Thought Leadership

The OBIE Op-Ed: Payments

The OBIE is a unique repository of insight, expertise, and experience gained from having brought the open banking programme to life in the UK. We are pleased to make this thought leadership available to the broader open banking ecosystem, as part of a new, regular, ‘The OBIE Op-Ed’ series.

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Delivering innovative payment solutions in a changing world
  • Fostering innovation in the payments landscape is crucial to building tailored services that meet the needs and expectations of a modern economy
  • Building on open banking’s successes – including the recent processing of over 1.2 million open banking-enabled payments in a single month – can lead to cheaper, faster, and more secure payments for consumers and businesses
  • The UK needs a coherent payments strategy that has open banking payments at its core, not at the periphery
  • Delivering the benefits of open banking is an ongoing journey; work must continue to drive adoption and monitor regulations to ensure its full benefits are realised

The way we manage our money is changing. The uptake of financial services apps and the use of open banking-enabled services are increasing rapidly, driven in part by COVID-19. According to a survey of 2,000 UK adults in early July 2020, one in five started using online banking apps during the first lockdown and 54% now use them regularly. Similarly, the number of people and businesses using open banking-enabled products has doubled to 3 million in just over six months. These innovative offerings are addressing real need and delivering clear benefits at a critical time.

Against this backdrop of behavioural change, the Treasury has been conducting its Payments Landscape Review, looking back through changes delivered over the past decade to consider what needs to be done to ensure consumers, businesses and the wider economy benefit “to the fullest extent” from payments networks.

Where do we stand?

There is much to be thankful for in the UK’s payments landscape. Faster Payments – an inter-bank agreement that reduced the time taken to transfer payments between accounts – allows for near-real-time settlement. Cards are widely accepted, and online shopping faces few barriers. The UK’s track record for innovation also stands up to scrutiny. For example, contactless payments have been enabled up to a value of £45, and the use of biometric and smartphone authentication is increasing.

But there are aspects of our payments ecosystem that still need to be improved. People should be able to cancel subscriptions at the tap of a button, not through a cumbersome phone call. This is crucial to avoiding subscription traps, a key tenet of the Competition and Market Authority’s (CMA) work on the loyalty penalty faced by too many consumers. Further, too much money is being lost to fraud, and the protections in place are inadequate. Lastly, too many businesses pay too much simply to receive incoming payments. At a time when businesses are struggling to remain viable, this needs to be addressed.

Where do we go from here?

We’re beginning to see growth in open banking payments. In 2018, 320,000 open banking payments were made. This rose to over 3.4 million in 2020. In 2021, this has jumped dramatically, rising to 1.2 million monthly open banking payments in January alone. This leap demonstrates how open banking can be the vehicle to take innovation in payments to new levels, enabling quick and secure payments directly between bank accounts, without the need for cards. This means retailers and charities accepting open banking payments, with funds going straight into their bank accounts and minimal transfer fees. See here how this was used to great effect during Captain Tom’s heroic fundraising last year. Open banking allows you to securely make payments without inputting unwieldy card details or to feel the need that you must save card details within a website. All can quickly be approved via your banking app or even by scanning the humble QR code.

Businesses will also be able to easily reconcile payments, using integrated invoicing, payment, and accounting software, powered by open banking.

At the Open Banking Implementation Entity (OBIE), we are particularly excited by Variable Recurring Payments (VRPs), a smart and sophisticated form of direct debit, which has the potential to solve the subscription trap by allowing people full control over their subscriptions, and the power to cancel them at any point. In the immediate term, we are in the process of developing a solution using VRPs for ‘Sweeping’ between an individual’s accounts, a move we see as a stepping-stone on the way to seeing VRPs applied across the broader economy. Greater control, greater security, greater speed, and lower cost – an essential innovation.

How do we deliver this vision?

Open banking provides a demonstrable means of delivering new innovative services and is a tangible example of a regulatory initiative that allows commercial activity to evolve from and complement existing payments infrastructure. The Open Banking Standards provide the basis upon which innovation can flourish without necessitating the need for participants to join the schemes directly.

For these innovative, world-leading initiatives to become a reality, we need a commitment to deliver the open banking revolution to completion. We at OBIE are proud of our achievements over the past three years and the role we have played in revolutionising how financial services serve consumers. It takes us one step closer to open finance, which could include data from areas such as pensions, mortgages, savings, and insurance. In order to continue making the most of the project and cement its benefits into the future, the OBIE, or its successor body, must have the remit to continue driving adoption and the power to recommend tweaks to regulation that may be required in the future. A coherent payments strategy is needed that puts open banking at its core, with the New Payments Architecture explicitly facilitating open banking payments and reducing the cost of faster payments.

We’re all striving for the same end game: a satisfied, empowered, and informed customer served by a buoyant and vibrant market. Regulation can create the right environment, conditions, and framework for the market to innovate and compete, both kickstarting the industry into action where it hasn’t occurred voluntarily and enabling disrupters to enter the market and cause a new sense of competition themselves.

We look forward to working with policymakers, industry, and the open banking ecosystem to make this payments landscape a reality.