The new code aims to avoid customers being penalised for fraudsters’ actions.

By Andrea Monks and Nell Perks

Estimates indicate that fraudsters stole £1.2 billion from UK bank accounts in 2018 — a 16% increase on the previous year. UK Finance has described fraud as a “major threat to the UK”, and has confirmed that the finance industry is committed to tackling the issue. However, developments in banking that have led to quick and easy payment methods, combined with increasingly sophisticated cyber scams, mean that fraudsters continue to flourish.

There has been a particularly significant increase in authorised push payment (APP) fraud, in which a customer is tricked into making a payment to another account that is controlled by a criminal. Historically, victims of this sort of fraud have struggled to retrieve their money — only 23% of losses were returned last year.

The PSR will not review the fees and rules set by Visa and Mastercard, but will look at the practice of bundling, and will examine effects on innovation in card-acquiring services.

By Brett Carr, Stuart Davis, and Christian McDermott

Following the publication of its Draft Terms of Reference in July 2018, the PSR has now listened to market feedback and has issued its Final Terms of Reference, marking the launch of its review into whether competition in the supply of card-acquiring services is working well for merchants and consumers.

Card-acquiring services allow merchants to accept payment for goods and services via debit, credit, charge, and prepaid cards. In order to benefit from card-acquiring services, merchants must enter contracts with so-called “merchant acquirers”. Card-acquiring services are often bundled with other services, referred to by the PSR as “card acceptance products” — these include physical card readers (also known as point-of-sale (POS) terminals) and payment gateways (the e-commerce equivalent of POS terminals).

The Final Terms of Reference follow a consultation period on the Draft Terms of Reference, the details of which are covered in Latham’s previous blog post.

By Christian McDermott

In recent years, PE firms have been paying to play in the payment processing sector. From Worldpay and Nets, to Bambora and Paysafe, payment processing companies have proven to be attractive investments for European PE. In our view, a wave of regulation in the FinTech sector will unleash further growth potential, and PE firms may be well-positioned to take advantage of this.

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The number of M&A transactions in the payment services industry has increased in Europe over the past five years, and we believe the sector will remain hot. A wave of regulation has been designed to stimulate competition and encourage new market entrants. Chief among this is EU Directive (EU) 2015/2366 on payment services in the internal market (known as “PSD2” since it replaces the existing EU payment services directive). PSD2 came into effect in EU Member States in January 2018, and has been designed to help newer market entrants (including FinTech startups) compete with traditional banks. Under PSD2, banks must open up their consumer data to FinTech companies. This is designed to allow these companies to use the data to take a bigger slice of the payment processing market, which has been typically dominated by banks and more established payment processors.

In our view, PSD2 will result in the creation of innovative financial products and potential investment opportunities. It allows FinTech companies to launch financial services products that link into banks’ infrastructure. The two key business models contemplated by PSD2 are: (i) “account information service providers”, who provide consolidated account information to consumers (e.g., via a smartphone app on which users will be able to see their various balances all in one place); and (ii) “payment initiation service providers”, who facilitate online payments from consumer bank accounts (while avoiding the costs associated with maintaining the account itself).