The UK Government took a bold step toward modernising the country’s payments landscape with its October 2024 National Payments Vision. This ambitious plan outlines a strategy for Open Banking to become a mainstream payment method, competing with cards for everyday transactions. It marks a decisive commitment to fostering innovation and competition in payments, paving the way for economic growth. Eline Blomme, Chief Strategy & Product Officer at Acquired.com, tells us more.
While the Vision signals progress, execution is complex. Regulators must address critical challenges in technology, regulation, and commercial alignment in order to realise goals of upgrading the UK’s payments infrastructure.
Competing with cards
Cards are integral to the UK’s payments ecosystem, with 29.1 billion payments made using credit or debit card in 2023. They operate through a reliable, multi-phase process consisting of three parts: (pre)authorisation, capture, and settlement. This enables flexibility for merchants and consumers alike. For instance, when an online grocery order is placed, funds are pre-authorised at checkout, adjusted as items are added or removed from the basket, and finalised upon delivery.
On the other hand, Open Banking payments combine authorisation, capture and settlement into a single step, simplifying the process but limiting flexibility in the payment journey. For example, consider an Open Banking payment for taxis. To guarantee payment, customers would have to pay the estimated amount upfront. Moreover, if the journey differed from the estimated amount, that would require another transaction to make up the difference, as would any tips. This means that one ride could include three transactions taking place, making the unit economics of offering an Open Banking payment option less attractive than cards for merchants.
In the Netherlands, where Open Banking payments such as iDeal are dominant, companies with variable payment amount journeys only charge the total amount at the end of the customer journey. This leaves merchants exposed to the risk of non-payment, which will likely result in costs that need to be offset by the benefits of using the payment method. As Open Banking solutions evolve, addressing these technological gaps will be critical to ensure seamless consumer payment journeys, whilst ensuring the return on investment in the payment method is economical for merchants.
Consumer protection
Dispute resolution, as established by major card networks, will be another process for Open Banking to emulate. Both merchants and banks have today well-defined systems in place to manage chargeback and fraud protection efficiently.
The industry has yet to develop comprehensive solutions comparable to those offered by card networks. This gap is a critical barrier to adoption. Consumers need assurance that if something goes wrong—whether it’s a fraudulent transaction or a delivery issue—they will have access to clear, reliable paths for recourse.
Regulators have a crucial role in addressing this challenge. By enforcing minimum standards for consumer protection and encouraging investment in automated dispute systems, they can help build the trust needed for widespread adoption. However, these efforts must be balanced against the need to keep costs manageable for merchants and banks—any new process would require substantial investment from both parties. Striking the right balance will be key to ensuring both consumer confidence and commercial viability.
Bank incentivisation
Securing buy-in from banks will be critical to the success of Open Banking. Currently, banks lack financial incentives to prioritise Open Banking transactions. Unlike card payments, which generate revenue through interchange fees, Open Banking payments impose costs on banks without offering a direct financial return.
Not only do these transactions threaten traditional revenue streams from cards and direct debits, multiple third-party providers (TPPs) have also flagged to the Open Banking Implementation Entity (OBIE) that high ticket size Open Banking transactions in the UK are more often declined through the fraud engines of banks, compared to the same value ticket size card transactions.
For Open Banking to flourish, banks must be incentivised to actively support its adoption. Regulators, such as the Financial Conduct Authority (FCA), must work closely with industry stakeholders to develop a sustainable commercial model that balances banks’ interests with the broader goal of driving innovation. Central bodies like the Open Banking Implementation Entity (OBIE) can also play a key role in fostering collaboration and overcoming the current impasse.
Open banking cost models
In designing reforms, regulators should consider how to retain the low-cost nature of early Open Banking models with the additional services that come from TPPs and merchant accounts. Early models saw funds flow directly from the consumer’s bank to the merchant’s account. However, this had limitations for merchant and customer experience, such as a lack of support for refunds, transaction tracking, or reconciliation services.
As a result, TPPs began collaborating with banks and e-money providers to set up merchant accounts, offering services like refunds, webhooks to release goods and reconciliation tools. While these improvements made Open Banking more viable for merchants, they also introduced new fixed fees, eroding the cost advantage over debit cards—particularly for low-value transactions with higher approval rates.
The road ahead
The UK’s National Payments Vision represents a transformative opportunity to reshape the payments landscape through Open Banking. However, realising this vision requires a concerted effort to address technological gaps, establish robust consumer protections, incentivise bank participation (especially for commercial variable recurring payments), and modernise infrastructure.
Regulators, banks, merchants, and TPPs must work together to navigate these challenges. With strategic planning and sustained effort, Open Banking can become a cornerstone of the UK’s financial ecosystem, offering consumers and businesses a flexible, efficient, and secure alternative payment method.