In July, the Government announced an independent review on the future of retail payments. The review seeks input on the most important retail payment journeys, such as user experience, security and cost; how they compare to other countries, and feedback on the current initiatives which are shaping retail payments today. The review will make recommendations to the government in autumn 2023.
TrueLayer is committed to serving the payments needs of businesses and consumers, and is leading the way in consumer research and user experience (UX) design — our most recent findings are published in our 2023 Payments experience playbook.
In this article, we make the case that open banking can, and should be, the future of retail payments — and outline the additional initiatives, building on open banking’s current success, that can get us to that future.
Why is open banking the future?
Open banking was initiated in 2016 to stimulate competition in banking — to open up access to both bank account data and payments to fintechs, so they could provide innovative services to consumers and businesses.
Fast forward to 2023 and open banking payments have taken off in the UK, with over 11 million payments made this way each month as of July 2023. Open banking payments have become a key driver of volumes over the UK’s world leading account-to-account (A2A) Faster Payment Service (FPS). Prior to open banking, FPS was predominantly used in a retail context for making payments to friends and family. Open banking means FPS is now being used everyday to pay individuals, businesses and government.
As a result of its success, the Payment Systems Regulator has identified open banking as a “secure and cost-effective alternative to using card networks, which could introduce more competition in the long term – which should help ensure fair prices and innovative services”. It has launched its own initiative to identify and address barriers to greater adoption of A2A payments for retail transactions.
Enabling A2A payments as a competitor to cards is crucial because, despite measures in 2015 to curb excessive card fees for merchants, scheme and processing fees have increased by up to 600%.
What are retail payments?
The independent review gives some examples of retail payments: paying a friend, paying a bill, paying businesses for goods and services, both in the UK and internationally. Beyond these examples, TrueLayer enables retail customers to pay into savings accounts, investments, and to pay off credit.
Does open banking have ‘product-market-fit’ for retail payments today?
As a relatively new technology, open banking is still finding its product-market-fit (PMF). This process involves both working with businesses to understand what their needs are, as well as working with industry and regulators to further develop the capabilities of open banking, to meet those needs. Below we look at product market fit for the retail payments outlined in the Future of Payments Review, and additional retail payments powered by TrueLayer or in development.
Paying a friend
Incumbent payments methods: manual bank transfers; pay-me links (such as Monzo)
Open banking PMF: Yes, such as VibePay allowing friends to pay each other via open banking
Paying a bill
Incumbent payments methods: direct debits, card-on-file
Open banking PMF: In development. Open banking is currently limited to single one-off payments - but work is underway to enable recurring payments to businesses, including for bill payments. This functionality will also enable open banking for subscriptions, introducing competition with card on file
Paying businesses for goods and services
Incumbent payments methods: cards, cash, cheques
enable recurring payments
enable physical point of sale (contactless)
develop additional protections for purchase issues/ insolvency
Save and invest
Incumbent payments methods: direct debit, manual bank transfer
Paying off credit
Incumbent payments methods: direct debit, manual bank transfer
Open banking PMF: Yes, such as The Credit Thing
What’s needed to secure open banking as a retail payment method for the future?
1. Address gaps in open banking functionality
Open banking is not yet complete as an initiative. There are several gaps to address, relating to the functionality available in open banking payments, and how open banking payments is supported and managed by each party in the payments chain. Some key gaps are:
Recurring payments: originally, open banking only supported single immediate payments. From 2022, capability was added for recurring payments, but only for the purpose of sweeping money between accounts in the same name e.g. to help consumers save money, or pay off debt. To unlock the potential of open banking for retail payments, the industry and regulators are now working towards developing recurring payments beyond sweeping, with government and regulators seeking a delivery plan and framework for Q3 2023.
Dispute management: 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. Despite attempts to develop a dispute management system for open banking from 2018, no single system is in use between open banking participants. This means communication and resolution in the event of issues or disputes can be slow and inefficient. As open banking scales into retail payments, the need for such a system increases. Government and regulators have tasked the Open Banking Implementation Entity (OBIE) with performing a gap analysis of disputes by Q4 2023.
Purchase protection: All types of payments can go wrong. This is why all electronic payments, including open banking payments, are governed by consumer protection rules set out in the Payment Service Regulations. These rules mean that if a problem with a payment is the fault of the payment service provider (PSP), such as the bank, or the open banking provider, it is the PSP’s responsibility to put the customer right — for example, issue a refund or compensate costs incurred, this includes unauthorised payments. Whether additional purchase protection options are needed for open banking payments is an important issue to resolve for the future of retail payments and is currently being debated by industry and regulators.
Physical point of sale: while open banking payments are taking off in the digital space, there are barriers for take-up at physical point of sale, which were identified by the PSR’s Independent panel report in April 2022. Although QR codes are being used, the report recommends that "the PSR should investigate what actions may be needed to enable consumers to use their devices to make open banking retail payments at physical point of sale via contactless technology."
Other functional gaps or issues which exist and need to be addressed to ensure open banking can power the future of retail payments are outlined by the Open Finance Association (OFA) here.
2. Include open banking payments in a UK payments strategy
While some of the gaps outlined above are being addressed through the PSR’s A2A initiative, and the Joint Regulatory Oversight Committee (JROC), to ensure open banking payments can power the future of retail payments, there needs to be an overarching strategy for the development of UK payments, which coordinates the activities of government, regulators and bodies involved in payments infrastructure delivery, i.e. HM Treasury, the FCA, PSR, Pay.UK and OBIE (or its successor). This strategy should address the interlinkages between open banking and other major initiates, including:
New Payments Architecture: a project to deliver a new retail payments system for the UK, replacing the Faster Payments System. Since open banking payments will increasingly power instant retail payments, the NPA needs to be developed with open banking in mind. In particular, the NPA needs to be developed in a way which prevents prohibitive costs for instant payments (as discussed here).
Anti-fraud measures: while measures are clearly needed to combat authorised push payment (APP) fraud, which can have a devastating impact on victims, there also needs to be more consideration of the unintended consequences such measures could have on open banking. If banks are liable in more circumstances for APP fraud, they may further decrease transaction limits and block more payments, as part of preventative measures. If this ‘de-risking’ is passed on to open banking, it will be more difficult to deliver cost savings to businesses, a consistent service to customers and the competition that open banking was intended to create.
Digital pound: if the digital currency proposed by the Bank of England is launched, it will be used to make in-store or online payments. There needs to be consideration of how Digital Pound payments are facilitated, and the role of open banking providers.
Future regulatory framework: following Brexit, the UK is developing its own payments regulation as part of the future regulatory framework. The EU has already introduced a draft of ‘PSD3’ which includes a number of measures to improve the performance and uptake of open banking. The UK will need to move quickly to keep pace with the EU, and develop an equally forward looking and robust regulatory framework for payments and open banking.
3. Secure an open banking delivery body
The OBIE was established in 2016 and employs technical experts to develop and maintain standards which help UK banks and third party providers to deliver open banking and monitor its implementation. TrueLayer has worked closely with the OBIE since it was set up. We believe it has been critical to making UK open banking a success.
But the OBIE isn't a permanent body and its future is now the subject of much discussion, following the end of the Open Banking Roadmap. The decision about OBIE’s future ultimately falls to the Joint Regulatory Oversight Committee (JROC).
For open banking to power the future of retail payments, a permanent open banking delivery body should be established, which can develop and deliver standards, guidelines and frameworks to address some of the issues and functional gaps outlined above. However, the successor body needs:
A new home: open banking standards for both payments and data should continue to be developed by a single, independent body. Splitting payments and data into new or existing organisations would lead to inefficiencies (such as additional regulatory requirements, different certification regimes and incompatible standards). Much of the value of open banking is built on using data and payments seamlessly together, so standards should be developed together.
A new mandate: the OBIE's narrow mandate has constrained the development of open banking in the UK. The CMA Order empowered the OBIE to develop standards for both payments and data APIs, which have supported a huge amount of innovation and competition. But it hasn’t been possible to go beyond what was prescribed by the Order. Variable Recurring Payments (VRP) is one example of this. The Data Protection and Digital Innovation Bill contains new provisions that can be used by HM Treasury to give legal underpinning to a successor body. We believe these powers should be used as soon as possible to put the body in place so it can start its work.
A new roadmap: the OBIE has focused on delivering core functionality, such as APIs to access data and payments, and more recently VRPs, but as outlined above, there are shortcomings in the way these APIs have been implemented or designed, which continue to hold back the adoption and development of open banking. The successor body should be tasked with delivering the open banking aspects of a future UK Payments Strategy.
4. Move to a sustainable commercial model for open banking
One advantage of open banking for retail payments is its low cost. This can be explained by the fact that open banking uses technology to cut out a number of other layers in the payment chain, such as acquirers and card schemes. The inherent security of open banking also reduces instances of fraud, which generally add to the cost of card payments.
But the low cost can also be explained partly by the fact that there are no fees currently paid to the bank (due to prohibitions on contracts in regulations).
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 - particularly as that role may increase, for example, in building new APIs with extra functionality, or in handling purchase disputes.
However, 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.
By working closely with banks on commercial models for open banking, TrueLayer is pioneering the sustainable economic model proposed by JROC.
Our work on a commercial model for variable recurring payments (VRPs) is a first step in this direction. Through continued engagement and partnership, we believe we can deliver real value for banks, retailers and consumers.
We look forward to working with all parties to ensure the UK has world leading retail payment services. We are confident that if the above issues are addressed, open banking can continue to increase its role in the retail payment market, making the most of the UK’s world leading instant payment infrastructure.