DP22/4 and DP22/5: Risks and Benefits of Technology for Payment Service Providers

Technology has had a profound impact on the financial services industry, with payment providers at the forefront of this transformation. People are more frequently relying on technology to make their lives more convenient through payment apps and services like Apple Pay and other online payment solutions.

Regulatory bodies such as the FCA, PRA, and Bank of England have released discussion papers to scrutinise the effects of artificial intelligence and big tech firms on the industry, acknowledging both the advantages and risks. Continued investment in AI and big tech firms promise to bring even more solutions, meaning more opportunities for innovation and further disruption, with new and exciting collaborations between a variety of businesses and payment service providers. Nonetheless, it is imperative to consider aspects such as data privacy, cybersecurity, and market concentration when evaluating the implications of these technological advancements for the industry and its customers.

The FCA, PRA, and Bank of England have released discussion papers, DP22/4 and FCA’s separate paper DP22/5, on Artificial Intelligence and the Impact of Big Tech Firms, which are timely given the industry’s reliance on technology.

These papers analyse how technology and the firms producing the technology are changing the industry, highlighting benefits for both the industry and customers equally, while also assessing associated risks. The main focus is on risks and benefits, a few of which are summarised in the table below:

RisksBenefits
Artificial Intelligence may be used to implement or facilitate further harmful strategic behaviour such as collusionEnable consumers to access, assess, and act on information more effectively
Prudential risks to the safety and soundness of firmsEnhanced data and analytical insights
Market size shrinkageIncreased revenue generation
Development of ‘Too Big to Fail’ firmsIncreased operational efficiency and productivity
System resilience and efficiency, through increased systemic risk and intertwined global economiesEnhanced risk management and controls, and better combatting of fraud and money laundering
Increase the cost of entering into the industry due to increased start-up costsMore responsive pricing and more accurate decision-making

Although there are risks and benefits to using technology in financial services, innovation in financial technology is unstoppable. Hence, open discussions between regulators and the industry are crucial. These discussions offer insight into regulators’ thinking, identify unexplored areas of advancement for firms, and provide information about potential activities to explore.

The Supervisory Authorities

Within DP22/4 the regulatory authorities describe themselves as being technology neutral. They are positioned in the middle of the argument and have core principles, rules and regulations that do not mandate nor prohibit the development and use of technologies. They recognise the use of technology and the benefits that it brings to the industry but at the same time they monitor and mitigate technology risk.

This is supported by DP22/5 in which the FCA has directly identified ‘Big Tech’ companies as a potential risk to the industry moving forward. The highlighting of these firms as a potential risk does not block the development of technologies but does send a message that these firms are being monitored and intervention will occur if the risks to the industry grow and become unhealthy. As such, it is a clear demonstration of the technology neutral mantra in action, as innovation by these companies is allowed to evolve and they are not being blocked, but their development needs to be controlled and monitored so risks, such as ‘too big to fail’ and additional global market risks, are not allowed to develop creating bad outcomes for customers and inefficient long-term markets.

What has been Learnt?

These discussion papers, which closed in February 2023, have been a clear demonstration of an area of the market that the supervisory authorities are monitoring closely and have identified as a potential risk hotbed.

Apple is a good example of ‘big tech’ firms moving into the space with the development of Apple Pay and the North American launched credit card, Apple Card. Apple’s Operation Breakout is also another element that highlights their intentions to pivot further into the financial services industry with the development of in-house payment technologies and the ‘Apple Pay Later’ scheme.

For payment providers, the rise of AI and big tech firms can introduce new opportunities and challenges. AI can enhance payment processing by improving fraud detection, enhancing security measures, and streamlining transaction processes. Big tech firms, with their extensive resources and customer bases, have the potential to disrupt traditional payment providers by offering innovative payment solutions.

However, associated risks need to be considered. These risks include the potential concentration of power in the hands of a few dominant tech firms. The discussion papers aim to assess these risks and understand the implications of technology-driven changes for both the financial services industry and its customers.

In summary, the information provided underscores the vital role of technology in the financial services industry, including payment providers. It highlights the impact of technology on payment methods, the analysis of AI and big tech firms’ influence, and the examination of associated benefits and risks for the industry and its customers.

How Can Complyport Help?

If this article has raised any questions and you are in the Payment Service Provider (PSP) space, or technology and data are a key component to your firm’s operations, or you think your firm may require assistance, please contact Jan Hagen via jan.hagen@complyport.co.uk to book a free consultation.

About Complyport

Complyport is a market leading consulting firm supporting the UK financial services industry for over 20 years. We specialise in providing Governance, Risk and Compliance services to support the regulated financial services industry to raise standards and thrive.

Complyport advises and assists firms to become authorised and to comply with the rules and requirements of regulators on an ongoing basis. We have successfully assisted over 1000 firms to become authorised with the FCA and EU and are providing regulatory support to over 600 regulated firms on an ongoing basis globally. With presence in the UK and EU, as well as via our Associates Network, Complyport can assist firms across multiple jurisdictions.

We specialise in supporting the UK financial services industry with compliance guidance, advice and best practice including support with:

  • Internal Audit Function support
  • Operational resilience & cybersecurity advice
  • CASS advice and protections of client assets
  • Prudential support, IFPR, ICARA and financial resilience advice
  • Financial Promotions management software solutions
  • Comprehensive compliance work-flow management software
  • Compliance managed services and resourcing compliance personnel
  • Financial crime and forensics
  • Consumer Duty implementation advice
  • Skilled Person Reviews and regulatory investigation
  • Expert Witness
  • Anti-Money Laundering and HMRC Supervision

Contact our Head of Regulatory Business Solutions, Jan Hagen via email at: jan.hagen@complyport.co.uk to book a free consultation.

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