This is the text of the speech as drafted and may differ from the delivered version. This speech was delivered by our Managing Director, Chris Hemsley, at the Payments Leaders' Summit on 22 April 2024.
Good morning. I’m Chris Hemsley, Managing Director of the Payment Systems Regulator and I’m pleased to join you here today.
It was only October that I was last stood here reflecting on the progress made by the payments industry, where all of us were awaiting the outcome of the Future of Payments Review, and at the PSR, we were setting out our position on the next steps in tackling APP scams and the development of Open Banking payments.
So, you might be forgiven for thinking that not much could possibly have happened in the six months since I was last here.
Well, in fact, you only need to look at the last five working days to have a powerful reminder of how much is changing, as we look to take payments forward.
On Monday, the Economic Secretary announced the creation of a new Taskforce to advise on how best to unlock new data use cases in Open Banking – seeking to realise the benefits that Open Finance and unlocking smart data can bring.
On Tuesday, I attended the first of those Taskforce meetings. It rightly is an industry led initiative. And – as a joint-chair of JROC – I offered my support to join this up with the emerging framework for Open Banking more generally.
On Wednesday, the Startup Coalition and the Tony Blair Institute for Global Change jointly published a report outlining a 'Progressive Vision for Fintech', with a number of its recommendations making reference to the potential of open banking.
And on Friday, JROC published our recommendations for the next phase of open banking in the UK. A new regulatory framework is crucial for the effective operation and oversight of new payments and data markets and to provide clarity to participants – allowing open banking to unlock its future potential.
These recommendations – which we are now seeking your views on – include detail on the design of the future entity for open banking in the UK, covering its structure, governance, and funding.
It also includes proposals on how to move to a new interim entity quickly – providing a new home for growth and new use cases for Open Banking. Before we then move these functions to the more enduring model of the future entity.
We want to widen out funding for this interim entity from the CMA9 to the largest open banking participants in the UK, including both ASPSPs and PISPs. The consultation also sets out our view that there should be a dedicated board that can act independently of any one set of interests, with knowledge and representation that reflects the whole ecosystem: TPPs, PISPs, ASPSPs and consumers and businesses.
It’s likely you are aware of these announcements already.
However, I wanted to talk about another event that I was at last week – on Thursday. A birthday party. Admittedly, it was for the Competition & Markets Authority. So there was no cake. But instead lots of discussion about the challenges and opportunities facing the UK economy, and how competition, consumer protection and market reform can help the UK meet the challenges of the future.
Open Banking was mentioned in every speech as part of meeting these challenges – including, naturally, the Minister’s speech talking about the potential benefits to be had from unlocking SME finance.
Sarah Cardell, the CMA’s Chief Executive, said the following:
“Open Banking [is] spurring an explosion of digital and data-driven innovation, not just by the big high-street banks but by smaller companies... The UK’s open banking regime has also been called ‘the envy of the European FinTech community’, as hundreds of ambitious, scrappy challengers (many with international investor backing) piled into a market now worth £4bn to the UK economy.”
Open Banking is also a key enabler of consumer choice. Using data to help guide consumers through an increasingly complicated and fast-moving economy. Ensuring that consumers can spur choice and competition by shopping around for better deals.
That open banking has huge potential to improve outcomes for consumers, businesses and the economy more generally is not a challenging sell to this audience, of course. It is, however, one that we need to keep in mind as we tackle the practical challenges of turning them into a reality.
Which takes me to open banking and payments.
There is a broad agreement on the potential for open banking payments. More choice, new capabilities and more competition. With the right rules and standards, it can also help support a transition to a safer payment ecosystem, by helping to tackle some forms of fraud.
New ways of paying like VRP, variable recurring payments, can benefit consumers – by giving them more control and by supporting businesses to innovate, compete and allow them to offer great payments experiences to their customers. There is also the potential for savings to be made from the cheaper costs of acceptance and reconciliation.
Realising this potential will also help to keep the UK as a world leader when it comes to payments.
So, what do we need to make open banking payments work in the UK, in ways that maximise its benefits for users?
How do the various workstrands currently underway combine to help build new markets and a stronger ecosystem?
As a start, you need at least three things that are pretty common when you talk about payments: trust; a broad network; and infrastructure that works.
Trust
Let me start with trust. A common theme in making payment markets work well. What does this mean in the context of building new markets for open banking payments and VRP in particular?
First off, there is a need for ways to resolve disputes – with clear accountabilities and processes, so there is better clarity on what is required when something goes wrong.
These sort of rules help create a level playing field and support a market that provides incentives on all firms to develop innovative solutions that will make a difference to everyone.
Trust also means that consumers need enough confidence that the payment method is sufficiently safe.
Our approach has been to focus on use cases where other risks to consumers are lower – regulated financial services, local government payments and regulated utilities. This is one reason why we refer to this work as a pilot – we want to make a start with these use cases before tackling the debates around the appropriate levels of minimum consumer protection for other, more complicated, use cases.
We also need to learn the lessons from APP fraud – including to allocate risks properly so that incentives on prevention exist in the right places. And making sure that the rules sitting behind open banking payments can adapt and change over time, in response to new risks and opportunities.
Building a network
The second part of supporting new markets is building the necessary networks.
We need a network of businesses and consumers – payers and payees.
For VRP – and more generally for open banking payments to work effectively – we need all ASPSPs to take part. Without this a merchant cannot, in practice, offer VRP as a simple alternative payment method.
Behind this is one of the current areas of debate. How do we secure this outcome?
Put somewhat simply, one approach is to set – or allow ASPSPs to set – prices that are high enough to encourage every bank to choose to offer these services. Is this likely to secure the best outcome overall? Would this create competitive pressure on other payment schemes?
On the face of it, this would also tend to result in prices set above cost and at levels that protect or offset any lost profit from alternative payment methods. Undermining many of the benefits that open banking payments could bring in terms of injecting meaningful competition and lowering costs for merchants.
And even if we took this approach, it would likely only take one large ASPSP to choose not to participate, to stop the market from developing.
The alternative approach – and the one we set out for consultation – is to set prices so that ASPSPs can recover their incremental costs. And to mandate participation to avoid the risk that one firm can stop the market from developing.
Infrastructure
The third element of making this market work is to make sure that the infrastructure supports good outcomes.
This includes raising standards of performance across the ecosystem, ensuring that everyone is bound by a set of rules and standards which ensure consistently good quality outcomes for users.
It also means that the underlying payment system needs to support open banking, including for retail purchase transactions. In time, this means we need to achieve certainty of payment in real time, and to do so at high and reliable speeds. On Faster Payments, this requires changes to the systems we have today.
When you hear me talking about the need for ongoing investment in our payment system, this is one example of what we need to improve.
Moving towards a long-term sustainable model
Much of this explains why we currently see a case for targeted regulatory intervention to unlock competition.
Our approach is, however, firmly rooted in considering what targeted regulatory action might help support a competitive and dynamic open banking payment market.
This is why commercial sustainability is important.
We need to move to a framework that allows firms to recover efficient costs and that provides a platform that allows new firms and innovators to compete, make a profit, and reward them for investment and innovations that bring benefits to end users.
Which takes me back to Friday’s publication.
Our proposals set out a way to move open banking from today’s approach. A way to move away from open banking focused on the CMA order, with costs met solely by the CMA9.
We have made really clear that we want costs to be met from across the ecosystem. And have set out details on how this can work and how we might get there.
It also sets out a path from today’s Open Banking Limited towards a new, sustainable and well-governed Future Entity. Performing those crucial central roles that allow open banking to realise its full potential as an innovative and growing market.
There remains a lot of work to do to get from where we are to this future model. Where we have consensus I urge everyone to make progress. And where there are difficult choices, let’s debate the options and find ways of moving forward at pace.
After all – the benefits are substantial. To competition, businesses and consumers. And also to the UK’s fintech sector.
We are on the cusp of delivering something that will be transformational to the whole of the UK – and that is something we can all take great pride in. We look forward to continuing to work with you on this important agenda.