What the JROC milestone document reveals about Open Banking in the UK

The Joint Regulatory Oversight Committee (JROC) co-chaired by the Financial Conduct Authority (FCA) and the Payment Systems Regulator (PSR), published its recommendations for the next phase of Open Banking in the UK.

The report provides a valuable roadmap for the continued development of Open Banking in the UK, and its recommendations could help address some of the challenges and barriers faced by the financial services industry. The roadmap contains 29 actions, to be completed in the next two years, and aims at addressing three priorities:

• Establish the base for the development of the Open Banking ecosystem, creating an ecosystem able to encourage and facilitate agreements between participants.

• Unlock the potential for Open Banking payments, for example enabling non-sweeping variable recurring payments (VRPs) use cases. As an extension of sweeping VRPs (which are used by consumers as me-to-me payments, i.e., automatic movement of money from one of their accounts to another), non-sweeping (or commercial) VRPs will enable consumers to move money to merchant and business accounts. The committee plans to be able to expand VRPs to non-sweeping use cases by the end of 2024.

• Adopt a common model for secure data collection and sharing, aimed at improving data quality and reducing complexity, which can be used to create tailored products for consumers and to help reduce risks to businesses and final users.

The 29 actions of the roadmap were developed under five themes, i.e. levelling up availability and performance of Open Banking application programming interfaces (APIs) across all account servicing payment service providers (ASPSPs), mitigating the risks of financial crime (through data sharing and developing effective tools), ensuring effective consumer protection (both consumer safety and effective resolution processes), improving information flows to third party providers (TPPs), and promoting additional services, using non-sweeping VRPs as a pilot.

Moreover, the report gives a special mention to the strong interdependency of Open Banking with broader initiatives in the regulatory space, such as Open Finance, New Payments Architecture (NPA), and other innovations in financial services such as stablecoins and digital assets, or the development of blockchain or a future central bank digital currency.

To mandate or not to mandate?

The report provides clear and specific guidance on how to enhance operational resilience, improve data quality, and address competition issues in the Open Banking ecosystem. Moreover, it promises to regularly monitor progress against all actions in the roadmap and to provide a first progress report in Q4 2023. The committee states that it will provide additional guidance and present a detailed plan for the future. Nevertheless, there may be some room for interpretation in the recommendations, since the report does not contain any directive, nor commits to publishing any. Indeed, it seems to be willing to leave room for different organizations which may need to implement the recommendations in different ways to suit their particular circumstances. This flexibility is important, as it allows organizations to tailor their approach to their specific needs and context.

Flexibility is not always the rule, for example, the implementation of PIX, a payment system that enables instant payments between individuals and businesses in Brazil, was different from the implementation of Open Banking in the UK. The key difference was that the implementation of PIX was mandated by the Brazilian government, whereas Open Banking in the UK will be driven by industry-led initiatives. The decision to mandate the adoption of PIX in Brazil was based on the government's desire to promote financial inclusion, increase efficiency in payments, and reduce the cost of transactions. By mandating the adoption of PIX, the Brazilian government was able to ensure that all participants in the payment ecosystem were on board and that the benefits of the system could be realized more quickly.

The implementation of Open Banking in the UK will be driven by an industry-led working group, made by JROC and all the market participants, with the government providing support and encouragement for the adoption of the new framework. While this approach may be perceived as less prescriptive, it allows for more collaboration in the development and implementation of Open Banking, with stakeholders from across the industry able to contribute their ideas and expertise.

Both approaches have their pros and cons, and the suitability of each one may depend on the specific context and goals of the initiative. The mandating of PIX in Brazil ensured a more rapid adoption of the system but may have allowed limited flexibility and innovation, while the industry-led approach to Open Banking in the UK allows for more collaboration and innovation but may take longer to gain widespread adoption.

According to the latest Open Banking Implementation Entity (OBIE) report published in August 2021, there have been over 1 billion API calls made since the launch of Open Banking in the UK in January 2018. Not all of these translate to payment initiation, but 1 billion “transactions” is trivial compared to the number of combined Faster Payments, Direct Debits, and card transactions. This is relatively early days for Open Banking in the UK and in the world. Like a marathon runner, the UK has probably passed the 1st-mile marker and is gathering some pace, whereas the rest of Europe and the US has only just placed their running shoes on. Nevertheless, there is no doubt that Open Banking has the potential to transform the financial services industry by promoting competition between payment methods, pushing innovation further, and increasing customer choice. Additionally, Open Banking has the potential to facilitate more sophisticated payments and financial services that may not be possible through Faster Payments or over the card payment rails.

What about other UK initiatives in the relatively recent history of the UK’s banking and payments industry?

Paym was a mobile payment service launched by the UK Payments Council in 2014 that enabled consumers to send and receive payments using just a mobile number. While Paym was successful in its early years, it has since been surpassed by newer payment systems such as Faster Payments, and its usage has declined. EDC published an article about the downfall of the Paym service in last month’s newsletter which can be seen here. Could Open Banking in the UK go the same way as Paym? It is possible that Open Banking in the UK could follow a similar trajectory to Paym, which was an industry-led initiative. Paym struggled to gain widespread adoption. However, there are some key differences between Paym and Open Banking that suggest that the latter is less likely to suffer the same fate. Firstly, Open Banking is a regulatory initiative, with the Competition and Markets Authority (CMA), which is backed by the UK government, giving it a stronger foundation and more widespread support across the financial services industry. Secondly, Open Banking has a much broader scope than Paym, as it enables a wide range of financial services beyond just person-to-person payments. This broader scope means that Open Banking has the potential to drive innovation and competition across the entire financial services industry, which could lead to greater adoption by businesses and consumers.

While there are no guarantees, the regulatory support and broader scope of Open Banking suggest that it is more likely to succeed than Paym. However, the success of Open Banking ultimately depends on a variety of factors, including the quality and availability of Open Banking-enabled products and services, the willingness of businesses and consumers to adopt new technologies, and the level of competition and innovation in the financial services industry. All of this highlights the crucial role that collaboration between participants in the ecosystem will have in its development.

What about the Current Account Switch Service (CASS), which was set up in 2013? The CASS was designed to make it easier for consumers and small businesses to switch their current accounts from one bank or building society to another. Its initial implementation costed the UK banks over £750 million, and the service has not seen the high number of account changes that was expected by initial projections. A survey by the UK's FCA in 2018 found that only 3% of adults in the UK had switched their current accounts in the previous year, despite the availability of the CASS. This is still significantly less than the UK divorce rate!

What about ending the use of paper cheques (or “checks” if you live in the US)? In 2011, there was a proposal to phase out the use of cheques by 2018, but it was met with significant opposition from consumer groups and small businesses that rely on cheques for their transactions. For example, Granny could not write a cheque for her favourite grandchild post-2018. As a result, the UK government decided to abandon the proposal and instead committed to supporting the continued use of cheques. According to the UK's Cheque and Credit Clearing Company (C&CCC), there were 177 million cheque transactions in 2020, which represents a decline of 23% compared to the previous year. Is it time to end paper-cheque processing in the UK? Ask any banker, and they would say “Yes please” because the cost of maintaining the cheque processing infrastructure must still be operating at a loss today, as it was 12 years ago. Costs are only increasing as the volume of cheques is decreasing. In 2018, the UK's C&CCC introduced a new image-based cheque-clearing system, which allows banks to process cheques electronically by capturing an image of the cheque and exchanging it with other banks. This system has made cheque processing more efficient and reduced the time required for cheques to clear. Surely in the future significant investment in physical cheque processing infrastructure will no longer be required, and it will be time to say goodbye to paper cheques in the UK.

Finally, this leaves us with cash. Access to cash refers to the ability of individuals and businesses to obtain physical banknotes and coins, which can be used for transactions and purchases. In the UK, there has been growing concern in recent years about the decline in access to cash, particularly in rural areas and among vulnerable groups such as the elderly and low-income households. It is surprising that in 2023 the question of access to cash is still lingering, as it has become a politically charged issue in the UK in recent years, with some politicians and advocacy groups arguing that the decline in cash availability disproportionately affects vulnerable groups and rural communities. There are also political and economic arguments in favour of reducing the use of cash, such as the potential for increased efficiency and reduced costs associated with digital payment methods. Moreover, there are also concerns about the risks of cash, such as the potential for money laundering and other criminal activities. The number of merchants going cashless is growing, as reported by EDC – see more detail here.

What’s next for JROC?

The JROC will monitor progress against all activities in the roadmap and will publish a progress report in Q4 2023. Also, in Q4 2023, the JROC will set out a detailed plan for the future entity and the OBIE’s transition to it. To summarise, the JROC report on Open Banking in the UK focuses on the current state of Open Banking and makes recommendations for the future development of the Open Banking ecosystem. It notes that the UK banking and payments landscape is likely to evolve rapidly in the coming years, with new technologies, business models, and regulatory frameworks emerging, and recommends collaboration from all participants to develop the new Open Banking ecosystem.

In conclusion, the UK Open Banking initiative has the potential to transform the landscape in the banking and payments industry, but it also faces significant challenges. Learning from the lessons of the past and addressing current issues may pave the way for a more efficient industry.

EDC will maintain a watchful eye on the activities of the JROC and how the industry responds to the Open Banking developments.

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The content of this article does not reflect the official opinion of Edgar, Dunn & Company. The information and views expressed in this publication belong solely to the author(s).