This is the text of Kate Fitzgerald's speech at Open Banking Expo as drafted and may differ from the delivered version.
Good morning. I’m Kate Fitzgerald, Head of Policy at the Payment Systems Regulator (PSR) and I’m delighted to join you this morning to give you a regulatory overview of the future challenges and opportunities for Open Banking.
As many of you will already know, the PSR is the UK’s independent economic regulator of the payment systems that underpin our economy – including the LINK cash machine network, Faster Payments, Visa, Mastercard, Bacs and, most recently, the forthcoming Sterling Fnality system. We regulate payment systems from cash and cheques, through bank and card payments, and now a forthcoming wholesale payments system based on distributed ledger technology.
We protect people and businesses by promoting competition. Our role is also critical in supporting ongoing change and innovation in payments, which itself supports a vibrant and productive economy. We think that better competition between payment systems can lead to better outcomes for users including better prices, more innovation and better-quality solutions.
We’re at an important time for UK payments and so I want to talk to you about the fast-approaching transformation in Open Banking payments.
A competitive environment for payments
Open Banking in the UK was driven in large part by a competition remedy. It’s not surprising then, that the PSR sees real opportunity in developing Open Banking payments beyond the CMA Order because we see even more potential for them to enhance competition, and in particular, competition between payment systems. Our Strategy sets this out as a key outcome, and this year we have been very focused on what needs to be done to deliver it.
Unlocking greater competition in payments sits at the very heart of our strategy, and today we see Open Banking as the most likely means of achieving this.
Already we are seeing innovative, new solutions being developed to support Open Banking payments. And through innovation, we will see a boost in competition. And through enhanced competition there will be greater choice in products and services available – not only through the tools we might use to make Open Banking payments, but in the protections and controls those services will provide.
This matters because over the last few years in the UK, we’ve seen a shift in payment behaviours, leaning increasingly toward digital options. As well as the obvious opportunities, that also brings challenges that we must tackle. Over the last few years, we’ve seen that people are using cash and cheques less frequently, and instead choosing to pay using their credit and debit cards. But that means, at the moment, sometimes the only realistic options that people have when they’re going about their daily business is to pay for things by card. It shouldn’t be that cards are the only alternative to cash that businesses can or want to offer. There are viable alternatives to cards. So, when we think about Open Banking as a way of enhancing competition in UK payments, it’s not hard to see that the effects of increased choice, protection, and control over payments, will all go some way to addressing some of the broader issues we have in UK payments today.
Open Banking – the opportunities and the challenges
We’ve seen great innovation across different sectors in getting the most out of open banking.
Over seven million consumers and businesses are using innovative open banking enabled products and services to manage their money and to make payments.
Personal finance apps have allowed consumers and businesses to take control of their money and manage it in one place. Opening up current account data for income verification and affordability checks means processes which used to take days or weeks can be done in seconds, making it easier for utility companies to get financial support to their customers.
On the payments side, immediate value on the FPS rails, and a mobile optimised user experience are all clear benefits that will drive further adoption by businesses and consumers.
But to understand what is working well, and what needs to improve, better insight is needed. Data collection frameworks need to expand across the whole ecosystem to accurately assess problems and identify where more consistent and improved levels of performance are required.
All those involved in open banking need to effectively mitigate risks and ensure consumers are safe. Real-time data collection and sharing allows us to better understand levels of financial crime, whether it be fraud or money laundering, in open banking, and then improve the tools needed to combat it. This will enable the ecosystem to scale and evolve safely.
There is already significant work being taken forward by Pay.UK, OBL and UK Finance on this front through the enhanced fraud data system that is being developed.
Here, it’s important that strong security enhances, rather than diminishes, the customer experience and access to open banking services.
Work is already underway to understand and mitigate gaps in consumer protection. Clear dispute processes and escalation routes are needed in case something goes wrong in the payments journey. It’s important to balance the need to ensure consumers are adequately protected, without duplicating existing rules and creating unnecessary complexity and costs for those that are looking to drive adoption of new payment types.
On these practical issues, it is clear that a lot of great work is already happening to make open banking more trusted
And at the PSR we’re also learning wider lessons too on how industry needs to build the services that customers, businesses and the payments ecosystem are demanding.
To achieve the reliability, resilience, trust, and efficiency to become truly competitive – it’s increasingly clear that central payment system rules setting out the functional requirements, consumer protections and commercial model are likely needed to unleash the next phase of open banking payments.
This should not be surprising – and is a frequent theme in our work across different payment systems. These systems need rules in place to bind participants and ensure they have the right incentives to achieve the performance that is required for a critical component of UK infrastructure. We expect Pay.UK, as the payment system operator, to play a strong role in co-ordinating participants, developing protection and conduct rules for open banking-initiated payments on the payment systems they run. They are well placed to understand the technical capabilities of the system, and work with participants to meet their customers’ needs.
While the existing baseline of regulatory-led free access has been, and remains pivotal in supporting innovation and competition, a new phase is now needed to allow the ecosystem to scale.
Not surprisingly, there are differing views on what the charging model should be. But these challenges are not to be shied away from.
We know that there are economic realities which explain why incentives for different parts of the payment ecosystem are not always aligned.
A charging model, contractual structure, and sufficient coverage to drive network effects are the foundations of a sustainable commercial model. This will require investment and innovation from the ecosystem. If agreement on these central components is not happening at the pace that is needed, and not aligned with the outcomes we are trying to drive – fostering competition, enabling innovation, and meeting end user needs – then the PSR will need to consider what intervention is required.
We published a paper this year, outlining the principles we believe are necessary to achieve commercial models that are sustainable, safe and scalable. Those principles are that fees and charges:
- broadly reflect relevant long run costs
- incentivise investment and innovation
- incentivise take-up of open banking by consumers and businesses and use of network effects
- are transparent
To drive adoption, payment services must be cheaper (or “better”) than existing alternatives available to merchants and consumers.
So, while there are a number of areas to address, we’re pushing ahead, as the opportunities greatly outweigh the challenges.
We have already seen some positive developments in Open Banking beyond the use cases set out in the CMA order, driven by bi-lateral agreements between ASPSPs and PISPs. For example, the East Lothian Housing Association is harnessing the power of open banking payments to give tenants more control over their rent payments. We do not want to stand in the way of these arrangements and are supportive on the ongoing drive of some ASPSPs and PISPs to develop and expand these use cases, while work to develop a multi-lateral arrangement is ongoing.
How far have we come?
In April we, alongside our fellow JROC members, published a roadmap for delivering the next phase of Open Banking. In it we set out three phases of delivery. This year we will unlock quick wins where there is broad industry consensus (like improving data), next year we want to unlock a greater set of payments use cases (including lower risk VRP use cases), and in 2025 we want to see a full set of open banking payments, including the retail use case unlocked.
One of the most exciting areas where we are seeing quick progress is the expansion of VRPs – variable recurring payments. This is a short-term priority for us and the ecosystem, to allow us to realise our longer-term objectives of opening up greater competition in retail payments.
Through JROC, we have seen industry come together and contribute to a working group that has been designing the framework for further VRP use cases.
It has been my pleasure to chair the working group, but this has been an industry led undertaking. That reflects our view on how you achieve meaningful change in this space – a combination of determined industry action and strong regulatory direction to drive sustainable changes where necessary.
Taking VRP to the next stage has required lots of intensive industry collaboration over the last few months. I want to extend my thanks for the positive spirit in which everyone has approached this work.
The group has been looking at how VRP is scaled from the current sweeping me-to-me payments, and as a first step they’ve focused on some of the lower risk use cases - payments to utilities and financial services, where existing regulation ensures fair play, and through payments to central and local government. These payments were selected due to their ability to scale but also because there are already baked in protections for consumers should something go wrong in the payment journey. Building trust in open banking payments has been a central theme coming out of the working group and there are lots of strong recommendations for how consumers can understand and control VRPs.
It’s been great to see the industry working at such pace to deliver the next phase of open banking payments. It’s also really welcome to see that many of the functional changes needed to scale VRP are already in place.
The framework being developed provides an overview of the key issues that need to be addressed for this initial roll-out, how much of a priority they are, and who is best placed to take these actions forward.
Taking VRP beyond these initial use cases will require more consideration as we think about its use in wider retail, e-commerce, B2B & B2C payments.
But we are realistic, and we know that as we progress, some difficult choices will need to be made. We have asked the working groups to highlight where regulatory intervention might be required. We will consider these views by the end of the year and act where we think it is needed to ensure people and businesses can benefit from Open Banking. And, of course, we will continue to engage in an open and transparent debate on the options in front of us.
We’re all in this together
Open Banking presents an almost endless number of possibilities and when we take stock of how far we have already come, it seems as though the next steps might be easily achieved. Put simply, we are on the cusp of unlocking significant benefits.
And there are many, including offering new ways to pay; or by giving people greater control over their payments which is so important, particularly in a cost-of-living crisis; or by paving the way to the future of digital payments in the UK and driving opportunities for a growing, innovative payments platform, backed by modern infrastructure.
We must keep driving this forward so that we deliver those opportunities. It’s going to need ongoing commitment for the funding of OBL until we transition to a different model.
From a regulatory perspective, we want to see this succeed and for it to become a testament to the vision and tenacity of the UK payments industry to deliver a fundamentally new way to make payments. So, we’ll continue to have the challenging conversations, to provide those opportunities harness everyone’s thoughts, reflect on the progress made and push forward on the next stages of development.
That means we need to keep engaging with industry – to work through any challenges, to encourage the new developments and provide the necessary focus to deliver.
Because there will be consequences if Open Banking doesn’t work. Without it, we could end up with less competition in payments and we could all be, literally, worse off.
Now, done right, Open Banking will have a big impact on the way people use payments.
And yes, the full potential of Open Banking needs to be unlocked. Will that be an easy thing to do? No – there will be challenges that we have to work through. But those challenges will be entirely worth it.
When we have an effective platform for new entrants, we will see innovation in ways that will tackle some of the societal challenges we’re living through. We’ll be in a place where people can easily and quickly manage their money, regardless of their financial circumstances. And that will be because we have all realised the benefits to working together and finding solutions that will bring about change.
So, to conclude, Open Banking is already delivering benefits. It is opening up the possibilities for people to make payments in ways they might never have expected. It’s being designed to ensure there is trust so that it will deliver for businesses who want to explore new, alternative ways of accepting and taking payments that don’t attract the costs they see with card payments. It will engender trust for consumers who want to make payments securely, knowing their money will be protected. And it’s creating an environment where new entrants can know that they will be able to compete – and compete effectively against the incumbents and have a chance of winning.
All of these things are worth the steadfast commitment of all of us here to deliver the future of payments.