The UK’s roughly £90trillion payments industry is on the cusp of a dramatic makeover. Even before COVID-19, payment providers were under pressure to retool their offerings to better serve an increasingly digitised customer base that demands greater flexibility and control over their money. And the pandemic has only served to accelerate this dynamic.
Meanwhile, after three years of focusing on the data requirements of Open Banking, the industry is now beginning to pivot towards Open Banking payments, unleashing a range of new possibilities, including Variable Recurring Payments (VRPs) and Sweeping.
With a new payments landscape on the horizon, two industry experts to help guide us through the prospective changes: Mike Chambers, Chairman of AnswerPay, who served for over a decade as Chief Executive Officer of the UK’s biggest retail payment system, Bacs Payment Schemes Limited, and Dan Scholey, Chief Operating Officer at Moneyhub, who facilitated the first-ever Open Banking payment by a member of the public shortly after the regulation came into force in 2018 and whose platform also powered the first-ever live Open Banking powered Point of Sale payment in 2020.
What follows is a synthesis of their thoughts on the future of payments.
Where are we today?
Even with the vast technological advances of the past decade, we still rely on too many legacy cumbersome payments systems that are increasingly not fit for purpose in the digitised age.
Manual processes and fixed payment schedules make it very difficult to move our money in a way that suits our modern lifestyles, and often leave us with limited or suboptimal choices. That’s why over a quarter of UK banking customers use current accounts as savings accounts and 15% of people miss credit card payments.
Payments between individuals is another challenge and can be time-consuming and laborious. To pay a friend or family member, we need to log on to our mobile banking app and set up a new payee, requiring the sort code and account number of the recipient, and all for the sake of settling last night’s bar tab.
And for businesses, receiving payments can be expensive and inefficient: when a customer buys a coffee on a credit or debit card, the merchant won’t receive the money for several days and they will incur high fees from the card company.
Open Banking can help remedy a lot of these pain points, but for most of the three years since its 2018 introduction to increase competition and innovation in the UK’s banking market, much of the industry’s focus has been on access to and aggregation of data.
Away from the public eye, organisations including Moneyhub have been collaborating to commercialise and industrialise the Open Banking payments infrastructure. And today we are at an inflection point where a slew of large enterprises, as well as government agencies including HMRC, are starting to appreciate and take advantage of the massive payments opportunities afforded by Open Banking.
The Open Banking Implementation Entity said that over 1.2 million Open Banking-enabled payments were processed in January, a significant milestone since only 3.4 million payments were made in all of 2020 and only 320,000 in 2018.
Where will we be tomorrow?
Though innovations abound in an industry where legions of entrepreneurs are constantly developing and iterating, structural changes in payments happen slowly. And the road from conception to ubiquity is long and perilous.
Take for example contactless payments. Commuters on South Korean buses were the first-ever recipients of a contactless payment card back in 1995, yet it took a further 12 years before the first card for UK banking customers appeared with the launch of the Barclaycard OnePulse card in 2007, while in the US, payments behemoths Visa, American Express and Mastercard only began offering contactless cards in the following year. And even with the arrival of these major players, it still took a further decade or so before widespread adoption of contactless.
Still, while our current payments architecture wasn’t built in a day, Chambers and Scholey believe Open Banking and covid-19 are accelerants for change.
A broad digitisation of the industry has been gathering pace since the creation of the iPhone, and the pandemic has sped up this digital transformation by several years: LINK, the UK’s main ATM cash machine network, reported a 43% drop in the number of ATM transactions in the year from March 2020, with the volume of cash withdrawn down 36%.
Meanwhile, the development of Variable Recurring Payments, is also a big step forward for the industry. VRPs are an emerging and novel way of making payments enabled by Open Banking where customers set up payment mandates via regulated third parties known as Payment Initiation Service Providers (PISPs), such as Moneyhub, to execute payments automatically based on set and personalised rules.
VRPs can strip out layers of complexity and cost. They also provide greater flexibility for customers, give more control and enable the creation of new types of financial services.
There are a wide variety of potential useful applications. OBIE, in its VRP Proposition Consultation Paper from November, said bill payers could use VRPs to allow their electricity provider to automatically take payments from their bank account while setting a maximum monthly withdrawal (replacing Direct Debits), while a customer of a subscription service could set up payments to expire after six months so as to not get caught in a “subscription trap” (replacing card on file), and a user of an online marketplace, could do a one-time payment setup for one-click payments to enable a quick checkout process.
Another important development enabled by VRPs is sweeping. These are automated payments where funds are moved between two accounts in the same name allowing, for example, customers to avoid unnecessary fees by moving money between accounts so as not to go overdrawn.
Taken together, VRP and sweeping allow greater control and visibility. Individuals can now act like corporate treasurers: managing their cash flow and seeing their financial position in real-time.
And Chambers even takes the analogy a step further: “We will have a bank in our phone and we will be our own bank,’’ he says. “So we will be in control of our money: we will be choosing who we pay, how we pay and when we want to pay them.’’
How will we get there?
For both Chambers and Scholey, the contours of the future payments landscape have become considerably clearer in the last six months. They are now asking how long it will take for developments like VRP to reach mass adoption and what can stop that from happening.
Their conclusion: though Covid-inspired digital transformation and growing Open Banking adoption have made clear the possibilities of a new world, they are unlikely to change the long-standing rule of the payments industry, that evolution takes time.
Chambers says the past 12 months or so have prepared us for a more digitised future, but “there’s a lot of life left’’ in existing electronic payments methods, such as Direct Debits, and new services will develop gradually.
“We’ve become more and more comfortable going deeper and deeper into digital payments so Open Banking won’t feel like a massive shift from an old world to a new world,’’ says Chambers. “If you put all that together, as a consumer I’ve been guided along a path step by step: it’s not a massive jump.’’
Scholey also acknowledges it will take time to unlock the full potential of digital payments, and says there will be winners and losers, with early-adopters best placed to benefit in the long term.
“Some of the established payments providers stand to lose out here and they won’t go down without a fight,’’ says Scholey. “Even so, I think as an industry we need to take each of the objections raised and really think about how we tackle them. The end result being better for consumers and merchants.”
What could slow the move to a world of ubiquitous Open Banking payments are the challenges of identification, fraud and financial inclusion when using digital services. Payment providers will need to grapple with these issues as the new system takes shape.