications for businesses and consumers.
As it stands, the conversation surrounding CBDCs is driven more by politics than economics. There is probably not a business case for CBDCs per se, but countries don’t want to lose political power and influence around the world, or for their currencies to
be overwhelmed by CBDCs from overseas. Another issue arises with regards to the different rules and regulations that apply to digital currencies versus traditional forms of payment, and what the rise of CBDCs may mean for banks and other payment intermediaries.
Banks have played a key role in orchestrating payments for hundreds of years. If CBDCs bypass the middleman, what will the wider impact be? Potential upsides of a digital euro could include: providing consumers with more choice, bringing people without access
to a bank account into the financial system, while also supporting instant payments development in Europe.
It is undoubtably true that as we move towards digital currencies, more structure and identification will be needed so that we can better understand the disparate subtopics this new world brings.
4. International standards
Internationally recognised and consensually created standards are essential to harmonise international payments. Standardisation plays a central role both in the implementation of agreed norms and more generally for the competitiveness of the European payments
industry. A standardised process around the integration of real-time payments is also key.
This year, the ISO 20022 regulations are still weighing on financial institutions’ minds as they come to terms with the level of disruption it is having on their IT systems and processes. With the majority of institutions estimated to be doing only the minimum
to become compliant, there is a still a lot of room for improvement. The benefits are only really seen if banks fully transition and can handle the richer data sets that compliance unlocks. Only then can they address corporate pain points around automation
and reconciliation. While it’s typically the largest incumbent banks that face the biggest transition headache, digital challengers will of course be fully ISO 20022 compliant from the outset. It will certainly be interesting to see this play out and the appetite
of corporates to avail of new ISO 20022 enabled services.
5. Open Finance
More competition in the financial services area, and particularly in payment services, implies new challenges from a regulatory perspective. The European Commission is trying to face such challenges via the soon-to-come Open Finance framework which will
aim at addressing possible risks, protecting consumers, and trying to maintain a level playing field.
In terms of hierarchy, first you have open payments, then open banking, and open finance at the top of the tree. Open finance will require more broad adoption from corporates, utility companies and governments, which remains a work in progress.
Starting with payments, the European Commission has put forward the digitalisation of payments as a high priority. The European payment industries can and will play an instrumental role in its deployment, particularly through the major opportunities offered
by digitalisation, instant payments and AI applications in particular.
It's up to all of us, as key stakeholders in the payments industry, to work together so that we can set a strong course for Europe’s payment industries.