The UK’s open banking implementation was good but there is still some room for improvement. The Australian model might just top it, writes Michael Bridgman, group product manager at GoCardless.
Image source: Photo by Catarina Sousa from Pexels
The recent news that the Competition and Markets Authority (CMA) has given some of the largest UK banks six months to enable variable recurring payments (VRP) through their open banking APIs has put a spotlight on discussions of what innovation might come next. Although developments seem to be steaming ahead, open banking continues to be plagued by criticism from the UK’s larger banks – complaining of high costs, additional bureaucracy, and potentially extended timelines.
While the UK is often touted as the world leader in open banking, we still have some work to do if we want to get big banks ‘on side’ to embrace its full potential. Notably, Australia’s unique open banking model is gathering momentum and should inspire all markets. In Australia, open banking typically refers to data sharing only. When I refer to open banking I mean data sharing or payment initiation facilitated by API globally. With that in mind, here are three key takeaways that should be adopted on a global scale to make open banking a success for all.
#1 Defining a central authority for open banking implementation
Firstly, the Australian open banking model has established a central authority that dictates a clear pathway for implementation. Currently, the UK has no central authority to regulate inefficiencies and potential flaws when it comes to faster payments. This can make it challenging for banks and payment service providers (PSPs) to align and establish a ‘common good’ – such as consumer protection.
In Australia, a new scheme called the ‘New Payments Platform’ (NPP) has been enforced to allow banks to commercialise their platforms, making way for more innovation around user experience. It serves as a coordinating body and creates value for everyone in the ecosystem, for example by creating a set of incentives that allows banks and fintechs to profit from innovative solutions, which will, in turn, allow merchants to reduce their cost-to-serve while increasing the payment security for payers.
This was built by all banks; creating a cohesive network and ensuring optimal consumer outcomes by enforcing customer protections for everyone to follow. The NPP is also compatible with older payment systems and allows mandates to be migrated, removing any barriers to entry for merchants – in the UK, the lack of central authority means migration of mandates is not possible.
This is not ideal as it makes it almost impossible for merchants to move between different payment suppliers without inconveniencing the customer. For example, with VRP in the UK, if your gym wants to use a different payment provider for recurring payments, you’ll have to sign up again. You can’t migrate your mandate. That’s bad for you and bad for your gym.
#2 Incentivising banks
Commercial incentives need to be provided for banks to embrace open banking. In the UK, open banking has forced banks to share data with PSPs and allow programmatic payment initiation to create innovation and competition in the marketplace. But beyond complying with regulations, there is currently no clear commercial incentive for banks to promote anything beyond the bare minimum. This means banks are just doing enough to stay compliant, rather than to push for development. However, in Australia, regulators have made it so that banks must support payment requests from PSPs, but they get to determine the rules under which they can charge, build access, and innovate. This, in turn, incentivises greater participation.
This is another initiative that UK regulators should consider to improve the incentive structure. They can work with both banks and fintechs to figure out what additional value-added services are going to be the most useful, and then let banks decide how to commercialise these services. The important thing to do here is to try and work with the current ecosystem to encourage innovation based on what has already been built, as opposed to starting from scratch.
#3 Removing overheads for third party providers
Finally, another tip we can take from the Australian model is the way they have encouraged participation from smaller players in the space. High costs to access the market means that only those businesses with scale can reap the rewards of open banking. Managing the costs for third party providers (TPPs) to access that network will encourage smaller companies to participate, which will bring competition and innovation.
With PSD2 in the UK, many TPPs go through API aggregators but have to go through the time-consuming process of registering with every bank in the system if they want to use their own licences to provide data sharing or payment initiation services. This lengthy process means there is a more concentrated market of companies with scale under PSD2.
Australia’s approach allows access to the NPP through a single financial institution, which is connected to a wider network. This means that third parties don’t have to spend valuable time registering to each and every bank individually, and subsequently, the market is made up of a mix of both smaller companies and those with scale.
The UK’s open banking can still improve by taking inspiration from others
While the UK open banking implementation has been done relatively well, there is still some room for improvement. The Australian model has demonstrated ways which can alleviate some of the pain points that banks have highlighted in the past; through a centralised authority to set a clear path for development, incentivising banks to share data with PSPs, and removing the overhead for smaller players which will bring competition and innovation.
The views and opinions expressed are not necessarily those of AltFi.