The increasingly complex nature of retail payments and the regular entry of new participants have resulted in regulation of the sector becoming fragmented.The Financial System Inquiry Interim Report has highlighted the need for competitive neutrality in payments regulation, a more streamlined approach and an overhaul of customer verification systems."Government needs to strike a balance that allows the benefits of innovation to flow through the financial system, while maintaining stability," the report said.The Inquiry supports the regulation of credit and debit card payment schemes, including the imposition of interchange fee caps, but it is concerned that differences in the structure of payments systems have resulted in systems that perform similar functions being regulated differently, which may not be competitively neutral.It said: "On balance, the Inquiry considers that interchange fee caps have improved the functioning of our four-party payment schemes. However, payment systems of similar economic substance should be regulated consistently. "An argument could be made that four-party interchange fees, companion card fees and incentive payments under all schemes are equivalent in economic substance."The report said new technologies in payments were testing the perimeter of anti-money laundering legislation, particularly regarding 'know-your-client' verification requirements.More generally, advances in technology have reduced traditional barriers to market entry in payments. New entrants can leverage high levels of internet connectivity and other networks, as well as the penetration of smart devices to connect users to payments."Some submissions argue that firms performing similar functions should be regulated in the same way," it said.The Inquiry's view is that the question of whether new entrants should be brought within a regulatory perimeter depends on the nature and scale of the risk they present and who bears the risk. "A tiered framework with clear thresholds for when an activity or participant becomes regulated," it said.The interim report suggested that there might be value in establishing a central mechanism or body for monitoring and advising government on technology and innovation and has asked for views on that question.