Big Tech and digital wallets: Regulatory perimeter under review following feedback to UK FCA and PSR call for information

Background: July 2024 call for information

In July 2024, the FCA and the PSR launched a joint call for information on the opportunities and risks of digital wallets for people and businesses. This came as recent data from the FCA’s Financial Lives survey had suggested that the rapid growth in the use of digital wallets means it’s likely that more than half of UK adults now use one to some extent, and the proportion of retail payments involving a digital wallet is also on the up. With these changes being driven, among other things, by increased use of smartphones and similar devices, this has led to Big Tech firms expanding their offerings into the payments market.

For more on the call for information, take a look at our article ‘Big Tech and digital wallets: UK PSR and FCA publish call for information’.

In the feedback statement, the FCA and the PSR state that it’s clear from the responses received that there is plenty of opportunity in the growth of digital wallets – with some challenges and risks, which are already being considered in other jurisdictions such as the EU and the United States.

The purpose of setting out these findings now is so that they can be taken into account by the Competition and Markets Authority (CMA) under the Digital Markets, Competition and Consumers Act 2024 (DMCCA).

What are the main conclusions from the feedback?

In outline, the main conclusions from the feedback received are:

• Digital wallets represent a significant opportunity for innovation and growth.
• Digital wallets could present a significant opportunity for non-card forms of payment as they become available (such as open banking account-to-account (A2A) payments, stablecoins and CBDC), particularly for retail transactions.
• However, stakeholder responses have raised potential competition, consumer protection and operational resilience issues. Concerns have also been raised about innovation in the supply of digital wallets and the effectiveness of the current regulatory framework.

The feedback statement also highlights some of the opportunities that could be achieved through broader adoption of other digital technologies, for example authentication and verification services emerging from the UK Digital Identity and Attributes Trust Framework and the launch of a GOV.UK digital wallet, or introduction of a digital pound.

What issues have been identified and what are the next steps to address them?

Potential Issue 1: Competition between digital wallets

• Stakeholder responses have suggested that competition in the supply of digital wallets is not working as well as it could be. In order to avoid regulatory duplication, the FCA and PSR have shared their findings with the Competition and Markets Authority (CMA).
• The CMA is currently carrying out ‘Strategic Market Status’ (SMS) investigations into the mobile ecosystems of the two largest digital wallet providers using its powers under the DMCCA. The FCA and PSR will work closely with it in relation to this, including in relation to the development of any appropriate conduct requirements. The CMA’s statutory deadline for issuing a SMS Decision Notice is October 2025.

  Potential issue 2: Competition between payment systems within digital wallets

• Stakeholders suggest card schemes’ position in UK retail payments could be entrenched unless consumers are able to access alternative forms of payment as they come to market.
• The FCA and PSR will work closely with the CMA to understand how any interventions to address competition between digital wallets (Potential issue 1) could impact competition between payments systems within digital wallets (Potential issue 2). This should inform whether additional future regulatory interventions are needed.

Potential issue 3: Operational resilience and consumer rights and protection

• Stakeholders highlighted that digital wallets could impact the financial system’s resilience as operational failures of digital wallets may temporarily prevent users from making payments, for both online and in-store transactions.
• The FCA and the PSR acknowledge this point along with views suggesting that such risks – as well as unauthorised transactions risk and financial inclusion considerations - may be further addressed by bringing the provision of pass-through digital wallets within the FCA’s regulatory perimeter (see further ‘Potential issue 4’ below).
• As well as gathering more evidence on the prevalence of the types of fraud mentioned within the feedback statement (to help in assessing its scale and extent – see below), the FCA will look to engage with HM Treasury (HMT) to consider the above issues and potential options as part of the review of the Payment Services Regulations (PSRs) 2017 and the Electronic Money Regulations (EMRs) 2011.

Potential issue 4: Legal powers and the regulatory perimeter

• The majority of the stakeholders who responded to the call for information consider that the current regulatory framework, including the scope of the FCA’s regulatory perimeter, is not fully effective to deal with consumer protection, security and resilience issues.
• The concerns raised by stakeholders were mainly theoretical and forward-looking rather than based on past or current issues with some stakeholders acknowledging that digital wallets are more secure than physical cards and can reduce fraud risks.
• Given the lack of sufficient evidence on the prevalence of the types of fraud the FCA will carry out further research and data collection to gain a clearer understanding of potential issues.
• The FCA will look to engage with HMT to consider this issue – specifically, whether pass-through wallet providers should fall within the FCA and/or PSR’s regulatory perimeters - and potential options as part of the review of the PSRs 2017 and EMRs 2011.
• The PSR’s position is that entities that provide infrastructure used for the purposes of operating a payment system or that provide services to non-participants that enable the transfer of funds using a payment system are ‘participants’ in that payment system under the Financial Services (Banking Reform) Act 2013 (FSBRA). The PSR has certain powers over participants in a regulated payment system. Each case would need to be considered on its own facts to determine whether the type of services supplied would bring the provider within the definition of a participant. The PSR will further engage with digital wallet providers on this issue as part of monitoring developments in the digital wallets landscape.

What’s next?

Apart from the above follow-up steps, the FCA and the PSR are not planning new in-depth work. However, given the ‘clear and significant importance’ of digital wallets for consumers, competition and innovation, both will work with others - particularly the CMA and HMT - to continue to monitor developments and consider issues that emerge.  In line with the National Payments Vision, the FCA and the PSR will continue to work closely on this as synergies arise between their work to avoid ‘regulatory congestion’. For some key takeaways from the National Payments Vision, take a look at our article here.

If you would like to discuss any of the issues raised by the call for information, please get in touch with any of the people listed above or your usual Hogan Lovells contact.

Authored by Julie Patient and Virginia Montgomery.