Written evidence submitted by Mastercard (IGR0085)

Response to the Science, Innovation and Technology Select Committee: Innovation, Growth, and the Regions Inquiry

Mastercard welcomes this opportunity to respond to the Science, Innovation and Technology Committee’s inquiry into “Innovation, growth and the regions” to assess the role of the UK’s innovation ecosystem in achieving the Government’s mission to kickstart economic growth across the country.

By way of background, Mastercard is a global payments technology company providing the underlying technology which enables consumers and businesses to make and receive digital payments every day. Our mission is to connect and power an inclusive, digital economy that benefits everyone, everywhere by making transactions safe, simple, smart, and accessible. In the UK, our customers range from banks and other card issuers to government departments and local authorities across the country. Vocalink, which is also part of Mastercard, is the infrastructure provider for the UK’s account to account payment system, processing 98 per cent of all state benefits on behalf of government, and 95 per cent of all salaries in the UK.

Mastercard is responding to this inquiry as we believe the digital economy, including the UK’s digital payments ecosystem, has an important role to play in helping to make Britain the fastest growing G7 economy by fuelling growth and innovation across the regions. Payments and the digital economy serve as the backbone of a modern economy and digital commerce, offering the critical infrastructure that drives and supports all digital transactions and activities. For example, card payments alone facilitated up to an estimated 6.5% of GDP in 2022, or £161bn - equivalent to the Gross Value Add (GVA) of the construction sector[1]. Payments innovation is fundamental to driving growth and innovation across the UK by delivering better outcomes for consumers and businesses as well as delivering greater payments choice.

For consumers, payments innovation can help to address the challenges of financial exclusion. Innovative fintechs are now developing a range of inclusive solutions that meet diverse consumer needs. Prepaid cards are one such inclusive payment solution; they do not require a bank account yet offer much of the same functionality as a bank issued card, such as online and point of sale payments.  They do not allow consumers to overspend, helping to address the needs of unbanked consumers who need support managing their money or want to avoid accumulating debt. They act as a bridge for financially excluded individuals, such as those with poor credit history, hard-to-reach, and unbanked individuals, helping them to realise the benefits of digital payments and build their digital financial skills and productively participate in the economy. In the UK, we work with a range of prepaid card providers, such as Monese, which was set up to provide migrant workers across Europe, including those coming to the UK who do not have a proof of address, local credit history, utility bills and other documents, access to financial services so they can receive a salary, rent accommodation, set up utility bills and manage their day-to-day spending. Mastercard recently helped Sibstar launch a new debit card and app on the Mastercard network that enables people living with dementia to access and spend their money while keeping it safe.

For businesses, there is broad agreement that the UK can capture a massive economic boost by helping more people to start and, more importantly, grow their businesses. Adopting digitalisation, including digital payments, can play a significant role in addressing some of the most pressing issues faced by SMEs by helping businesses get paid and get capital. Mastercard is sponsoring the Centre for Finance, Innovation and Technology (CFIT)’s third coalition, which focuses on breaking down the barriers that deter the UK’s 5.6 million SMEs from seeking and accessing finance. The coalition will develop demand-side solutions to complement the work already undertaken by CFIT on how to boost the supply of lending to SMEs.

In addition, payments data insights have the potential to deliver significant economic and social benefits to individuals, businesses and government at all levels and in all corners of the UK; indeed, it already is. Better use of data generated from digital technology, including digital payments data on economic spend, has the potential to deliver more inclusive, economic growth. It can also improve lives and empower communities by facilitating intelligent, evidence based, and data driven policies. Using data in this way will be integral to helping the UK’s economic growth ambitions.

The UK has historically been a global leader in the development of payments innovation. To help maintain this position, the government launched its National Payments Vision (NPV), which was welcomed by Mastercard. The NPV seeks to deliver a trusted, world-leading payments ecosystem delivered on next generation technology, where consumers and businesses have a choice of payment methods to meet their needs. Mastercard supports these ambitions and wants to see a strong UK payments ecosystem, which creates the right conditions for increased innovation and investment across the UK. We are excited about the possibilities that the NPV opens up, particularly in retail A2A payments, Open Banking and fraud protection.

To realise the growth and innovation potential of the UK payments industry Mastercard recommends that the Committee encourages the Government to:

1. Develop a National Fintech Strategy: The UK’s fintech and paytech sectors are well placed to support the government’s objective to deliver growth across all regions and nations. As set out in the 2021 Kalifa Review,[2] fintech is a major UK success story which is not confined to London, but spread across the UK in ‘clusters’, notably where financial services and technology expertise, STEM skills/academia and investment capital are present. At Mastercard, our Start Path programme has enabled us to support more than 230 later-stage start-ups, offering them access to our technology and network to help them scale. To this end, we have also given our support to CFIT and a commitment to the UK Fintech Growth Fund. To unlock further growth, we recommend that the government creates a National Fintech Strategy to help address some of the barriers to fintech growth and to help deliver focused long-term support for the next generation of fintechs, with a particular focus on support for social purpose fintechs. The National Fintech Strategy would set out how to a) close funding gaps for social purpose fintechs, b) consider improvements or changes required to create a regulatory regime fit for purpose to help social purpose fintechs start and scale and c) help to better connect regional fintech associations with industry, and, working with CFIT enable the sharing of best practice and private sector support across the UK to address outstanding economic and social challenges.

2. Unlock the economic potential of smart data through enabling commercial models: The UK has the potential to unlock substantial economic growth by fostering open banking, open finance, and open data—collectively referred to as smart data. CFIT's first coalition found that Open Finance and personal data mobility alone could increase the UK's GDP by £30.5 billion. In the medium-term, we believe that this approach should be extended out from financial services across a broader range of sectors. This might include energy, utilities and transport - thereby fuelling innovation and growth across a wider range of industries and regions of the UK. To ensure that the market is enabled effectively Mastercard believes that there could be one or more over-arching schemes for data exchange that cut across all smart data sectors, whilst supporting sector-specific nuances at a next level within that overall framework. However, sustainable commercial models are needed to secure investment and innovation. For open banking, finance and data to realise its potential it is essential for there to be sound economic models at the heart of the ecosystem that allow the development of sustainable data-sharing commercial models. Without commercial drivers the market is neither viable nor scalable. Primary legislation, such as the Data (Use & Access) Bill, should require regulation to establish this sound economic model as this will enable industry to make long-term, sustained investment and deliver ongoing innovation.

3. Deliver a proportionate, coordinated, and stable regulatory environment: This provides the basis for innovation both at a national and regional level. The UK is often at the global vanguard of innovation in payments – benefitting from investment in cutting edge technology from firms such as Mastercard. However, we note that global firms tend to base investment decisions in individual markets on the stability of the regulatory environment (amongst other factors). To attract investment in payments innovation, the UK should focus on market/consumer outcomes. Therefore, regulatory intervention should be focused on key principles and desired consumer outcomes, and cases where the market is unable to overcome specific obstacles - not on how those outcomes are to be achieved. This will reduce the risk of disincentivising private sector innovation. An example of where the this can be delivered is by facilitating the next generation of account-to-account (A2A) payments. There is a need to reconsider the UK’s Faster Payments service as we are now beginning to fall behind relative to other markets in certain areas. By getting governance arrangements right, investment can be unlocked and growth delivered.  Mastercard engaged a respected third-party econometric consultancy (EY LLP) to create a “sophistication index” to compare the different levels of sophistication of A2A payments infrastructure across 25 global economies including the UK. The resulting preliminary analysis suggests that a one-point increase in the sophistication score of the UK's A2A payment systems could lead to a 0.8% increase in the volume of transactions and translate to around a £10 billion boost in economic activity annually. This is not a mere redistribution of existing transactions from cash to digital but represents net new economic activity. We believe that the UK’s next generation A2A payments system can be implemented in a way that restores and then maintains the UK’s pre-eminent position in A2A payments. Specifically, an approach focused on unlocking innovation should encourage greater competition ‘in the market’ rather than ‘for the market’ in the provision of A2A infrastructure, in line with a range of other markets. Moreover, there is a need for a less prescriptive regulatory regime for A2A payment systems in general, whereby the regulators define key principles and the outcome(s) they are seeking and leave it to industry/the market to define the best way to achieve this, in the context of a competitive marketplace.

4. Use data insights to better design, calibrate and evaluate government policy: The innovative use of data has a central role to play in the development, execution and evaluation of government policy. Mastercard understands the use of data is essential to both develop and measure policy outcomes. For government, data innovation allows greater measurement of how effectively various policies are working and thereby improve the efficiency with which public services are delivered. From a citizen’s perspective, embedding data science into government policymaking presents the opportunity for public services to be developed based on citizens’ needs which may differ across the regions of the UK. As a case in point, Mastercard’s Data for Growth solution uses our rich payments data insights to help government make smarter decisions, encourage action, and support the efficient delivery of public services, with better outcomes for citizens, businesses, and the public sector. Our solutions, such as Spending Pulse and Geo-Insights, can be used across the entire life cycle of a policy helping policymakers to identify areas or sectors most in need of social or economic investment, develop and measure the impact of different policies, and course correct as required, ensuring public funds and private investment provide an efficient return on investment. From a regional perspective, these types of insights could feed into Local Growth Plans and work being done by Metro Mayors and the Combined Authorities across the country including as part of the Government's Devolution Plans for England.

24 January 2025