Name
Global FinTech Guide
Country _ Name
United Kingdom
SectionTitle
Payment services
Body
FinTechs belonging to this category offer alternative payment services which are supposed to provide a faster and cheaper way for national, European, and international payments for private and business customers by using new technologies.

For example, payment service providers hereby offer solutions to easily integrate several payment services in online shops.

Some FinTechs furthermore provide real cash register systems and online-reservation solutions for restaurants and shops providing their own payment services or making use of the payment services of FinTechs described above.


Introduction

Attitude of the country towards modern payment services

Social / Political Overview
The UK is a global FinTech leader, building on its reputation as a leading financial services centre. London is one of the top two highest ranking FinTech ecosystems in the world. The UK maintains a highly supportive policy and a strong regulatory and infrastructure environment. For example, the Financial Conduct Authority’s (“FCA”) Innovation Pathways and Innovation Hub, and the Bank of England’s New Bank Start-up Unit aim to support new FinTech companies within the UK’s regulatory landscape

The UK government has also established Co-Operation Agreements and “FinTech Bridges” with regulations in other jurisdictions to reduce regulatory barriers and promote international expansion post-Brexit (https://www.fca.org.uk/). The UK’s policy environment is progressive, offering wide access to both capital and talent, and the Government recognises and wants to strengthen the positive contribution of FinTech to the UK economy. 

“Brexit” (the UK’s withdrawal from the European Union in 2020) has reduced access for UK financial services companies to the EU markets, and vice versa, through the loss of “passporting” and other rights under EU Directives. Some firms authorised in EU states which were already carrying on regulated activities within the UK market prior to Brexit have been able to continue on a transitional basis (under the Temporary Permissions Regime (“TPR”) and the Financial Service Contracts Regime (“FSCR”)) but as yet no agreement has been reached between the UK and the EU regarding financial services.

To access the wider EU market, UK based financial services firms are now required to be separately licenced and regulated (and usually to establish a presence) in an EU member state, either by establishing a regulated entity or branch office or by establishing a business relationship (for example for product distribution) with an existing EU member state authorised business. Many EU and UK FinTech firms have adapted to the restrictions arising from Brexit by obtaining dual authorisation in both the UK and an EU member state (either directly, or through a branch or group company). 

In 2020 the UK Government commissioned an independent review of the UK’s FinTech sector. The Kalifa Review of UK FinTech was published in February 2021(
https://assets.publishing.service.gov.uk/). The Report identified priority areas for government support, and reported that:

  • The UK FinTech sector represented 10% of global market share and £11bn in revenue, and the UK is a dominant force in FinTech.
  • The total tech spend by UK financial services firms was £95bn in 2019.
  • SMEs and corporates are all keen users of fintech. UK citizens are becoming digitally active and 71%  are now using the services of at least one fintech company. 
  • Investment into UK fintech stood at $4.1bn in 2020 – more than the next five European countries  combined. 

 The 2020 / 2022 Covid pandemic has accelerated the adoption of FinTech based service in the UK – for example by the rise in demand for contactless payments.

The Payment Systems Regulator (“PSR”) has oversight of the seven main UK payment systems: Bacs (the interbank payments processing system): CHAPS (the interbank payment system for high value payments), Cheque and Credit (the interbank payment processing system for cheques and other paper instruments); FPS (the interbank faster payment scheme); LINK (which manages the ATM network); Mastercard and Visa Europe.

Social and political climate towards modern Payment Services
Following the 2008/2009 financial crisis, the UK Government recognised that the monolithic dominance of a handful of large retail banks presented systemic risks to the UK economy. There was also a recognition that the banking sector was oligopolistic, and not serving consumer and SME customers well. 

The UK Government’s desire to diversify the economy after the economic shocks of 2008/2009 led to a policy to make the UK the global leader in FinTech and Open Banking by “kick-starting” an ecosystem of digital innovation. The implementation of the recast European Payment Services Directive (Directive 2015/2366/EU) (“PSD2”) coincided with an investigation by the UK’s Competition and Markets Authority (“CMA”) into banking sector competition. This led to the CMA Order (Retail Banking Market Investigation Order 2017) requiring the nine-biggest UK banks (the “CMA9”) to allow licensed payment services start-ups direct access to their customers’ data. The CMA Order set up the Open Banking Implementation Entity (“OBIE”) to create software standards and industry guidelines to drive competition and innovation, in particular by standardising APIs (Application Program Interfaces) to make it easier for third party providers to access data and initiate payments from payment accounts (the “Open Banking Remedy”).

The UK’s political climate towards FinTech based payment services is extremely favourable at a governmental, legal and regulatory level. Payment Services innovation has also received positive take up by consumers and businesses (which has accelerated during the Covid pandemic).
New FinTech payment service providers (including the so called “challenger banks” or “Neobanks”) have begun to encroach on the dominance of the traditional big retail banks. Non-cash payments (in all forms) in the UK have overtaken payments in cash. Payments by debit cards (card payment directly debited from the customer’s bank account) still predominate (about 45% of all in person purchases) followed by credit cards, and with cash making up only about 10% of payments. The use of payment devices (such as mobile phones linked to a bank or credit card account) are rapidly becoming the norm.

Brexit has reduced the ease and increased the costs of international payments through the UK mainstream banks, resulting in an increased use of FinTech driven payment service providers for international payments. The reduction of mobility, and reluctance to use (or for businesses to accept) cash during the Covid pandemic has also driven the uptake of FinTech based payment services. 

From 15 October 2021 FCA regulations increased permitted contactless payments (in person payments by card without the need to validate the paymentby entering a personal identification number (“PIN”) from £45 to £100, which increased the ease and frequency of contactless payments. Payments of up to £300 can be made by a payment device such as a mobile phone.

The convenience of contactless payment via mobile phones (contrasted with traditional payment cards) has made FinTech apps such as Google Pay and Apple Pay very popular, and accelerated the expansion of FinTech into daily life in the UK. A reported one quarter of mobile phone owners use mobile payment apps, and 54% of adults used mobile banking in 2020. By contrast, the use of paper cheques fell by over 80% in the decade to 2020, and continues to fall rapidly.


Legal affairs

Obligations and requirements to provide payment services or ancillary services described above

Legal Overview
There is no single regulatory framework for FinTech in the UK. Much of UK regulation for financial services activities remains unchanged from the EU Directives that applied pre-Brexit within the UK, now “on-shored” as UK domestic law (the process whereby existing EU Directives and Regulations were adopted directly as national UK law under regulations made under the European Union (Withdrawal) Act 2018, as amended by the European Union (Withdrawal Agreement) Act 2020).

No person may carry on a regulated activity (in the course of business) in the UK unless they are authorised or exempt under the Financial Services and Markets Act 2000 (“FSMA”). This is known as the “general prohibition” (s. 19 FSMA) and lies at the heart of financial services regulation.

The Financial Services and Markets Act 2000 (Regulated Activities) Order 2001/544 (“RAO”) sets out those financial services activities which are regulated. The UK has three financial sector regulators, the Prudential Regulation Authority (“PRA” – which is part of the Bank of England (the UK’s central bank)), the Financial Conduct Authority (“FCA”) and the Payment Systems Regulator (“PSR
”). The FCA is the authorisation authority for most regulated activities (a list can be found on the FCA’s web page “List of financial activities we regulate” (https://www.fca.org.uk)). Banks, credit unions and insurance firms (but not insurance intermediaries) must apply for authorisation to the PRA and are authorised and regulated by both the PRA as well as the FCA (known as “dual regulation”). The PSR is not an authorisation (licensing) authority but is an independent subsidiary of the FCA responsible for promoting competition and innovation and to ensure payments systems are operated and developed in the interests of payment system users.

The UK Government and regulators are generally receptive to innovative FinTech businesses. The FCA aims to be a world leading regulator in this sector. The FCA’s ‘sandbox’ initiative allows businesses accepted into the scheme to test innovative products and services with real consumers in a controlled environment. The Bank of England and the Information Commissioner’s Office (or ICO, the UK’s information regulator, responsible for protection of personal data) also encourage innovation and development in the FinTech sector. 

Almost all regulated activities are capable of being delivered or supported in a way that could be categorised as “FinTech”. The activities most obviously falling directly within the definition of FinTech are:

  • Operating an electronic system in relation to lending (peer to peer lending)
  • Issuing electronic money
  • Payment Services

When a firm becomes authorised to carry on regulated activities by the FCA or the PRA, it will be subject to various legislation and rules, and (depending on the nature of the activities carried on) ongoing reporting requirements. FinTech firms based overseas who deal with customers in the UK may also be subject to regulation in the UK. There are various regulatory exemptions (providing “safe harbours”) from the requirement to be authorised (for both UK and for overseas firms), which must be considered on a factual, case by case, basis. 

Firms carrying on regulated activities are also subject to the UK’s financial promotions regime (the “restriction on financial promotions” (s. 21 FSMA), which is the second main pillar of financial services regulation in the UK). This restricts any person from communicating (or causing to be communicated) any invitation or inducement to engage in investment activity, unless the person is authorised (i.e. by the FCA or PRA to carry on financial services) or exempt, or the communication has been approved by an authorised person. The restriction applies to communications made by a person from outside the UK if it is capable of having an effect in the UK. Again, various exemptions (providing “safe harbours”) are available to the restriction on financial promotions (both from within the UK and from outside the UK) which depend on the nature of the person making the communication, and/or the nature of the recipient, and/or the nature of the communication. In some cases, certain prescribed steps must be complied with to ensure that the communication falls within the exemption.
Anyone who carries on a regulated activity or engages in financial promotion when not authorised to do so (where no exemption applies) commits a criminal offence and may be subject to a fine, or imprisonment or both. Agreements entered into in breach of the general prohibition or the restriction on financial promotion may not be enforceable by the person in breach (except with the consent of the court, or (for consumer credit matters) the FCA).

Generally, a proposed activity must be considered on a case-by-case basis to determine (a) if it is a regulated activity falling within the general prohibition (the distinction between regulated activities and activities that do not require authorisation is not always obvious); and (b) if so, whether any of the regulatory exemptions apply, so that the activity can be carried on without the requirement to be authorised. In the same way, careful consideration must be given to whether communications are caught by the restriction on financial promotions, and/or if any exemption is available. 

Some regulated activities are subject to a “lighter touch” registration process, or to a limited permission authorisation. In those cases, the registration or authorisation process can generally be carried out on-line, and takes a relatively short time (a matter of weeks). Full authorisation by the FCA usually takes a minimum period of six months (from when a completed application is received by the FCA), but can take longer if the FCA require further information. An application to the PRA for authorisation to carry on a new banking or insurance business may take several years of discussion with the PRA to satisfy the PRA that the proposed business model (etc.) will not present a risk to the UK financial system or consumers. A bank or insurer already established overseas and entering the UK market may be able to achieve PRA authorisation in a shorter period. 

An initial application fee for authorisation is payable to the FCA (or PRA for banking or insurance activities). The amount of the fee will depend on the nature of the business to be undertaken, and the regulatory permissions applied for. There will also be annual fees. See: https://www.fca.org.uk/firms/authorisation/fee for details on the fees for FCA authorised activities. The firm must satisfy the FCA (or PRA for bank and insurance companies) that it has sufficient capital resources (“regulatory capital”) to be able to carry on its activities.

Applications can be costly and time-consuming (depending on the nature of the permissions applied for) and authorised firms will incur ongoing costs for compliance and reporting requirements. Firms usually engage lawyers and/or specialist compliance consultants to assist with the application process.

The UK has also on-shored the EU General Data Protection Regime (“GDPR
”), with some modifications, into UK domestic law (as part of the Brexit process). The UK GDPR regulates the processing and transfer of personal data. It is likely to apply to UK FinTech firms and, in some circumstances, to FinTech firms established outside of the UK. Firms must comply with the high requirements for processing personal data under UK GDPR as “controllers” or “processors”. The UK GDPR is supplemented by the Data Protection Act 2018 (“DPA”) and the Privacy and Electronic Communications Regulations 2003 (“PECR”). 

FinTech firms should also be aware of the following laws and regulations (in addition to FSMA as the primary legislation, and regulations made under FMSA) which are likely to apply to their activities:

  • Cyber Security - there are various regulations and laws which make up the UK’s cyber security regime.
  • Anti-Money Laundering – the key UK legislation is the Proceeds of Crime Act 2002 (known as “POCA”).
  • Sanctions compliance – under the Sanctions and Anti-Money Laundering Act 2018 and other national and international regulations and obligations.
  • Bribery – covered by the Bribery Act 2010.
  • Firms authorised to carry on regulated activities (and some other firms – such as crypto-asset businesses) are also required to comply with higher level anti-money laundering and “know-your-client” obligations under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (“MLRs”), and expected to conduct business in a way consistent with the Joint Money Laundering Steering Group's (“JMLSG”) Prevention of money laundering/combating terrorist financing guidance.
  • Tax Evasion – covered by the Criminal Finances Act 2017.
  • Other - there may also be sector-specific laws which apply, such as in banking, consumer credit, insurance, etc.

Obligations and requirements to provide Payment Services
The Payment Services Regulations 2017 implements the EU’s PSD2 into UK law (now, following Brexit, on-shored as UK domestic law). A firm providing payments services (within the meaning of PSD2) in the UK must be authorised by, or registered with, the FCA to do so. 

Authorised and registered firms must comply with the Payment Services Regulations 2017.

A detailed summary of the FCA’s approach to the regulation of Payment Services and Electronic Money is set out in its publication The FCA’s role under the Payment Services Regulations 2017 and the Electronic Money Regulations 2011 November 2021 (currently version 5 (https://www.fca.org.uk/publication/finalised-guidance/fca-approach-payment-services-eleic-money-2017.pdf).
A firm operating below an average monthly turnover in payment transactions of €3m may register with the FCA (instead of applying to be authorised) as a small payment institution (“SPI”). Firms that intend to provide account information services only can apply to the FCA to become a registered account information service provider (“RAISP”). 

The requirements for registration, and the ongoing compliance and reporting requirements for registered firms, are less onerous than for fully authorised firms. The registration process is relatively straightforward and quick.

Electronic money (“E-Money”) issuers must comply with the Electronic Money Regulations 2011, which implements the EU’s Second Electronic Money Directive (2009/110/EC) into UK law (now, post Brexit, as on-shored UK domestic law).

E-Money institutions that expect their total business activities not to exceed an average of €5m outstanding E-Money may apply to the FCA to register (instead of applying to be authorised) as a small electronic money institution (“SEMI”). Registered SEMIs can an also provide Payment Services that are unrelated to E-Money (known as unrelated Payment Services) if the average monthly turnover in payment transactions does not exceed €3m.

An E-Money firm that does not meet the requirements to be a SEMI (for example because the expected average outstanding E-Money will exceed €5m) must apply to the FCA for full authorisation (not just registration). An authorised firm can also provide unrelated Payment Services.

Both authorised and registered firms must comply with the Electronic Money Regulations 2011.

Authorised and registered Payment Services and E-Money firms must have their main place of business and be centrally managed and controlled from within the UK.

The authorisation and registration fees currently payable for authorisation or registration as a payment services institution are:
  • For a small payment institution: £500
  • For an authorised payment institution (applying for authorisation to carry on money remittance and/or payment initiation services and/or account information services): £2,500
  • For a registered account information service provider (applying for registration to provide account information services): £1,000
  • For an authorised payment institution (applying for authorisation to provide payment services for any one or more of: enabling cash to be placed on payment account and all operations required for operating a payment account; enabling cash withdrawals from a payments account and all operations required for operating a payment account; execution of direct debits, payment transactions executed through a payment card or similar device, credit transfers; execution of payment transactions where the funds are covered by a credit line for the payment service user; issuing payments instruments or acquiring payment transactions): £5,000
  • For an authorised payment institution where the applicant intends to use agents: £1,000 for each agent (in addition to the fees payable as set out above)
  • Where an application is made to vary a registration or authorisation, a fee of 50% of the relevant fee for an application is payable.

The authorisation and registration fees currently payable for authorisation or registration as an electronic money institution are:

  • For a small electronic money institution: £1,000
  • For an authorised electronic money institution: £5,000
  • For an authorised electronic money institution where the applicant intends to use agents: £1,000 for each agent (in addition to the fees payable as set out above).
  • Where an application is made to vary a registration or authorisation, a fee of 50% of the relevant fee for an application is payable.
 
For both authorised or registered payment services institutions and for authorised or registered electronic money institutions, ongoing annual fees are payable.

Additional comments regarding the legal situation for payment services or what FinTech’s must be aware of in this business area

Payment services and electronic money institutions familiar with the EU regimes will find (at least currently) that the UK regimes are essentially the same, as the UK regimes are based on the relevant EU Directives and Regulations.

It is possible that the UK regimes may diversify from the EU regimes in the future. One of the main premises presented for Brexit was to enable the UK to depart from EU regulation, and to simplify the UK’s regulatory environment. As yet, no steps have been taken in that direction.

Economic conditions

Market size for payment services and biggest payment service providers

Precise data is not available. Prior to the Covid pandemic, cash payments represented an estimated 27% of all retail purchases. This has reduced to 10%, representing a corresponding increase in non-cash payments. Debit cards still represent the most popular form of payment. 

UK Finance (the UK’s banking and finance industry trade body) report 2021 (
https://www.ukfinance.org.uk/sites/default/files/uploads/Summary-UK-Payment-Markets-2021.pdf) indicated that 35.6 billion payments were made in 2020, of which more than 85% were made by consumers. This includes card and mobile payments, bank transfers, bank direct debits and standing orders, and cheques. More than half these payments were made by cards and payment devices.

UK Finance statistics also show that in 2020 32% of the adult population (17.3 million people) had registered for mobile payments (a 75% increase over 2019). Of those registered for mobile payments, 84% of people had made at least one payment, and 50% made payments fortnightly or more frequently. The adoption of new payment methods was far higher in younger age groups.

Additional comments regarding the economic situation for payment services or what FinTech’s must be aware of in this business area

The UK Payment Services sector is rapidly growing. It receives positive support at a governmental and regulatory level. The sector is recognised as being very important to the UK’s position as a leading centre for financial services innovation and to the UK economy as a whole.
Although the overall number of purchases of all kinds declined in 2020 / 2021 due to the Covid pandemic the upward trend of FinTech adoption is continuing, and the rate of growth is likely to accelerate.

The UK’s loss of EU passporting (and other freedom of establishment and services) rights on Brexit, and the failure to reach and agreement with the EU regarding financial services, has introduced challenges for UK based FinTech businesses. UK businesses also no longer enjoy rights under the EU’s Electronic Commerce Directive (2000/31/EC) to provide information society services (“any service provided for remuneration, at a distance, by electronic means and at the individual request of a recipient of services”) on a pan EU basis with no or minimal barriers.

So far, no progress has been made towards reaching a trade agreement between the UK and the EU for the financial services sector. However, for the moment at least, UK law remains fundamentally unchanged from EU law. Payment Services and E-Money regulation is still based on the EU Directives, so common regulatory standards prevail across the UK and the EU. This means that FinTech solutions for the EU markets remain scalable into the UK market, and vice-versa.

UK (and EU) FinTech firms have generally been able to find effective solutions to the barriers arising on Brexit, for example by applying for dual authorisation in the UK and an EU state. 

Authors

Close

Choose country