UK Fintechs Respond To Government Consultation With Open Banking Wishlist

September 7, 2023
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The Open Finance Association has urged the UK government to establish a long-needed dispute management system for open banking, address the high costs of low-value open banking payments and create a more sustainable commercial model for participants.
  • Dispute management a key gap in open banking functionality, OFA says
  • Fintechs say open banking is “uncompetitive” for low-value payments
  • TrueLayer urges bank compensation for open banking

The Open Finance Association (OFA) has urged the UK government to establish a long-needed dispute management system for open banking, address the high costs of low-value open banking payments and create a more sustainable commercial model for participants.

The remarks were made in OFA’s response to the government’s Future of Payments Review, which aims to make the UK a “world leader” in retail payments.

“We believe open banking can, and should be the future of retail payments,” OFA said in its submission

Open banking can play an essential role in expanding the use cases of account-to-account (A2A) payments, moving it beyond sending money to friends and family to making payments to businesses.

OFA argues that enabling A2A payments as a competitor to cards is “crucial” as card scheme and processing fees have increased by up to 600 percent since 2015.

However, although there were 11m payments made using open banking in July, equivalent to just 3 percent of Faster Payments transactions in the same month. The association says the initiative is “not yet complete” and there are several gaps that need to be addressed.

One of the key gaps is the lack of a dispute management system.

“As open banking payments develop from simply moving funds between accounts, to enabling purchases of goods and services, there will inevitably be more issues and disputes to resolve between parties in the payments chain,” the document notes.

Despite attempts to develop a dispute management system for open banking since at least 2018, there is still no single system in use between open banking participants.

This means communication and resolution in the event of issues or disputes “can be slow and inefficient”.

This issue has been picked up by the government and regulators as well, who have tasked the Open Banking Implementation Entity (OBIE) with handing down a gap analysis of disputes by the last quarter of 2023.

In addition to addressing the issue of dispute resolution, OFA urged the government to make recurring payments available beyond sweeping, consider whether additional purchase protections are needed for open banking payments and encourage open banking at the physical point of sale, for instance, via QR code payments.

Open banking ‘uncompetitive’ for low-value payments

Although the association says open banking payments have been a key driver of volumes over Faster Payments, it claims that accepting these payments could cost merchants double as much as accepting a debit card.

Sending and receiving payment via Faster Payments currently costs the sending bank and the receiving bank around 1p.

Banks, however, typically charge merchants much higher fees, between 10p and £1, to receive a single Faster Payment into their bank account, according to the submission.

By comparison, the cost of card payments, which is typically a percentage of the purchase price, averaged 26 basis points for a debit card payment in 2020. This means that accepting a £10 debit card payment would cost the merchant 3p.

This situation “is likely to get worse” with the introduction of the New Payments Architecture (NPA), the association warns.

The NPA is expected to cost £400m, which will be spread over all the direct Faster Payments participants based on usage.

Given that the institutions will likely try to recover these costs, OFA estimates that this could add between 1 and 6 pence per payment to the cost of settling an inbound Faster Payment.

A sustainable commercial model

The association says open banking can ultimately deliver low costs in retail payments partly because it cuts out a number of other layers in the payment chain, including acquirers and card schemes.

In a response, which largely mirrors the submission of the OFA, open banking firm Truelayer said: “We believe that a sustainable future for open banking is one where banks are remunerated for their part in the delivery of open banking payments.” 

TrueLayer argues that bank compensation is particularly important given that their role may increase in building new APIs with extra functionality or in handling purchase disputes.

“The efficiency of open banking payments means that even where banks are remunerated for their part in the initiation of payments, there can still be cost savings for merchants versus card payments.”

“A win-win for banks and merchants.”

The idea of bank compensation has previously come up in a parallel initiative led by the Joint Regulatory Oversight Committee (JROC), which comprises the Payment Systems Regulator, the Competition and Markets Authority, the Financial Conduct Authority and HM Treasury.

In June, JROC said it supports the development of premium APIs that would allow banks to offer services to third parties for a fee.

HM Treasury opened the consultation in July which closed on Friday (September 1). 

The review is expected to make recommendations to the government in the autumn.

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