DPF Response to the FCA/PSR “Big Tech and Digital Wallets” Call for information

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The Digital Pound Foundation welcomes the opportunity to respond to the Call for Information on Big Tech and Digital Wallets from the Financial Conduct Authority (FCA) and Payments Systems Regulator (PSR). Our full response is available to read below. Alternatively, you can download a PDF copy of the full submission here.

1. Overview of the Digital Pound Foundation

The Digital Pound Foundation (DPF) is a not-for-profit organisation that was incorporated on 22 June 2021 to work with a variety of stakeholders and participants towards the implementation of a well-designed digital Pound, in both publicly and privately issued forms, and an effective, diverse and competitive ecosystem for new forms of digital money. 

The DPF’s goal is to act as a catalyst among stakeholders across the public and private sectors, including academia to explore and articulate the case for a well-conceived digital Pound, in both publicly and privately issued forms. Beginning with a programme of research, advocacy and multi-stakeholder engagement, our work will progress through to regulatory engagement and industry testing, via support for practical sandbox experiments, proofs-of-concept, and pilot work, as needed. The DPF will support and complement other projects and associations having similar objectives, including the Bank of England’s consultation framework and Engagement and Technology Forums, existing industry associations, and private sector initiatives. 

Our intention is to create an inclusive, well-functioning forum for collaboration that looks at the implementation of a digital Pound from a holistic perspective, addressing narrow questions, such as the design, implementation and successful adoption of central bank digital currency (CBDC), and the wider impact of a digital Pound, in both publicly and privately issued forms and on the UK’s economy and society. We will advocate and provide constructive input on vital considerations such as privacy, financial inclusion and technology inclusion, and will consider the digital Pound’s role in enabling the UK’s transition to a digital economy and underpinning a more efficient, sustainable payments and financial markets infrastructure. 

The DPF’s members include Accenture, Agant, Avalanche, Chavanette Advisors, Clearbank, Clifford Chance, CMS, Electroneum, Enryo, Fireblocks, Greengage, Kodelab, Link, Nobo, Quant, Ripple, SETL, and Travers Smith. Partners include Blockchain for Europe, CryptoUK, Digital Euro Association, The Digital Dollar Project, Global Blockchain Business Council (GBBC), Global Counsel, Global Digital Finance (GDF), Herbert Smith Freehills, Hyperledger Foundation, The University of Manchester, Merchant Advisory Group, Positive Money, Stablecoin Standard, The Realization Group, UDPN, and UK CBT. Originating Members of the DPF include: Jeremy Wilson, Jannah Patchay, Lee Schneider, Victoria Thompson, Phil Kenworthy and Melanie Budden.

2. Specific Responses

Question 1: 

What are the benefits of digital wallets for consumers, businesses and other parties in the payments value chain? Your answer might include comparison to alternative ways of initiating payments and consideration of the impact of digital wallets on UK payment trends and metrics, such as:

  • the impact on consumer and business experience of payments
  • the speed and convenience of checkout processes
  • the rate of fraudulent transactions
  • the cost of making or receiving retail payments for different types of party

The Digital Pound Foundation (DPF) concurs with the statements made in the consultation paper leading up to this question. Additionally, we would like to emphasize the following points:

  • The growing use of wallets, whether third-party or self-custody, for managing crypto holdings and associated keys is increasingly relevant to the payments landscape. These wallets are pertinent to this consultation as they enable users to make payments directly from their wallets to those who accept cryptocurrency, including stablecoins and CBDCs potentially, in transactions.
  • For individuals who are typically reliant on cash, some ‘lite’ wallet services provided by Electronic Money Issuers (EMIs) may offer a more accessible way to engage digitally with the UK’s payment infrastructure compared to traditional banks. For instance, one major UK high street bank requires evidence of a three-year UK address history as part of its Basic Bank account application process, potentially excluding those who have recently arrived in the country.

The DPF would also like to bring attention to the use of personal (self-custody) wallet software, where no financial intermediary is involved.  In particular, we believe it is important to distinguish between situations where the provider has custody (control) over the assets in the wallet and is acting on the instructions of the owner as opposed to situations where the owner is in complete control.  This distinction is important for regulatory purposes and provides the dividing line between regulated financial services intermediaries and those that simply act as software providers.

The key features of a “personal wallet” are: 

  • It is a software tool that allows individuals to interact with blockchains and Web3 platforms, enabling them to manage their own activities independently of intermediaries.
  • It holds the private keys to one or more accounts on public blockchains, with only the user (owner) having access. This gives the owner full control over storing, holding, and transferring various crypto-assets.
  • These wallets are known as “unhosted” or “self-custodial,” as control rests solely with the owner, without any involvement from intermediaries, custodians, or third parties.

It is also worth noting that while the mainstream “Web2” internet relies on usernames and passwords to access services, Web3 requires tokens stored in wallets to interact with blockchain platforms.  Cryptocurrencies accessed via a personal wallet function like stored credit card details in a web browser, but without the intermediary role of a credit card company

The contents of someone’s physical wallet today are varied and valuable (often a combination of cash, credit cards, identification (e.g. driving license), membership cards etc), which can be used for a variety of purposes but which are personal to the owner.  The key management capabilities of a personal digital wallet are therefore similar in terms of these attributes.  

Beyond their autonomy, the functionality associated with personal wallets sits in the competitive space in terms of how software companies can provide customised services to users.  

Question 2: 

Please provide information on the use of digital wallets in the UK. We welcome information on the current situation as well as trends over time. We are interested in the percentage of retail transactions overall (by value and volume) that involve digital wallets, as well as more detailed information on usage – for example, by digital wallet provider, customer type and/or for different transaction types, such as:

  • in-store/face-to-face retail payments
  • retail payments using mobile web browsers, including on tablets
  • retail payments using mobile apps, including on tablets
  • retail payments using desktops/laptops
  • other

The DPF offers no view on this given this sits in the commercial space

Question 3: 

Are there likely to be any significant developments in the UK over the next five years regarding digital wallets – for instance, in terms of their usage, functionality or features? This could include the launch of entirely new functionalities/services or ones that are already available in other countries. As far as possible, please explain the likelihood of these developments, their expected magnitude and their implications for competition, innovation and service users.

The DPF would offer the following views on this question:

  • Within the competitive marketplace, the DPF would envisage continued development and promotion of commercial digital fiat and crypto, including stablecoin, wallets over the next five years.  
  • The DPF believes a significant and, potentially positive, impact would arise from the adoption of a UK digital pound (either a Central Bank Digital Currency and/or a systemic retail stablecoin).  This could have widespread adoption if:
    • If this was to be well designed with attributes similar to cash.
    • Catered for both financial and digital inclusion.
    • Was available across the population as well as to small to medium size businesses.
    • Covered both retail and wholesale (cross-border) applications.

Question 4: 

Are there any features related to the supply of digital wallets that cause harm to (or mean that payments could otherwise work better for) service users? We are particularly interested to hear about any features that may limit competition in payments or otherwise adversely impact service levels, degree of innovation or fees. Where available, please provide supporting evidence.

Although, as previously mentioned, some EMI providers offer digital wallets to consumers who might not otherwise have access to the UK’s domestic payment systems, the DPF acknowledges that this is largely provided by the for-profit commercial sector. If we aim to support those in society who are reliant on cash due to financial or digital exclusion, a broader government-sponsored initiative or regulatory intervention may be necessary, rather than leaving this responsibility solely to the commercial sector.

Currently, there are few clear answers regarding what will happen when cash usage in the UK reaches the point where it is no longer sustainable, a situation primarily driven by issues with cash acceptance rather than access to cash.  Each bank branch closure increases the difficulty for retailers to deposit cash, and each measure taken by local authorities to limit cash usage in their boroughs creates additional challenges for those who are least able or willing to transition to digital alternatives.  It is crucial to continue planning for how those dependent on cash can navigate UK society when this point is reached.

In addition, we want to highlight the significant public concern about payment fraud, particularly APP scams, which creates additional barriers for those who might otherwise consider using digital wallets.

Question 5: 

Please explain whether any harms identified in your response to Question 4 could be outweighed by benefits associated with those same features – for instance, in terms of greater convenience or security. Where available, please provide supporting evidence.

The DPF believes that the issues of financial and digital exclusion can only be effectively addressed if Digital Wallets are designed to be more accessible to those who are currently excluded from existing payment methods.

Regarding fraud and APP scams, the DPF suggests that the digital identity features incorporated into wallets linked to a digital pound could help mitigate these concerns. Since these identity features would also apply to beneficiary accounts (where fraudulent funds would need to be transferred if moved to another digital wallet on a CBDC ledger), they could offer a layer of protection. If fraudulent funds were directed to a traditional fiat account, additional beneficiary identification requirements could be implemented at the interoperability stage, where the payment transitions from CBDC to fiat currency. The risk posed by Big Tech in the context of APP scams, particularly at the point of payment initiation, has been a significant concern, and the DPF believes that these measures could substantially reduce this risk.

Question 6: 

If you think that there are features that result in harm, what measures would be effective and proportionate to improve outcomes? Please explain:

  • any technical standards that would need to be specified – for instance, through regulation
  • whether the measure would be effective in isolation or other steps would also be required (if the latter, please specify what these might be)

As mentioned earlier, inclusivity in the use of digital wallets could be supported by:

  • Implementing consistent and secure forms of digital identity linked to digital wallets, with restrictions or additional checks for money transfers to unknown third parties outside the ledger.
  • Ensuring seamless interoperability between digital wallets (for both sending and receiving) and the existing national payments infrastructure.

Question 7: 

If not covered in your other responses, please explain what fees (if any) digital wallets charge and how these have changed over time. What impact do these fees have on UK service users? Please provide any evidence available to support your answer.

The DPF has no view on this question.

Question 8: 

Aside from fees charged to issuers, are there any other sources of potential revenue available to pass-through digital wallet providers? If so, what are their impacts on service users?

The DPF has no view on this question.

Question 9: 

What role could digital wallets have in increasing the take up of account-to-account payments in the UK retail sector? Please explain the reasons for your answer.

Regarding Section 4 of the Call for Information paper, the DPF suggests that it would be helpful to further differentiate between debit cards and credit cards. A debit card, whether used through a digital device or directly, is typically linked to a retail or commercial bank account, effectively carrying the credentials of the originating account in a transaction. This is not the case for a credit card transaction, as it lacks a direct connection to the payer’s bank account. Instead, payments are made via a revolving credit facility between the credit card issuer and the payer, with settlement between the two occurring in full or in part each month according to the terms of their agreement.

On the question of whether digital wallets could help increase the adoption of account-to-account payments in the retail sector, the DPF believes this is possible. However, it would require a system where the payment initiator can direct the payment to the digital wallet of the retail payment beneficiary during the transaction. This would necessitate sharing the wallet credentials with the payee (or an intermediary) to facilitate the payment.

Looking ahead, if a CBDC were introduced in the UK, the potential for account-to-account payments could be enhanced. With both consumers and retailers potentially holding digital wallets on the same ledger, transactions could occur similarly to how “on us” transactions are settled within a commercial bank when both the payer and payee hold accounts at the same institution.

Question 10: 

Are digital wallets likely to integrate existing and potential account-to-account payment types, including for spontaneous purchases? If not, what barriers exist and what do you think needs to happen for digital wallets to integrate account-to-account payment types in a manner that enables effective customer access to them? Please explain your answer and provide any evidence you have.

Referring back to our previous answer, the DPF has nothing further to add here.

Question 11: 

How do you think digital wallets should best develop to encourage effective competition between payment systems that benefits service users? This could involve:

  • the fees involved in account-to-account payments
  • the commercial agreements underlying the digital wallet user experience
  • whether consumers are able to use one or multiple digital wallets
  • how the underlying payment system is chosen
  • any operational issues, including necessary investments in infrastructure
  • whether any technical standards should be set, including through regulation
  • whether other payment providers, such as PISPs, will be able to access digital wallets

When consumers pay for goods or services, especially online, they are often given a choice of payment methods. However, in-store transactions typically offer more limited options, usually either cash or card. Tradespeople may accept payment via bank transfer through their invoice terms, as do commercial retailers involved in higher-value transactions (such as car purchases), where accepting cards can be challenging due to limits and fees.

Addressing some of the points raised:

  • Digital Wallets could be most effective if retailers are able to specify them as a payment option, either through their point-of-sale systems or separately, much like tradespeople provide their bank account and sort code on invoices.
  • The main requirements are ensuring the retailer receives a guaranteed payment and providing a payment method acceptable to the consumer. This may necessitate interoperability between different types of digital wallets and a transaction/payment mechanism that supports their use.
  • For account-to-account transactions via digital wallets to work effectively, consumer protections should be on par with those offered by other payment methods.  It’s worth noting that protections already vary between debit and credit card transactions, with debit cards offering chargeback protection (which can fail) and credit cards providing Section 75 protection under the Consumer Credit Act for purchases over £100. The growing use of digital wallets could present an opportunity to standardise and consolidate payment protection methods into a more consistent form.

Question 12: 

What harms are likely to arise in the event of a digital wallet provider’s operational failure, either now or over the next five years?

Just as account holders at a Payment Service Provider may be unable to send or receive payments during an operational failure, we anticipate that a similar issue could arise if a Digital Wallet provider experiences a disruption.

Given this, we suggest considering the opportunity to bring a systemically significant digital wallet issuer under formal recognition and Bank of England oversight, either as a Recognised Payment System Operator or a Critical Infrastructure provider, in accordance with existing Banking Act provisions.

Additionally, recent events involving Crowdstrike have underscored the importance of having alternative payment methods available for both consumers and retailers in the event of a local or widespread payment infrastructure failure. As cash usage continues to decline, Digital Wallets, along with potentially enhanced interoperability with existing payment systems, could play a crucial role in bolstering the resilience of the payments ecosystem.

Question 13: 

We are interested in how the growing use of digital wallets, and the allocation of responsibilities between parties involved in transactions, affects the security of payments. Your response might include consideration of the following questions:

  • Do security features such as biometric authentication mean that digital wallets are less prone to fraud than alternative means of payment? Alternatively, do the speed and convenience of using digital wallets to make a payment make them a greater target for fraudsters? What evidence is there regarding the impact of digital wallets on the incidence of fraud?
  • Does the current responsibility/liability model for payments initiated by pass-through digital wallets, set out in Chapter 6, provide the right incentives and controls for parties involved in transactions to implement appropriate anti-fraud measures?

We are interested in both the benefits and risks of digital wallets, arising now or in the future. Where possible, please provide evidence to support your answer.

The DPF has no view on this question.

Question 14: 

What do you think are the likely impacts of digital wallets integrating with open banking – for example, in terms of users’ access to financial services, security, or any privacy issues that may arise?

The DPF recognizes the potential benefits of integrating digital wallets through Open Banking, particularly the convenience it offers consumers to view their digital wallets alongside other accounts and to make payments or transfers between accounts via a single interface, whether on an app or desktop. However, we are concerned that extending Open Banking in this way could lead to a public misconception that all accounts visible to a consumer carry the same levels of security and protection, regardless of whether they are selected as a payment source or destination for funds.

As noted in our response to Question 11, consumer protection already varies across different payment methods, and expanding payment options through Open Banking could complicate matters further. Regarding deposit protection, consumers may already struggle to determine whether accounts held at seemingly different financial institutions are individually protected by the FSCS or share a protection limit due to shared banking licenses within a group. The introduction of digital wallets, which may be subject to different safeguarding rules rather than FSCS protection, could further confuse this situation. For Open Banking to function effectively across various account and wallet sources, a uniform set of consumer protections should be established for both payment initiation and deposit protection. Without this, it may become too difficult for consumers to understand their level of protection and to make informed, safe choices.

This concern also extends to fraud protection. If a consumer uses a digital interface that aggregates multiple account and payment providers through Open Banking, there should be 100% equivalence in the level of fraud protection offered across all options. Additionally, with fraud being increasingly initiated through social media platforms operated by Big Tech companies, it is crucial to ensure that Open Banking does not exacerbate these risks further.

Question 15: 

Are there any significant issues in relation to consumer rights and protections that could become relevant in the future? For instance, how significant is the risk that payment firms start to introduce new payment services through digital wallets that could disadvantage consumers without smartphones?

As noted in our earlier responses, the DPF is acutely aware of the risks associated with financial and digital exclusion as more consumers and businesses move away from using cash in favour of other payment methods. This Call for Information focuses on “Big Tech and Digital Wallets,” which, as the name implies, involves large for-profit organisations, some of which already hold a significant share of the digital wallet market.  If additional commercial payment services are introduced and widely adopted, the DPF is concerned that this could further worsen financial and digital exclusion unless proactive measures are implemented simultaneously, whether voluntarily or through regulation.  However, if the UK government decides to introduce a Digital Pound (CBDC) with wallets accessible to all consumers, it could create an opportunity to address these concerns by providing protections such as low-cost, secure digital wallet devices with free access to connectivity.

Question 16: 

Do you consider that the current regulatory framework is effective, so that digital wallets develop and work to promote the best interests of service users? If there are any current or future potential harms that you consider could be mitigated through changes to regulation, please explain what these are and provide evidence to support your answer.

As per our previous answer, The DPF would highlight the following as areas where potential harms could be mitigated by constructive regulation:

  • Harmonisation/merger of consumer payment protection laws to ensure identical consumer outcomes across all payment types.
  • Similarly, for deposit protection across all forms of accounts/wallets for consumers and businesses to be made consistent.
  • An onus for digital and financial inclusion to be considered as part of any development of what might be systemically large digital wallet systems.

Question 17: 

Please share any further views or evidence on digital wallets and their impact that are not captured by your responses to the previous questions.

The DPF has no further views on this Call for Information

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