In April 2023, the Joint Regulatory Oversight Committee (JROC) published its recommendations to grow open banking in the UK in a safe, scalable and economically sustainable way. The recommendations centred on five key themes:
- Levelling up access, availability and performance
- Mitigating the risks of financial crime
- Ensuring consumer protection if something goes wrong
- Improving information flows to third-party providers (TPPs) and end users
- Promoting additional services using non-sweeping variable recurring payments (VRP) as a pilot
The recommendations come at a crucial time. To date, the UK has been at the forefront of the open banking movement with over seven million active users (consumers and small-medium enterprises (SMEs)). Despite this success, there are concerns that we are falling behind other countries. And there is a sense of urgency on the part of all stakeholders involved, including the UK government, banks and third-party providers (TPPs), such as fintechs.
Open banking is seeing success in different regions, for various reasons, but to date, none have gained the same level of adoption as seen in the UK.
In some countries, including the U.K., adoption has been driven primarily by government regulation. Hong Kong has its Open API framework which outlines a phased approach for banks to implement Open APIs with access for TPPs of their choice. Australia has the Consumer Data Rights Act (CDR), which allows consumers to share their data with any authorised third-party of their choice. And Brazil, where adoption has grown more quickly than any other country in the last two years, its Open Finance initiative is promoted and regulated by the Brazilian Central Bank.
In other countries such as India, Japan, Singapore, South Korea and the U.S., open banking adoption has been more market-driven, assisted to a lesser degree by regulations encouraging increased data sharing between banks and TPPs.
The reality is, we need both regulatory and market drivers to really propel open banking.
Open banking has succeeded to date in the UK, but gaps exist
Much of the progress in the UK can be attributed to the 2018 UK government mandate requiring the nine largest account providers to consumers and SMEs to use open APIs to allow authorised TPPs to access customer-permitted data and initiate payments on behalf of clients. Enforcing a single standard for the largest account providers with regulatory oversight, provided the UK payments ecosystem with a clear path and avoided the complexity we’ve seen in other regions, without the same level of standardisation.
At the same time, we’ve lost some momentum. One reason is performance. The banking flows can be very inconsistent and there are simply too many instances of failed payments and downtime. When that happens, everyone is left picking up the pieces. There is no real protection for consumers or SMEs. Payments do not have a scheme level guarantee, meaning beneficiaries typically need to wait to receive the funds rather than having total faith in confirmation messages sent in advance of the payment. Likewise for consumers, there is insufficient protection in the unlikely event that something goes wrong.
Another is the maturity of our existing payment rails. Unlike countries like India and Brazil, UK consumers and businesses already had the ability to make fast payments without the assistance of open banking. UK payers have been accustomed to keying in bank details themselves since 2008 when the Faster Payment Scheme was launched, and it has worked so well that payers may see no obvious benefit to having these details populated for them by open banking.
There is also a lack of awareness at the user level. In those countries where open banking is taking off, there tends to be a very clear open banking option/brand at the point-of-sale. That just hasn’t happened in the UK. The recognition isn’t there among the general population.
To be fair, we’re talking about a new technology here and changing people’s long-standing payment habits doesn’t happen overnight, but without a huge awareness campaign, we should not expect open banking to continue to grow at the same rates here.
The opportunities ahead
To re-energise the growth of open banking here, we have to think beyond the benefit of faster payments. Businesses are looking to reduce the friction in their payment processes, while ensuring the validity and security of payments. For consumers, it comes down to convenience. How can we make it easier and more seamless for them? We have to promote how open banking delivers on those points.
Cost matters too. If merchants are to adopt open banking, the banks will need to offer those transactions at a cost less than credit and debit cards. And unless merchants promote open banking as a more convenient option at the point-of-sale, consumers won’t even know it exists.
Another opportunity is recurring payments, which would open up huge payment volumes. This too will depend on how banks price those transactions for merchants. The government could play a role here by setting pricing guidelines.
Payer protection is crucial as well. Right now we have different protections for different payment methods – credit card, debit card, direct debit and open banking all offer different levels. Rather than create another payment protection, Open Banking has the opportunity to align with the protection offered by an existing and established payment type; one suggestion would be to align with the Direct Debit Guarantee which provides protection against errors, but does not stray into the complexities of providing protection against the quality of goods being purchased.
Lastly, I’d like to see a more connected approach across different payment channels. In the same way Open Banking payments have the chance to align with an existing payment protection (rather than creating yet another one), I would urge Open Banking to look for ways to standardise payment consents. Right now a payer would need 3 different consents to set up AIS, PIS, VRP, and even more if the payer wanted to add in other payment types like Direct Debit; each of these requiring a different flow with plenty of friction. At the end of the day, the payer is trying to buy goods or services; by standardising these consents Open Banking has a chance to make payments smarter so that payments could be routed through the best channel to match the payer’s preferences and type of purchase.
