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Governance and voluntary industry initiatives have taken centre stage in a new report on the future of open banking payments, which has been compiled by financial services industry association UK Finance.
There are now more than 2.5m open banking payments a month compared to just 320,000 in the whole of 2018, and the recommendations from the UK Finance report aim to support the further development of open banking products and services.
Although 30m annual open banking payments may seem minuscule in comparison to the 29bn non-cash transactions that took place in the UK in 2020, the UK has been regarding at the forefront of open banking development and a step ahead of its neighbours on the continent.
UK Finance, which represents banking and payment providers, has now set out its strategy for a future model of open banking in the UK.
“Open banking payments are already working today for many millions of customers and it has the potential to be much more,” said Chris Henderson, payments head at Tesco Bank. “This report shows how the industry can work together to develop the next phase for open banking for the benefit of customers and businesses.”
The shared vision for open banking payments is to offer customers and merchants a greater choice in how payments are made and received, said Jana Mackintosh, payments director at UK Finance. “Open banking has an exciting future, and the payments industry is working together to consider how the market could be enhanced for customers and merchants.”
Getting governance right
The key recommendations outlined in the report revolve around the governance of open banking in the UK, as well as the possible framework for the industry.
According to UK Finance, there should be further development of open banking payment standards and functionality would benefit from industry governance and an associated technical group that includes industry bodies.
Industry governance could come from a working group, consisting of leaders from the market who will help promote the commercial development of open banking payment standards and help the market meet its ongoing regulatory obligations.
Should UK Finance’s proposals come to fruition, this technical group would be tasked with progressing the technical issues that sit outside the Final Open Banking Roadmap, and require a collaborative approach to resolve.
This includes, for example, more certainty of payment execution, further developing payment context codes and visibility of payment status.
“Open banking has huge potential to benefit businesses and consumers and is in its infancy,” said Abdulla Mashaal, payments practice lead at BCS Consulting.
Governance, although necessary to achieve consistent outcomes, can be blunt and have a dampening effect on innovation, he continued, referring to the future of open banking. “Arrangements that shorten the journey to common outcomes and win-win, pro-competition use cases could not be more sorely needed, but there is no silver bullet.”
Mashaal told VIXIO that the intention to further investigate and stand up technical groups is to be praised. However, in some ways, the report does not go far enough in spelling out tangible outcomes and champions for these initiatives.
“Some of the issues highlighted in the report could be solved in other ways too,” he said, noting the potential of request to pay as an approach that could improve subscription payments for gig economy consumers and vulnerable customers using existing payment methods (including open banking payments).
“This has stalled in recent times,” he said.
Variable recurring payments
Further work is also required to explore the development of a voluntary multi-lateral industry framework that has the capability to introduce commercial APIs, as well as functionality and performance that sits outside the scope of the CMA order and Payment Services Directive (PSD2).
“Fundamentally, I believe open banking will dramatically transform the payments industry and how payments get embedded into commerce experiences,” Huw Davies, co-founder of Ozone, told VIXIO.
However, this potential will only be truly unlocked once open banking payments move beyond the current scope, he said, making reference to single, immediate payments.
“Variable recurring payments provide the functionality to enable many of the use cases that will really unlock the potential,” said Davies, echoing the plans outlined in the UK Finance report.
Variable recurring payments (VRPs) enable customers to connect authorised payments providers to their bank accounts, which means that they can make payments on a customer’s behalf providing that they are within agreed parameters.
According to UK Finance, a multilateral framework for VRPs is needed as, without this, there could be fragmentation in the market resulting from bilateral arrangements.
Therefore, the roles, responsibilities and liabilities of different types of market participants should be the next focus, the report says.
The trade association has shown its commitment to advancing VRPs with a recent "hackathon".
According to Mackintosh, this demonstrated new ways that open banking payments can be used to make it easier to pay tax, make gaming payments and shop online.
The hackathon, which opened for applications in September, was collaboratively managed by UK Finance, as well as Ozone and Open Future World.
The eventual winners of the six-week event varied from NatWest to PlayStation.
VRPs are arguably the most significant development in open banking to date, said Steffen Vollert, one of the judges, and chief technology officer at Volt. “With variable recurring payments, consumers can authorise a third party to make payments from their bank account on a continuing basis. VRPs are widely expected to bring added impetus to the trend towards open banking payments.”
VRPs have now been mandated for the CMA9 by the competition authorities.
However, although this has been widely welcomed, the CMA last week agreed to delay implementation by six months, conceding that the nine largest banks are not yet completely ready for the mandate.
