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The Strategic Working Group (SWG) has issued its final report on open banking in the UK, outlining short-, medium- and long-term priorities for open banking, and eventually open finance, to be a success.
The SWG, which was tasked by the UK’s regulators with acting as a consultative forum on open banking, has released its final report: The Future Development of Open Banking in the UK.
This is likely to play a pivotal role in deciding the terms of reference for the Open Banking Future Entity, which is currently in development. Plans for this are due to be announced by the Financial Conduct Authority (FCA) and Payment Systems Regulator (PSR) in Q1 of this year.
"Open Banking and its future continue to be a joint priority,” confirmed Chris Hemsley, the PSR’s managing director and Sheldon Mills, the FCA’s consumer lead, in a joint statement. “As the SWG’s work ends with the report, the Committee’s work on open banking and engagement with industry and broader stakeholders continue.”
“Fully realised, open banking and then open finance can bring further benefits to consumers and businesses and will help the UK become more competitive and innovative."
Variable recurring payments
The SWG, which was chaired by Cambridge academic Bryan Zhang, pays particular attention to Variable Recurring Payments (VRPs) in its report.
VRPs enable customers to connect authorised payment service providers to their bank account so that they can make payments on the customer's behalf, in line with agreed limits.
VRPs are intended to offer more control and transparency than existing alternatives, such as direct debit payments.
A short term priority, for example, is evaluating the use of VRPs in low risk sectors.
According to the report, many stakeholders, and particularly representatives of retailers, expressed a strong appetite for the expansion of VRPs beyond "sweeping."
Sweeping is a type of VRP that lets consumers or businesses transfer, or sweep, money from one of their accounts to another to, for example, take advantage of favourable rates.
Yet, there are several obstacles to this expansion, such as the lack of a customer protection, disputes regime and a broad commercial arrangement.
However, the evidence also highlighted some potentially low-risk sectors for the expansion of VRPs, such as government or utility payments.
“Evaluating ways to expand VRPs into lower risk sectors could provide an opportunity to maintain the momentum for this new open banking capability,” the report suggests.
A long term priority suggested in the report is making VRPs scalable.
“VRP schemes could address a number of the identified challenges in the market,” the report says. “There was a wide range of views on the appetite for, nature of and desirability of regulatory intervention to facilitate the development of VRPs.”
According to the SWG, several respondents further suggested that VRPs have potential to resolve key ecosystem performance issues with open banking payments, given the lower level of friction in VRP authentication compared to single immediate payments (SIPs).
Open banking payments scheme
VRPs aren’t the only payment solution touted in the report, with the SWG evidencing calls for an e-commerce scheme: Account 2 Account Retail Transactions (A2ART).
This would be a long term solution, the report suggests.
“Whilst there was very limited reference in the evidence to a potential A2ART scheme, many respondents wrote and spoke about the need for open banking payments to provide an alternative method for paying for goods and services, in particular online,” the report says.
“Others, including some TPPs [third party providers] saw open banking payments’ extension and expansion into e-commerce and POS [point of sale] retail transactions being a relatively low priority area for now.”
In the medium term, the SWG has touted multilateral agreements and codes of conduct as a priority.
"The evidence provided suggested a range of mechanisms through which firms could work together to enable a wider range of payments solutions that are not currently available in the market," the report suggests.
These mechanisms, the SWG says, could be used to help solve multiple thematic priorities and could range from simpler solutions, such as agreement templates, to more complex solutions, which have similar features or components to a payment scheme.
This could include a trust mark, inter-firm compensation arrangements, customer redress process, and liability models.
The SWG acknowledged, however, that some feedback had been sceptical these issues could be effectively resolved without regulatory intervention.
"There was little objection in principle to any of these proposed mechanisms, although many stakeholders provided evidence to suggest that the market did not require any of them at this time, and expressed confidence that ultimately, the market would find appropriate solutions if there were a need."
However, third part providers (TPPs) in particular favoured more concerted efforts to bring firms together, including in some cases regulatory intervention around areas such as voluntary or commercial agreements to determining compensation arrangements.
The SWG says that, having considered the evidence provided, a phased approach may be most appropriate, with each phase building on the previous phases’ foundations and learnings.
Fraud
As with other recent UK regulatory reports on payments, fraud was a key issue. The SWG has proposed several recommendations in their final report.
One short term issue noted is the need for better, and more granular, fraud data to be collected from across the ecosystem. This would including banks and TPPs to help inform decision-making and the development of open banking payments.
“This is particularly needed to inform the debate about fraud and friction, where data is fragmented, inconsistent, and insufficiently detailed about use-cases and transaction values,” the report says.
“In addition, whilst there is agreement that payment journey completion rates have improved over time, there is a significant disparity between some TPPs' evidence and that of ASPSPs [account servicing payment service providers].”
The report also notes that Transaction Risk Indicators (TRIs) could be helpful in improving fraud risk assessment and therefore reduce the incidence of false positives.
According to the SWG, stakeholder feedback determined that, in the short term, TRIs should be implemented consistently across the whole ecosystem by all ASPSPs and TPPs.
“A phased approach to implementation was suggested by some respondents, starting with a technical implementation only,” the report says.
“This approach could mitigate some of the concerns raised in evidence, recognising that 'fraud declines' and 'limit declines' are separate but linked items and may require different solutions.”
