Key takeaways

• The publication builds on the PSR’s previous work on contactless mobile payments and the FCA’s work on Big Tech activity in financial services.
• Digital wallets are defined in the call for information as ‘apps, software or online services that allow consumers to make payments, quickly and conveniently, using mobile phones or other electronic devices.’
• The PSR is particularly interested in understanding how digital wallets impact consumers’ choice of payment options at checkout. It is looking to develop its understanding of the implications of digital wallets’ growing role in the payments value chain, and the implications for competition between payment systems including in relation to its strategic objective of unlocking the potential of account-to-account payments.
• The FCA’s focus – in line with its regulatory remit - is on issues such as how digital wallets may impact competition in the supply of financial services and the operational resilience and systemic safety of the UK financial services sector.
• The range of issues touched on in the call for information include:
  • Whether digital wallets are working well for consumers, businesses and other users of payments: For example, do practices such as Big Tech limiting access to mobile device functionality raise barriers to entry by third-party digital wallets and risk higher fees, worse services and less innovation, and if so are they counterbalanced by enhanced security and convenience for users? The call for information refers to the likelihood that there could now be greater scope for competition between digital wallets to drive better outcomes, given the possibilities offered by open banking and new ways of paying, such as account-to-account payments.
  • Whether there are any disincentives or other barriers to digital wallets integrating account-to-account payments as an alternative to card payments: For example, what fees will be involved where digital wallets provide access to payment systems and how will the payment system used to complete a transaction be chosen? In a 2022 blog post, the PSR acknowledged that several issues need to be addressed to enable wider use of account-to-account payments in the retail sector. These include the need for a commercial and regulatory model that allows account-to-account payments to compete with other forms of retail payment, and that provides commercial opportunities for PSPs to innovate, compete and invest (see this further 2022 PSR blog post).
  • Whether stakeholders consider that digital wallets raise any significant consumer protection or market integrity issues, either now or over the next five years: For example, they may have an effect on financial resilience and systemic risk within the financial system if they suffer an operational failure or outage. Regarding consumer protection, while open banking has the potential to change how consumers use digital wallets by connecting the wallets directly to bank accounts, this creates new vulnerabilities that could potentially be exploited by fraudsters. The call for information therefore asks what evidence there is of the impact of digital wallets on the incidence of fraud, and whether the current responsibility/liability model for payments initiated by pass-through digital wallets provides the right incentives and controls for parties to implement appropriate anti-fraud measures. The subject of (digital) financial exclusion is also raised, with a query about the degree of risk that payment firms start to introduce new payment services through digital wallets that could disadvantage consumers who don’t own smartphones.
  • Whether the current regulatory framework is effective, or if there are any current or future potential harms that could be mitigated through changes to regulation. Regarding the current position, the PSR’s view is that digital wallets could in principle be characterised as ‘participants’ in a payment system designated to its regulation, depending on the specific services provided and how they operate. For the FCA, while some digital-wallet-related services and activities fall within its regulatory perimeter (eg e-money issuance by a staged wallet or account-to-account payment initiation services), it considers that other aspects, such as card tokenisation, fall outside it.
  • Whether there are likely to be any significant digital wallets developments in the UK over the next five years, eg in terms of usage, functionality or features.
• The call for information points out that there has also been a significant amount of interest in this area internationally, including from the European Commission at EU level and the U.S. Department of Justice.
• The issues that the PSR and the FCA examine in the call for information may be relevant to the work of the CMA's Digital Markets Unit under the recently enacted Digital Markets, Competition and Consumers Act 2024. Both the PSR and the FCA will continue to liaise closely with the CMA on this topic.

What should firms be thinking about?

• In addition to the request for input via the call for information, a sample of firms will also be contacted and asked to provide more detailed data on specific topics, such as usage of digital wallets and fees, to help inform analysis of the various issues. Firms in the payments and wider financial services sector should therefore be prepared to respond to this second level of consultation.
• As one focus area for the PSR and the FCA is potential barriers to entry and expansion given the position of Big Tech in the current market, the call for information may be of particular interest to existing third-party digital wallet providers or those firms considering establishing such products.
• The continuing emphasis on unlocking the full potential of open banking payment services by exploring any disincentives or other barriers to digital wallets integrating account-to-account payments as an alternative to card payments should also be heartening for payments market participants. Hopefully this moves things a step closer to the realisation of commercial opportunities for PSPs in terms of innovation, enhanced competition and avenues of investment.
• Also of note is that the PSR and the FCA highlight their awareness of other areas of Big Tech activity in payments and financial services that impact payments. They are open to stakeholders providing them with views on issues they consider to be relevant to their respective horizon-scanning processes, including in relation to the costs, benefits and impact of Big Tech. For example, the regulators are interested in the way Big Tech’s involvement may have spurred more traditional players in the market to innovate and compete, and the impact that possible fee structures that such tech companies may use in the future might have (i.e. charging users in addition to charging issuers, or earning revenue from them in other ways through having access to a greater wealth of consumer data collected via digital wallets).

What’s next?

The call for information is open until 5pm on 13 September 2024. The PSR and the FCA are interested in hearing from stakeholders across the payments and wider financial services landscape, including digital wallet and technology providers as well as their service users and other parties with an interest in digital wallets. As mentioned above, a sample of firms will also be contacted and asked to provide more detailed data on specific topics covered in the call for information.

The PSR and the FCA will consider all feedback to the call for information and provide an update by Q1 2025.