Open banking: the future of payments?

Fintech

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In a recent open letter to the Open Banking Implementation Entity (OBIE) – the body responsible for creating software standards and industry guidelines around Open Banking – the Competition and Markets Authority (CMA) dropped a quiet bombshell.

It revealed that it would give banks six months before they must be in a position to allow their clients to sweep cash between their personal accounts using so-called ‘variable recurring payments’ (VRPs).

While this might sound a bit esoteric (I’m conscious I’ve already used three acronyms in two short paragraphs), it’s also hugely important – with significant implications not only for investment platforms and fintechs, but for payments and daily life more generally.

Let’s find out why.

What does the recent news mean, exactly?

Currently, any payment made via Open Banking must be authorised by the account owner, while Account Information Service Providers (‘AISPs’ – any service that can access a bank account’s details via the Open Banking infrastructure) must require them to re-authenticate every 90 days.

Users can set up recurring payments via Standing Order through Open Banking, but unless you only want to send the same fixed amount each month, that’s not hugely helpful.

But following this latest instruction, banks will now be required to allow their clients to sweep cash from one account (such as a current account) to another of their own accounts (like their savings account) by a variable recurring payment (VRP).

This means that a third-party can set an amount and change it – exactly as they already do using Direct Debits – allowing services to accurately sweep cash between client accounts. For example, your savings management service could now sweep cash from your savings account to your current account, just in time for your energy bill to come out.

Some well-known Open Banking providers

Some well-known Open Banking providers

Why is this exciting to us?

By enforcing banks to build functionality to sweep payments AND to do so via VRP, the CMA is forging a path for VRPs to take precedence – and (if Banks are wise enough to take up on it) to introduce the ability to create recurring payments to external accounts.

Whilst this ability to set up payments to external accounts is not an explicit requirement of this mandate from the CMA, the enforcement of the use of variable recurring payments to do the sweeping is. Which means that the structure of authorisation flows and mandates that are required to do so must be built by any bank offering Open Banking. It brings external-facing VRPs within reach, which would allow services to instruct monthly payments, with a single login, to a third party.

What does this mean for the world of investment platforms?

With Open Banking – and the introduction of VRPs in particular – I personally believe that we could be looking at the end of Direct Debits, and the arrival of what will quickly become the primary way in which investors and investment firms will get cash onto their platforms. And you need only check out my recent blog to learn why we love Open Banking as a custodian.

Here’s the vision. An investor logs into their preferred investment platform or advice service. They then log into their banking app to allow this service to take cash on their instruction. Once they’ve done that, they’re able to instruct payments directly from the investment platform, with no need to instruct payments, accept further mandates or switch between accounts.

And, thanks to VRPs, investors will now enjoy the added bonus of their platform or advice service being able to sweep cash from their savings account, too, should they want it to.

It effectively means platforms can become one-stop-shops for investors to manage all of their assets, regardless of where their cash is. Instant payments across the board. No disappearing cash due to settlement period. No wait times. And a rethink of indemnity and claw back claims.

Platforms can become one-stop-shops for investors to manage all of their assets, regardless of where their cash is.

Any third-party payment provider not using Open Banking will, I think, have to question the longevity of their offering. After all, why would investors or platforms pay to use their service, if they can instruct it directly through their bank for less?

Could Open Banking spell the end of debit card payments?

Could Open Banking spell the end of debit card payments?

But it’s not just the world of investment platforms that Open Banking looks set to disrupt –the impact could be far wider. In daily life, there’s room for it to compete with Visa, Mastercard and other card providers, as a way of paying in stores.

Debit cards are only a means of getting money out of your bank and into the hands of a merchant, without going to a cash machine. Why use one if you can pay directly from your bank account? And if you’re a merchant, why would you choose to pay the high fees for cards when they can transfer their customer’s cash instantly out of their bank account and into yours?

Why use a debit card if you can pay directly from your bank account without one?

None of this will happen overnight, of course, and I’m sure there’ll be some twists and turns along the way. But we’ll be watching this space very closely, and eager to jump on the opportunities that Open Banking will continue to offer.