Another JROC milestone for the UK’s Open Banking landscape

The UK’s Competition and Markets Authority’s (CMA) Chief Executive, Sarah Cardell, recently said “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. The JROC is designed to support competition and innovation in the UK payments market, for example, by supporting firms to develop alternative retail payment methods.

There is no doubt, Sarah Cardell at the CMA is right. However, we seem to have lost 12 months since the JROC’s last milestone publication given that the UK payments industry has not necessarily learnt much more than what it knew 12 months ago. For example, the JROC’s exciting plans to pilot consumer-to-business Variable Recurring Payments (VRPs) under a commercial API model could have seen Open Banking move one step closer to competing with the international card networks and give UK consumers more options to pay. Undoubtedly, it is not simple to develop a Commercial VRP model that will fully unlock the potential of Open Banking. What appears to be encouraging is that the work done on non-sweeping VRPs, and the lessons learned to date will be used to inform the wider thinking on premium APIs. This will enable innovative use cases through the combination of payment and data-sharing.

The new JROC publication states that there is a need for a new “Future Entity” which will be responsible for standard-setting for Open Banking and Open Finance services mandated under a future regulatory framework. The clue is in its title “JROC’s proposal for the design of the Future Entity for UK open banking”. The Future Entity will create a structure that promotes further innovation and functionality along with consumer protection. It will undertake the monitoring of API performance and of their operating standards necessary for Open Banking to function. This is great news for the payments industry but when will this be established – the JROC is vague on the details of the timelines. The timeframes that are shared are high level and consist of two phases. Phase 1 starts in August 2024 with the Interim Entity and the Future Entity being established in January 2026.

The JROC describes five workstreams. Until the long-term regulatory framework is in place and the transition to the Future Entity is complete, the JROC recommends that an “Interim Entity” is established as a separate legal entity with the purpose of undertaking these five JROC workstreams. This will be a key step to the establishment of, and transition to, the Future Entity. Reading the JROC’s proposals feels like looking at a chess player strategizing several moves ahead to ensure the actual tactical and strategic move goes smoothly and sets the stage for a successful project. We are informed, for example, that the Interim Entity will be needed for at least 18 months.

With a UK general election looming, any new regulatory architecture for UK financial services will have several scheduling issues that require careful navigation. 2024 is set to be a significant year for the UK’s financial regulatory framework and the Financial Services and Markets Act (FSMA) will mark a new era for financial services policymaking. With advances in digital technology continuing to reshape financial services and the promise of new AI-enabled products and services, UK regulators will be super busy seeking to both improve safeguards and encourage responsible innovation.

The document dives into more detail about the necessary funding, governance, and remit for the Future Entity. Other than this, the payment geeks will find the five proposed Workstreams of more interest. Workstream 4, for example, will review the data flows to Third Party Providers (TPPs) and end users, whereas Workstream 5 is aimed at promoting additional services, using non-sweeping VRPs as a pilot. The relationship between Payment System Operators (PSO) and the Future Entity funding and charging arrangements will be of particular interest but the detail has yet to be defined. The JROC does include an example of what we might expect in the future with a diagram that illustrates how Open Banking and payments-related charges could interact, in a future model. When considering which incentives and outcomes for end-users are created, any coherent charging/funding arrangement for Open Banking-initiated payments will need to consider charges in relation to the development of Premium API services, as well as those generated by the underlying payment system. Exactly what these charges are likely to be is not the JROC’s remit but to be set by the market. This is where much more work is required by the PSO, the TPPs and other stakeholders.

The JROC document delves into the complexities of a specific arrangement of the Future Entity, the regulation, operation, and its funding. It is peppered with technical jargon and numerous abbreviations that justify a large glossary in the annex. This makes this 60-page report difficult for anyone unfamiliar with the subject matter to fully understand, let alone appreciate the implications for any of the end-users, such as merchants. Numerous cross-references, appendices, and footnotes further increase the complexity of this document. However, it is a tantalising glimpse into the future of Open Banking in the UK, and we are truly at an important crossroads. For the establishment of the Interim Entity a new funding model is desired and it appears that the big CMA9 banks have enough of exclusively spending their own resources on the development of Open Banking in the UK; investments which are likely to benefit many non-paying players such as fintech start-ups What happens if the Interim Entity does not get the necessary voluntary funding? Will progress be delayed or even stopped? Will this lead to divergence between big banks and Fintechs, just at a time when everybody says there is a need for cooperation?

There are lessons to be learnt from the other side of the English Channel. The European payments industry encountered similar challenges in establishing a new EU card scheme. Who is ultimately paying for the development of a regulatory driven initiative? And is it worth making those investments when future revenue pools are still to be determined? Whilst Open Banking is clearly marked as a competitor to card payments, some challenges seem to apply to all of them. Certainty around future revenues is important to justify investments.

Based on this proposal from the JROC it will require careful reading, potentially multiple times, with time to process the information and determine the potential implications for new commercial business models in the future. An understanding of the context surrounding the regulation, the relevant industry, or the legal framework will be necessary to decipher the true implications of this document.

Consulting with experts, such as EDC, familiar with the subject could be crucial for a complete understanding. EDC will maintain a watchful eye on the activities of the JROC, the establishment of the Interim Entity during the summer of 2024, the subsequent launch of the Future Entity in 2026 and the industry’s response to the Open Banking developments.

Meanwhile, the JROC invites any interested parties, such as payment services providers, banks, merchants, and other stakeholders to provide feedback by 20 May 2024 on the proposals for the Future Entity. See link.

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