Establishing sustainable commercial models for open banking: Overcoming the quagmire

by Chris Menon

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Open banking in the UK has yet to fulfil its potential, with apparent division between banks and fintechs regarding how best to proceed and establish viable commercial models.

Open banking in the UK has long promised to promote competition, innovation, and transparency in the financial sector, allowing consumers and businesses to better manage their money and make payments. However, according to some, it’s currently stuck in a ‘quagmire’, with participants divided on how best to build sustainable commercial models.

As the Joint Regulatory Oversight Committee (JROC) noted in its report ‘Proposals for the design of the future entity for UK Open Banking’, published on 19 April 2024: “Open banking has come a long way since the CMA’s retail banking market investigation in 2016, the introduction of the CMA Order, and the implementation of the PSRs 2017.”

It cited data collected and published by Open Banking Ltd (OBL) in March 2024, showing that 13% of digitally active consumers and 18% of small businesses in the UK actively use innovative open banking-enabled products and services to manage their money and make payments. On open banking payments specifically, volumes more than doubled in the first six months of 2023 compared to the same period in 2022, with a total monthly value estimated at £4.5 billion.

Nevertheless, the progress of open banking has been slower than many hoped. Indeed, Joe Garner, the industry executive who authored the ‘Future of Payments Review Report’ stated at The Payments Association’s PAY360 event in March 2024: “We need sustainable commercials around open banking, and it feels to me like it has been caught in something of a quagmire.”

It’s true that the UK has been a frontrunner in open banking, with the launch of the Open Banking Standard back in 2016. At that time, the UK Competition and Markets Authority (CMA) mandated the nine largest banks to open their data through application programming interfaces (APIs) to promote competition and innovation in the retail banking sector.

However, as Garner points out: “We started building this thing in 2016; we really ought to know what we should be charging for it by now.”

Ellie Hewitt, a director in KPMG’s UK payment consulting practice, agrees with Garner that open banking commercial use cases have been stuck in a quagmire.

We need sustainable commercials around open banking, and it feels to me like it has been caught in something of a quagmire.

As to how we’ve ended up in this situation, she explains: “There have been several challenges: there are challenges around what commercial VRP should look like, more broadly, there are challenges around the commercial model and the fact that at the moment big issuing banks aren’t incentivised to engage in or innovate within the ecosystem of open banking. Another of the other big challenges is around the customer protections model.”

She appears almost philosophical about the difficulties of trying to escape this quagmire. “One of the challenges with open banking is that there are a number of different views on every topic that you consider, and trying to reconcile the different views between, say, merchants and fintechs and banks is never going to be easy.”

For example, there has been some progress in sweeping variable recurring payments (VRPs) or me-to-me payments. In 2021, the CMA obliged banks to make VRP APIs publicly available for free. Despite a short delay—the compliance deadline was pushed back from January to June 2022—the technology is now available and increasingly commonplace.

However, non-sweeping VRPs, sometimes known as ‘me-to-business’ or commercial VRPs, don’t yet exist. Although these VRPs could potentially replace direct debit cards and cards on file for various payments from consumers to third parties, they’ve been stuck in the so-called ‘quagmire’. The main issue that has hitherto held up their introduction appears to be establishing a ‘commercial model’ acceptable to both banks and fintechs.

Fintech view

According to Fliss Berridge, co-founder of fintech payments firm Ordo, whilst banks, of course, must be able to cover incremental costs (given their gateway position in the market), the banks don’t seem to have a problem being commercially sustainable, as the Big Four, NatWest, Lloyds, Barclays and recently posted profits of £44 billion, according to CityAM.

Rather, she argues that commercial sustainability should focus on those providing open banking services and their merchant clients. “It’s not the banks that are providing open banking services. For businesses and consumers to continue to receive open banking services, it is the open banking service providers, the fintechs like Ordo and others, that need to be commercially sustainable. For FCA-authorised and regulated fintechs to be commercially sustainable, they need access to bank APIs. This is either available due to market competition or, in the absence of market competition, appropriate and targeted regulatory intervention to enable them to compete with cards,” she explains.

Berridge argues that the banks’ conflict of interest (they make money from card payments) and monopoly position in providing the APIs to access consumer bank accounts have made a competitive market impossible.

Talking to fintechs generally, it’s clear banks are very reluctant to come forward with commercial offers. Indeed, during the course of writing this article, the author only heard mention of one that has put forward any pricing.

For FCA-authorised and regulated fintechs to be commercially sustainable, they need access to bank APIs.

Berridge goes on to explain the solution: “As a result of the bank conflict and monopoly market reality, the Payments Systems Regulator (PSR) is proposing to intervene and set the price between bank and payment initiation service providers (PISPs) centrally for the first sectors which expanded VRP is to be rolled out to, namely financial services, utilities, and central and local government. The PSR’s view is that banks should be able to recover any relevant incremental costs efficiently incurred for providing VRP APIs. As VRP has already been built, and there are no material incremental costs for the Phase 1 sectors, the PSR is proposing to set the central price at zero pounds at this single point in the supply chain.

Berridge’s proposal was published by the PSR in December last year. According to her, the above three sectors “have either got consumer protection frameworks in place and/or regulators,” so they are easier, less risky, and quicker market sectors to enter.

In an exclusive interview with Payments Review, Andrew Self, senior manager at the PSR, agreed that the lack of a commercial model for open banking was a broader issue than just VRP. “To fully unlock its potential—payment options and data services that better meet the needs of consumers and businesses—open banking needs to be underpinned by sustainable commercial models that drive investment in innovation.”

Nevertheless, regarding VRP, Self acknowledges: “We haven’t seen a shared consensus on two crucial areas—how a commercial model allows competition with other payment methods and encourages adoption by businesses and consumers.”

On behalf of the PSE, he did confirm: “The proposal we consulted on is set at zero; the price sending firms can charge PISPs for access to customer accounts and payment initiation. We provisionally identified the faster payments charge as the only relevant incremental cost for sending firms for the initial rollout and therefore proposed removing this charge from sending firms.”

Self was also at pains to stress that the JROC, which the PSR co-chairs, hasn’t yet made any formal decisions but has proposed how to expand the use of VRP. “We’re continuing our assessment of responses to our proposals and engaging across the ecosystem ahead of publishing our response this summer.”

While some in the fintech community have warmly welcomed the PRS proposals, the banks are far from satisfied.

The banks

What measures do banks deem essential for developing sustainable commercial models for open banking? Securing an official statement from a bank proved challenging. However, based on informal insights, it appears that banks do not see the need for stringent price regulation. Instead, a preference for ‘free market’ experimentation could be at play to create a sustainable commercial model that aligns with their interests.

Given the impasse between banks and fintechs, Hewitt is surely correct when she states, “I think there will need to be a regulatory mandate to get this off the ground.”

However, she adds: “I also think a commercial model that incentivises bank participation is necessary.” However, it’s not clear what this model could be, given the underlying market structure and the fact that banks (as card issuers) will be competing against VRP.

Certainly, if further investment in open banking is forthcoming, all parties need to see the value of doing so for consumers and their businesses. For the fintechs, many of whom are funded by venture capital, commercial sustainability in the form of a return on open banking is absolutely critical, and Berridge believes “targeted but minimal regulatory intervention” is required to unlock the full potential of open banking, just as has been necessary for the highly competitive telecoms industry with the regulation of call termination rates, for more than 20 years.

“This must happen sooner rather than later if the UK is going to maintain its position at the forefront of open banking across the globe,” she says. It will also be important in attracting investment to target markets.

Asked for the PSR’s response, Self was clear: “For VRP to be sustainable, the long-term model needs to allow current account providers to recover relevant costs in providing these services to their customers. It’s also important that prices for customer accounts, whether for payment or data services, are transparent and don’t create unfair barriers to new entrants.”

Other jurisdictions

In terms of other jurisdictions that the UK can learn from when it comes to progressing open banking, Hewitt explains: “There are lessons to be learned by the UK from all of these different markets, but they are specific and individual lessons, not about the success of open banking overall.”

She cites the fact that if one examines all the different markets, such as Brazil, Singapore, India, Europe, or MENA, compared to the UK, there are some aspects where the UK is better and some aspects where the UK is lagging other countries. 

“I think it is very difficult or nearly impossible to put a blanket order on it, because you are not comparing apples with apples in any country. For instance, a lot of people talk about learning from Brazil or India, which had huge success. However, they are markets that aren’t heavily carded today, so they have moved from a very cash-based economy to an open banking-based economy. Again, you can’t compare that because that’s not relevant to the UK context because we are not a cash-heavy economy. We are moving from a very much carded economy already today. So, it’s very difficult to make any definitive statement that says: the UK should be learning from X.”

Australian viewpoint

Take Australia for example. Nick Kavass, is head of policy at FinTech Australia, the main advocacy group for Australian fintechs. He outlines how its open banking market is evolving. “In Australia, we are seeing open banking reach a crucial point as the ecosystem transitions from a long ‘build phase’ to a period of adoption and uptake, with the emergence of new products and services products and services powered by open banking data sharing. The success of open banking hinges on the development and commercialisation of these new and innovative use cases, as well as the switching of existing data sharing from legacy methods to open banking APIs.”

Nevertheless, it appears to lag the UK when it comes to enabling payments, as Kavass explains: “A key limitation for open banking in Australia, and a clear point of difference from the UK, is that it currently only provides for the sharing of information. Expanding the framework to performing actions, like payments, is currently being considered by the Australian Parliament. However, Australia recently rolled out a fast payments platform (new payment platform) and a payment initiation solution (PayTo) which has raised some doubts about the need for open banking payment initiation and how this would be commercialised.”

Frollo is one innovative Sydney-based fintech that has successfully monetised open banking data. It connects accounts, aggregates data, categorises it, creates personal features on top of that, and then sells those features and that technology to banks, to lenders and brokers.

Tony Thrassis, Frollo’s head of open banking markets and regulation, sees the role of open banking as empowering consumers to make better decisions. Though proud of the breadth of Australia’s open banking data offering, he is critical of the government, which he believes should be doing more: “They don’t even advertise what open banking is. They haven’t educated the consumers, we’re doing all the education of consumers. Nobody is doing anything to educate people that this exists and explain what this is. If I go out onto the street and talk to people about open banking, they’ll go: ‘What are you talking about?’”

Thrassis would also like to see some financial help from government because of the expense in building the infrastructure. “With all the rules here and with all the compliance it’s not cheap. The banks can’t charge you for getting their APIs, but the banks are in the same spot. When the legislation came in for open banking for the banks to give out their data via APIs they spent a fortune, hundreds of millions of dollars on a solution.”

Overcoming obstacles

In addition, he wishes that Australia had an equivalent to JROC to help implement open banking. “We created all these rules but didn’t market them properly, and we’ve left it to the intermediaries and participants to roll it out. But the government hasn’t helped with that rollout. We have different regulators, and they say that they can do it, but they all have different jobs, so they can’t do it. There is no single entity looking at the implementation and ensuring that whatever hurdles people are coming up against, they can go and change the rules so that they can get over that hurdle or are totally compliant so that it’s a fair field.”

Certainly, it’s encouraging to hear praise for the UK governance of open banking. However, is Hewitt confident that the UK will emerge a leader in open banking from its current quagmire? “I think yes because it is clearly an objective of the regulator and an objective of the government, but a lot needs to be done before achieving that,” she says.

Jacob Rider is UK payments practice lead at Projective Group, a consultancy in financial services. He, too, is optimistic that the open banking ecosystem in the UK is set to improve as UK regulatory bodies and the EU seek to level up the playing field for account servicing payment service providers (ASPSPs), payment institutions (PIs), and third-party providers (TPPs). “With the UK Confirmation of Payee (CoP) and New Payments Architecture kicking in, all involved parties should look to increase the size of the pie and long-term growth,” he says.

Furthermore, he argues that larger ASPSPs should improve system design, technical interfaces, and data access models to manage the risk around the ethical use of data. “We believe that this will be very crucial in standardisation of customer data and building consumer trust”. He adds that ASPSPs could recover the costs through the take-up of premium APIs, tiered pricing, volume discounts, and economies of scale.

Certainly, there are competing priorities and passionately different views on the answers to the same questions from those working in the open banking arena. For industry executives wondering how best to navigate them, it’s probably worth taking this comment from Joe Garner, made in a speech on 1 January 2024, at face value and trying to live up to it: “I am utterly convinced that everyone in this room shares a deep commitment to achieving the best possible outcomes for consumers, businesses, and the wider society.”

Following that, the North Star should enable the payments industry to escape the quagmire eventually.

Payments Review Summer 2024
Read the entire Payments Review summer edition here

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