Good afternoon, I’m Chris Hemsley and I’m the Managing Director of the Payment Systems Regulator.
In the lead up to giving this speech, I've been thinking about the ways I’m making payments. As you’d expect from the Payment Systems Regulator, I feel pretty confident using different payment methods for different types of scenarios. I carry cash, I'm set up for mobile payments, I make purchases – both in person and online – using my card, and I’m able to transfer money using my online banking.
But, the way I made payments adapted as the extent of the lockdowns inflicted by the pandemic took hold. I pretty much relied on using cards and direct bank payments.
That made me think – if you cast your mind back 18 or 19 months to the beginning of the pandemic, one of the sectors hit hardest was the charity sector.
The move towards digital, meant that those organisations which relied on casual cash donations saw a drastic decline in their collection pots.
However, through collaboration via open banking, a new initiative saw QR codes being deployed to allow you to donate to a charity in less than a minute – helping charities to collect donations.
And so, with that reminder about the importance of innovation at what was a pretty bleak time, I want to talk to you about the importance and future of Open Banking.
The potential of Open Banking
The UK is at the forefront of Open Banking, it enables innovation and increased productivity in our economy. But it is worth considering how it might realise this potential and what we need to do to make it happen.
I think it is useful to distinguish between two broad ways that Open Banking brings these benefits. First, the benefits that come directly from the use-cases it can support.
But, second, there are also the wider strategic reasons for wanting to make the best use of the opportunity provided by Open Banking, due to the impact it can have on supporting a vibrant and competitive payments ecosystem. One part of this comes from the potential to support retail purchasing and allowing for more flexibility for all payment services. But, to do this, requires a lot more work.
The opportunity for Open Banking to meet the needs of people and businesses
But first, the direct benefits.
Open Banking represents a real opportunity for more user control over payments, lower fraud risks, and new services.
I see very significant benefits from cost savings, speed of settlement, control and safety. And want to walk through a few examples with you to explain why.
Open Banking has significant potential to bring down the costs of payment acceptance for many merchants. Something made all the more important by the increasing cost of card acceptance. We have been analysing this and published our final conclusions on the card-acquiring market review. This also included our financial analysis which showed that average scheme fees more than doubled over the period from 2014 to 2018, with most of this increase occurring between 2016 and 2018.
So the examples of Open Banking being put to large-scale use is a valuable sign of the longer-term potential. For example, Ecospend, a PISP that facilitates tax payments is already helping HMRC, including by cutting its payment acceptance costs.
And there is also JustGiving – which used Open Banking on Captain Tom Moores’ fundraising page, allowing donations to be made via a bank transfer, helping the charity platform to reduce their costs.
Speed of settlement for merchants
Another way in which Open Banking can support businesses is the speed at which merchants receive a payment. Currently, we know that they can wait a long time to receive money that is owed to them.
If merchants can use Open Banking safely, they could receive payment immediately. And managing working capital effectively is a really important issue; for businesses large and small. Cutting several days off the time it takes to get funds into your bank account matters.
Control over payments
An increasing number of us no longer rely on a weekly or monthly salary. It is becoming more common for people to be paid for the work they undertake, potentially for a number of different jobs. But this makes it harder to manage your finances, particularly if your outgoing payments are unnecessarily inflexible.
And, at present, the inflexibilities of direct debit don’t work for everyone.
Which presents another opportunity for Open Banking to solve real-life problems.
Open Banking can already support business models that make one-off bill payments more flexible, such as Ordo's, which in turn allow people to have more control over their payments.
More generally, the ability to make Variable Recurring Payments (VRP) should allow people to safely authorise their bank to make frequent payments on their behalf, which could unlock further business cases in the future.
Open Banking could give us an alternative way of paying for things (including bills, subscriptions, coffee) with better control, flexibility and transparency.
Safety – APP and fraud
A further benefit Open Banking can bring are the opportunities for reducing APP fraud.
Open Banking provides the ability for banks to communicate with one another through an overlay messaging service, where they can send and receive information.
A way in which this has been implemented is through Confirmation of Payee (CoP) – the name-checking service designed to help people spot when new payee details aren’t right. Messages are sent to check whether the name of the payee matches the details entered.
The responses are all transacted using the Open Banking directory.
There are more than 1 million of these messages going across Open Banking every day.
CoP is just the start of proving that banks can communicate between themselves to prevent things going wrong with a payment and prevent customers and businesses being defrauded.
Industry participants are considering what further information could be shared between themselves to help identify when a payment is suspect, and when further checks need to be undertaken. Also built into Open Banking is Strong Customer Authentication (SCA). SCA can reduce the friction and increase the security on a consumers digital payments transaction.
So, really we see the range of different benefits that Open Banking can bring, by supporting new ways of paying that better meet the needs of people and businesses.
But that is only part of the opportunity. As I mentioned, I see significant additional benefits that Open Banking could unlock.
The longer-term benefits of Open Banking
These benefits come in the form of the contribution that Open Banking could make to a healthy, sustainable and competitive payments sector.
As you all know, there is a significant transition going on.
When we go about our daily lives, buying things in shops and eating out in restaurants, we have historically relied on cash, cheques and card payments. Cash is still important, but the trend of retail payments is increasingly towards digital debit payments.
New firms have entered and offered choice in terms of how to initiate these payments – Zettle, Square, Apple Pay, Google Pay and so on.
But the bulk of these payments still rely on Visa or Mastercard.
We want to unlock the potential of existing payment systems, such as interbank payments supported by Open Banking solutions, so that they present a viable alternative option for a larger proportion of payments.
Done right, this will ensure that – at this structural level – UK payments have sufficient diversity and rivalry.
Why does this matter?
Well, if we have confidence that there is sufficient rivalry at all parts of the payment chain – including between different payment systems and across a broad range of payment types – we can have more confidence that prices will reflect cost, and that there will be sufficient ongoing pressure to innovate. Ultimately, it makes it more likely that people and businesses get the payment services that work for them.
Furthermore, a viable alternative to card schemes in retail payments could mean a more competitive market that requires less regulatory intervention in the longer term.
This important role of Open Banking is recognised in our Proposed Strategy. It is also reflected in the recent conclusions to the Government’s Payment Landscape Review, which was published in October.
But to deliver these benefits – and properly realise the potential of Open Banking – a number of things need to work well. I am going to focus on three today: the technical capability of the interbank infrastructure; consumer and business confidence in interbank and Open Banking; and appropriate governance and regulation.
The NPA and Open Banking
Turning to the first of these – the importance of the renewal of our interbank infrastructure. The New Payments Architecture, or NPA, whose implementation we are overseeing.
In order for Open Banking to work effectively and to its full potential, we need the infrastructure supporting it to work better. This requires technical changes to upgrade our interbank system so that it works better for retail transactions.
We need there to be immediate certainty for the retailer so that they know whether they can release the goods – two hours is too long to wait, even if it only affects a small percentage of transactions. The interbank infrastructure will need to be scaled so that it can handle a larger volume of transactions, and banks who want to support retailers and purchasers will need to provide real time connections and be available for real time transactions, 24/7.
It also means that the NPA scheme rules and charges need to support these use-cases, and so support greater competition in practice. Today, retailers point out that the current pricing model doesn’t work for them, as it does not allow them to use interbank for smaller transactions.
Consumers’ confidence in Open Banking
The second thing we need, is for consumers to have confidence in using interbank payments, and Open Banking payments. Customers need to be able to recognise and trust the payment service they are using, as well as understand how that payment service works when things go wrong. This means getting the right level of consumer protection, and helping them understand what this protection is. This is reflected in our recent work.
As many of you may know, I recently co-chaired a Working Group with the Open Banking Implementation Entity (OBIE) looking at the topic of consumer protection within Open Banking payments.
The discussions we had in the Working Group formed the basis of a recommendation from the chairs to the CMA and fed into the PSR’s existing work on consumer protection.
We concluded that although existing protections work well for the current interbank use cases, more will likely be needed in the future to ensure that innovative services gain trust and – crucially – traction.
As things stand, Open Banking and Faster Payments have legal protections in place to protect against unauthorised or wrongly executed payments. However, those protections need to be strengthened as more and more retail payments are going to flow through them.
But there are different ways to deliver these protections.
We expect new services to offer levels of protection that reflect the level of risk emanating from the transactions they facilitate and, by extension, meet the needs of those making a payment. Buying a coffee, settling a credit card bill, and booking a holiday have very different risks. There is an opportunity here for PISPs to tailor protection to the needs of customers.
However, this requires thought and for risks to be understood and managed. Simply relying on customers to know whether they are protected is not enough – it doesn’t reflect the reality of what people know or could be reasonably expected to know. Customer knowledge needs to be supplemented by robust protection for higher-risk transactions, such as high-value payments, payments for goods and services that are delivered at a future point, or payments with an increased counterparty risk.
It is in the interests of the Open Banking ecosystem to get this right. If there is a high-profile failure to protect people, the public is unlikely to distinguish sufficiently between those that have been acting responsibly and those that have not. It will damage trust in Open Banking for all.
Governance and regulation of Open Banking
Which brings me on to governance and regulation.
As Open Banking moves from being a competition remedy – guided by the Competition and Markets Authority – into being a business-as-usual part of the UK payments ecosystem, it is vital that it has the right governance. In part, so that it can meet the above challenges, change rules to build consumer trust in new products and deliver improvements that support the next wave of new services.
As OBIE transitions to a new entity, it will need governance that supports the potential for Open Banking in payments. This means being able to develop new standards and rules, and to secure compliance with them.
As a regulator, we also need to consider whether these rules should focus on narrow technical standards, or whether other minimum standards need to be in the rules – most obviously to deliver confidence in the overall payment ecosystem, to the benefit of all.
However, I do not think that good governance alone is enough to realise the potential of Open Banking payments. Open Banking is, essentially, a new payment system. It has network effects, coordination problems, and many of the other features that lead payment systems to be subject to regulatory oversight.
So, the payment aspects of this new Open Banking entity need effective regulation. This means regulation by the PSR – as with any other large-scale payment system.
The commercial model in payments
Which brings me to the final thought I would like to leave you with. How best to deliver the technical capabilities, consumer trust and governance that will realise these benefits.
Here, the commercial model in payments presents some choices.
Today there are two very different models for on the one hand cards, and on the other for Faster Payment Services (FPS) and Open Banking:
- For cards, the costs are generally passed through to charges on merchants. And these charges include some that generate income for Issuers and Banks. A card payment generates income for Issuers and Banks.
- For FPS and Open Banking, a payment generates a cost to Issuers and Banks.
This difference will affect the commercial incentives faced by Issuers and Banks to support and promote the use of cards and the use of interbank – including Open Banking.
Until now, Open Banking payments have achieved what they have through a regulator-led programme. With OBIE pushing change forward, backed by the CMA and its competition remedy.
We could continue this broad regulator-led approach. The PSR could pick up the payment system aspects of regulating Open Banking, and seek to push forward change, through ongoing detailed regulatory oversight and intervention.
But there is a different way. A choice.
We could look at this commercial model. Can we better align the commercial incentives so that all – or at least most – parties have stronger financial incentives to make it work.
This commercial-led approach is likely to be more nimble and more innovative than one that relies on PSR regulatory directions. If the commercial incentives do more, the need for detailed regulatory intervention is lessened.
So, to return to my title – the Opportunity of Open Banking – the opportunity is significant. Yes, it is the new use cases, such as solving real-world problems for the charity sector. But it is also the potential for Open Banking to support a vibrant, sustainable and competitive payments ecosystem.
But to realise these benefits, there is a lot of work to do. We – at the PSR – are committed to facing those challenges head on. And I know I can count on your expertise, ideas and enthusiasm to take that next step to properly embed Open Banking within the payments ecosystem.