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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The public sector and Government departments have a challenging role in today’s society. While easy to criticise from afar, their task is immense, complicated, and on a scale that few private sector businesses will ever face – without considering the impact of the COVID-19 pandemic.
A key function in any organisation, public or private, is contingent upon its relationship with a banking provider. This is even more critical for a core distributor, such as the Department for Work and Pensions (DWP) or a core collector, such as HM Revenue and Customs (HMRC). The volumes they process are staggering: HMRC collected around £627 billion in the 2018/19 tax year, while the DWP distributed £190 billion in 2019/20.
Banking’s particular legacy issues are embedded into payment frameworks and typically solved by either expensive or near-perfect workarounds, further complicating the system. When these ‘workarounds’ function, we are none the wiser. But when these solutions fail (and they do) they can cause serious issues.
Take HMRC: imagine 1000 people paying corporation tax to HMRC. Each must quote a reference number, sort code, and account number. Once, a cheque would be submitted with the relevant paying-in slip. But what happens when payments are made with the incorrect reference, or cheques are sent without paying-in slips? Maybe the person doesn’t have online banking or a cheque book? While payment via debit card may provide another bank workaround, how do we fix the 1% of errors that still occur?
The teams that repair transactions have a challenging role. With this HMRC example, they would need to manually search records for similar matches and use antiquated (legacy) methods to allocate income. Combined with the transaction fees incurred by card settlement, the result is a difficult environment in which to provide a logical, cost-effective solution.
Open banking provides an answer. Let’s first focus on failed payments due to incorrect referencing. Instead of relying upon manual rectification, open banking automates the entire process: when sort codes, account numbers, references, and amounts are pre-filled, that 1% of errors disappears.
Delving deeper into the public sector, we see many use cases where open banking could deliver similar benefits: bar code payments for manual payment methods, child support repayments, benefits over-payments. These can all be addressed with open banking.
The potential of this technology to the public sector is so considerable that HMRC recently tendered and awarded a contract for integrating open banking payment processes. Ecospend, an ecosystem participant, was selected to streamline and automate parts of HMRC’s payment processes, minimise errors, reduce fraud, and improve ease of use for taxpayers. This means that payments can be sent directly from a payer’s bank account, using validated HMRC data to pre-fill the details outlined above, while funds can be transferred via Faster Payments without the need to share card or bank details. HMRC is also in the process of awarding a Confirmation of Payee (CoP) contract, (CoP is a Pay.uk product underpinned by the open banking directory).
The strongest weapon in open banking’s armoury is much more than reducing errors: it’s the potential to create a more diverse and inclusive financial ecosystem. Many people who deal regularly with our public sector are financially excluded. Some cannot get a debit card or bank account as they exist in a cash-only society. They have no credit file, they pay in person at a post office, make deposits at a bank and use pre-paid meter cash networks. Open banking will soon ’open up’ their access to the digital society.
Open banking enables a secure framework that allows customers to digitally authenticate themselves to third-party providers to share data or to make a payment. If we extend these principles, businesses (or indeed public departments) could create a framework that enables people to share their identity with other third parties within similar trust and security frameworks with the consumer’s consent.
This will make it easier to open a bank account or access online services or an app on a smartphone. There is no credit risk in these instruments, so the financially excluded could access instant and accurate payment and account methods. This in turn would lead to better tariffs. Right now, the only barrier is digital access. Open banking will enable much more of society to be included.
The COVID-19 crisis has taught us some harsh lessons, but it has also been a catalyst for much needed change within the financial services sector. In the post-COVID era, the demand for digital solutions will only gain momentum and open banking must be at the heart of it.