Making payments directly from one account to another is not new: direct debit, for example, has been widely used for many years and worked well for regular payments. But open banking offers the potential to develop account-to-account payments further, delivering new payment solutions and additional benefits to retailers and consumers. This includes people using account-to-account payments to pay for goods and services in shops and online. We want to ensure that innovations like these can reach their full potential, so that payment systems are accessible, reliable and secure, and represent value for money.
The UK is recognised as a leader in open banking, having created a world leading payment mechanism using dedicated application programming interfaces (APIs). Underpinned by modern security standards, they deliver account-to-account payments that are initiated on customers’ behalf by a third party. This, for instance, allows HMRC to offer people the option to pay their taxes directly from their bank account.
Yet despite this, very few payments in the UK are made using open banking-enabled account-to-account systems. This is especially true in the retail sector, where a significant proportion of payments are ‘spontaneous transactions’ such as a supermarket shop.
While people usually have multiple payment options, such as contactless, wallet-based payments, PayPal and even ‘buy now, pay later’ solutions, most of these payments are underpinned by a card-based transaction. This means retailers are restricted in their choice of payment system and the prices they pay for it, with these costs ultimately being passed down to consumers.
This is where account-to-account payments could help, by increasing the choice for retailers and ensuring that the prices they pay are fair. But with innovation already happening in the market, why are account-to-account payments not being used more widely in the retail sector?
The problem is that they aren’t yet ideal for all types of payment. They work well for people making payments using digital banking to other individuals – for example, paying a friend your share of the bill after a night out, or making a payment to an electrician.
However, retail transactions have important differences to person-to-person payments. For example, a retailer may need to choose when a payment is made or change the transaction amount after the customer has authorised their payment (such as when substitutions are made in an online supermarket order). There are also increased risks associated with goods bought online, or those with a long delivery time such as furniture. So, consumer protection is an important consideration.
To promote account-to-account retail transactions using open banking, we believe there are four issues we need to address:
The system’s functional capability: We need to address the particular user needs of retail purchase transactions (for example, retailers’ ability to trigger the payment with the customer’s consent when the customer is not present) – and to have operational and technical standards that support this. There may be a need for new functionality, but we assume much of the existing functionality can be reused or repurposed. We want to look at different retail uses to find if the current functionality works for users and, if not, how issues or gaps could be overcome.
Dispute processes: Retail transactions bring new risks, such as unsatisfactory goods being delivered after the payment, or the retailer not acting in good faith. We need to ensure all the parties involved in the transaction act together to minimise these risks, that refunds can easily be initiated, and that the right processes ensure that customer disputes can be resolved efficiently.
We will also need to understand if further protection is needed in certain instances (for example, in cases of fraud, or if a seller goes bankrupt), so that consumers and retailers alike are confident using account-to-account payments.
Access and reliability: Retailers and consumers must be able use their preferred payment method when they want to. We want to ensure that the system works properly for the end-to-end journey for a retail transaction, and that customers don’t have any problems when they make their purchase.
We also want to explore what the seller needs to feel assured that they will be paid, and ensure that there is sufficient capacity to match the potential uptake in the future. There are several ways to achieve access and reliability. The technical build is one, but there could be alternative approaches such as providing assurances for future payments, or considering contingency options.
A sustainable funding model: For account-to-account payments to work in retail, we need a commercial and pricing model that ensures all parties receive sufficient compensation for the services they provide, and can continue to invest in new products and further innovation. We need to investigate how these payments can provide an opportunity for all parties, including account providers, to receive compensation, and the process for this.
Any solution will need to be economically viable, appealing to retailers and consumers, and attractive to the market. There will be a need to balance the needs of all parties in a (potentially multilateral) agreement.
To agree the best way to do all this, we – together with the Financial Conduct Authority (FCA), Competition and Markets Authority (CMA) and the Treasury – are setting up a strategic working group. This group will allow stakeholders to give us their views on the issues I’ve discussed here, and more. The working group will report into the Joint Regulatory Oversight Committee for open banking, and advise it on establishing a vision and roadmap for the future. For more information on the Joint Regulatory Oversight Committee and the strategic working group.
My team and I look forward to working closely with the strategic working group’s members and our wider stakeholders to discuss the outcomes we want to see. And, of course, we will continue to publish more information on our website over the next few months.
