Hello everybody and welcome to another edition of C&F Talks. Today, it's my pleasure to have with me, Tony Craddock who's Director General of the Payments Association. And Tony is going to be speaking at our Payments Regulation and Innovation Summit, which is being held in London on the 21st of January. Tony, welcome.

Great to be here, thank you, Maurice.

Great to have you. First question if we may, Tony.

The government recently introduced a mandatory reimbursement scheme for APP frauds. What impact do you think this will have on the industry, in particular the smaller players? What can they do to counteract the rise in online scams to protect consumers?

So, what is fascinating about this set of regulations is, it's the first of its kind anywhere in the world. In fact, most places there is no reimbursement let alone mandatory reimbursement but the government gave the regulator the mandate to go out and regulate to prevent fraud and they said right our principle is we're going to make it really, really expensive for both the sending and receiving payment service provider to allow the scams of a bank payment to actually exist and it was quite, quite brave.

It's a bold regulation and we spent about a year talking to the industry regulator, the payment system regulator, about whether this was a smart idea or not. A lot of people in our industry said it wasn't and I'd like to share with you first of all the summary of the findings we had from a piece of research we did just before the regulations hit, about whether people thought this was a good idea or not. 74 percent of them said they thought it would be negative for the UK financial services industry.

Over half of them said they thought it would increase fraud. Almost all of them, 93 percent of them, said it would increase their cost base and 60 percent of them would increase their prices as a result. So, in terms of the first question, that's the sort of thing that could well happen.

The early indications are, curiously enough, that the sky hasn't fallen in, that the fraud levels haven't hugely risen in the short term, but we think this is a longer term issue so it'll be fascinating to review this in 12 months from the regulation in October next year where the regulators said they're going to find out what the impact has been. The question will be, has it excluded financially vulnerable consumers? Has it made it harder for people to attract investment and grow their company? Has it actually made the number of fintechs able to provide payment services decline? You know, let's see that we've got some months to sit and wait.

Yeah, as you say, you know, that's a point about hindering the growth of fintechs and so on. That sort of counters the government's growth strategy, isn't it? But what's the impact going to be on the smaller players, do you think, in particular? Presumably they're going to suffer the most.

Yes, it's going to put their cost base up. I mean, let's be honest, the smaller players tend to be the ones where the bank scams are greatest and so you can understand why this is a place where we should be addressing our concerns and changing the regulation to prevent them from allowing scams to take place on their platform.

The difficulty is for many of them, they're the receiving PSP, so they're now having to reimburse 50% of the cost of the fraud and they didn't have to do that before, so they're having to go out and get more money, build their capital adequacy. But interestingly, they're having to also pass this cost onto other players and passing it on to other people in the value chain because they're saying, look, it can't be all of our responsibility. So, I think it'll challenge their growth rate for sure and I think investment in those companies will be a little bit more challenging.

And I suppose one solution to the problem, an obvious solution, is to reduce the rise in online scams.

Do you see any approaches or strategies that might achieve that thereby reducing the cost at the same time?

Well, yes, I mean, what we really hope is that this becomes a really difficult market in which people, scammers, all the people who carry the money, the money mules, to actually be involved. We want to make it so hard that they stop playing in the UK, which by the way, remember, big market, lots of financially excluded people or digitally excluded people, lots of vulnerable, potentially people vulnerable to being scammed.

So it's a very good breeding ground. Also English is the first language, so it's a very good breeding ground for scammers. We're trying to make it a very poisonous place for them to be based and hopefully that will mean basically the scams will go somewhere else.

That's the hope. We're not sure whether that's the case yet. We think there's even a possibility that this will prevent people from doing payment at all bank-to-bank and they'll simply move back to using debit or credit cards again, which will be a bit of a blow to open banking.

But let's see, the jury's out, we have some interesting months ahead.

Yeah, well, that certainly would be a retrograde step, wouldn't it?

You're kindly moderating a panel discussion at the event on overcoming the barriers to entry facing companies. We discussed one of those, haven't we?

Yes.

We had a similar panel last year. Do you think that the sorts of barriers have changed? Have they broken down in the last 12 months? Is it becoming more competitive?

It's a great question. I think that the underlying atmosphere has changed.

The mood music has changed in the last few months. Honestly, I think the new government is continuing with the direction of travel of the previous one and it's published its national payments vision. It's actually a pretty assertive vision.

There's some really good ingredients in there, some big scene changing things to anticipate around digital identity, for example, and data sharing to not only prevent fraud, but prevent the fraud's earnings being laundered through the financial system. But in terms of having to be more obstacles than less, I'm looking forward, not looking back. With the one contingency that we don't know what the US's trade laws could mean in terms of overall background at this position, I'm pretty confident that it's going to become more appropriately regulated.

The balance will have moved away from being so totally pro-consumer protection to at least enabling innovation and competition. The payment systems regulator, for example, has a new objective, which is to be an enabler of innovation. For that to be the case, it's got to be a little bit more circumspect about how officiously dominating it is.

It has to be a bit more tolerant of new solutions to problems. It's perhaps got to be a bit more understanding of how organisations in this ecosystem have to collaborate. They have to be interdependent to survive.

Without that, the industry won't survive. I'm confident and I'm actually underlying all of this. I'm optimistic that the trade barriers will become less rather than more.

Good.

I suppose in terms of innovations, we have the potential rise of digital currencies, in particular stable coins. What role do you see these playing in the payments ecosystem in the future? What do you think the likely timetable is for them to come into use?

Those are great questions. They're also huge questions. They're questions my industry, the payments industry, is addressing day in, day out. We did a paper three years ago looking at the future for the adoption of digital currencies. It was called a new era for payments. Interestingly, we're still anticipating a new era of payments. We haven't seen it yet.

Essentially, there are two great applications for digital currencies in the payments industry. One is as a direct replacement for cash, digitalised cash, and that's a central bank digital currency. That's likely to come through.

The government hasn't promised it, but the digital pound is being looked at in great detail by the Bank of England. That's exciting. I think really the most exciting thing is the equivalent of that, which is an independently issued digital currency tagged to the value of the local fiat currency that is inherently stable in value.

It has all the exciting characteristics that digital currencies like Bitcoin and other things actually have around track and traceability, an ability to demonstrate the provenance, and this wonderful construct around programmability. The money itself isn't programmable, but the payments around it is.

Now, at the moment, we rely upon legal contracts to make a payment programmable, but if you can build that into the technology, that's hugely exciting in terms of prevention of fraud, in terms of reduction of cross-border payment costs, and in terms of broader applications around payments that we haven't even thought of yet.

So, I'm very excited about stablecoins, and I'm pretty confident they're going to be on the basis of the government's national payment vision adopted within the years to come here.

Yeah, I think that's undoubtedly true. We had Tulip Siddiq, the City Minister, speaking at our Tokenisation summit a couple of weeks back, and she announced that the legislation for crypto assets of all kinds will come in early next year, and you saw the FCA have also issued their plan. So, that will be a new era.

We look forward to discussing that at the conference on the 31st of January. So, for our viewers, we very much hope you'll be able to join Tony and our other speakers at that conference. Please do attend in person if you can. Further details are available on our website, www.cityandfinancial.com. And Tony, thank you very much for that conversation. Really enjoyed it.

Pleasure. Thanks, Maurice.