Open Banking’s part to play in the next payments revolution

Read time: 5 mins Added date: 30/05/2024

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With businesses focused on providing the optimal customer experience, attention is now turning to Open Banking’s role in ‘embedding’ the payment process into the fabric of the customer journey.

Embedded Payments, powered by Application Programming Interfaces (APIs), are becoming crucial components of a business’ toolbox – allowing them to provide their customers with a frictionless payment experience. In parallel, consumers are beginning to expect immediacy and ease when making payments. This technology is beginning to mature as more businesses make the switch to embracing frictionless payments. So what’s on the horizon for Open Banking in 2024 and beyond, and how will it fuel the next payments revolution?

The Open Banking landscape in 2024

Embedded Payments are possible due to Open Banking, an initiative that enables the safe and secure sharing of financial data, born out of the European Commission’s second Payment Services Directive (PSD2).

As of 2024, there are now eight million active users – both consumers and businesses – of Open Banking-powered financial management apps and payment tools in the UK. In November 2023 alone, users made 12.85 million payments via Open Banking technology – representing an increase of 78.5%, compared to the 7.2 million payments made during the same month in 2022.

It’s now estimated that 14% of all digitally-enabled consumers (PDF, 6MB) are active users of at least one Open Banking service. What’s more, 74% of digital consumer payments globally will take place via platforms owned by non-financial institutions by the year 2030, according to marketing research firm IDC.

This growth is a sentiment also witnessed by Lloyds Bank. Across our suite of API-powered Embedded Payment solutions, we saw a 25% increase in users between 2022 and 2023, and a further increase of 42% between 2023 and 2024. The momentum behind this rise shows that businesses across the UK are placing value on speed and convenience in the payment experience.

Innovation through legislation

2024 will be a pivotal year for Open Banking and collaboration between industry stakeholders will be crucial to drive innovation.

Key pieces of legislation will play a central role in influencing the future of Open Banking technology. The Data Protection and Digital Information Bill, for example, intends to shape the processing of – and access to – digital information. The Bill will update and strengthen the UK’s current data protection framework, drawing on themes such as data collection, data portability, and the right to erasure.

Additionally, it will improve data security with the establishment of a Digital Verification Services (DVS) register (PDF, 428KB), making proving identity easier, cheaper and more secure. It will also create new use cases for Open Banking – approved providers will be able to use Open Banking, among other data sources, to verify an individual’s identity. The Bill will therefore foster the development of a trusted digital identity market in the UK which, in turn, will make verification processes – from starting a new job to buying a house – simple and secure.

Further afield, the European Commission’s next Payment Services Directive (PSD3), a new and updated iteration of the EU’s landmark payments legislation, is expected to be finalised and available by the end of 2024, with an 18-month transition period for EU Member States. Among other factors, the legislation is expected to introduce more robust security measures to the payments space, while strengthening the concept of Open Banking. Although PSD3 will only directly affect Member States, there will certainly be ramifications for the financial services sector in the UK as firms aim to match the pace of change in Europe.

New legislation is likely to create opportunities for industry stakeholders to collaborate and embrace new technologies – the impact of which is likely to shape the future of frictionless payments.

Return to sender

As the technology matures, new capabilities are being developed. Lloyds Bank’s PayFrom Bank is one example of a solution that has benefited from recent developments. PayFrom Bank enables users to make payments directly from their bank accounts, without the need to enter their payment details. As a result, the customer is able to experience a fast, frictionless and secure payment journey. On the merchant’s side, benefits can include lower fees and faster reconciliation, improving cash flow and visibility.

PayFrom Bank has been gaining considerable traction in a variety of sectors, including real estate, transport, hospitality and higher education. The addition of the one-click refund capability, introduced in March 2024, will open the technology to use cases in a wide range of new sectors – most notably retail. The opportunity for retailers to offer their consumers an easy and secure way to make account-to-account payments with the option of providing a refund via the Faster Payments Service is transformative.

The development of PayFrom Bank’s refund capability also echoes many of the recommendations made in the retail-focused Future of Payments Review. The report, published in November 2023 and to which Lloyds Bank was a contributor, highlights the need for retail payment methods to be resilient, secure, adaptable, fast and convenient. It also reaffirms the need to improve the consumer payment experience and fully exploit the opportunities that Open Banking presents.

The next leap forward

Experts in the payments industry are focused on how the Open Banking ecosystem will evolve, with emphasis placed on the future of non-sweeping Variable Recurring Payments (VRPs) as the next big development to use Open Banking technology.

VRPs enable a consumer to set strict parameters, including the maximum value and frequency of payments, enabling them to control how much a merchant can take and when. This enables frictionless transactions without the need to input any card or account details for future transactions, while retaining the ability to cancel permissions at any time.

As a result, non-sweeping VRPs could possess the potential to transform payments in sectors such as utilities, enabling customers to cap the maximum value of payments that can be taken. In addition they have the potential to streamline the process of paying tax. From a consumer point of view they could be instrumental in helping consumers make regular e-commerce transactions such as grocery shopping or ordering a taxi, removing the need to store card details.

In December 2023, the Variable Recurring Payment Working Group published a blueprint (PDF, 870KB) proposing a delivery plan to enable a phased roll out of the technology, to which the Joint Regulatory Oversight Committee responded with a call for an initial roll out (PDF, 142KB) to take place in the third quarter of 2024.

Despite this progress, there are many challenges left in the road to the full implementation of non-sweeping VRPs, and they will require collaboration between regulators and the industry to overcome. What’s clear is that the successful, secure and sustainable implementation of Open Banking-enabled VRP technology, when used as part of a toolkit of other payment methods, could boost customer choice and spark a new wave of innovation in the payments landscape.

Open Banking-enabled technology requires an equilibrium of security, speed and efficiency to be effective. Working with our clients to identify new and innovative use cases, Lloyds Bank is at the forefront of innovation and change. Our Embedded Payment products fully harness the potential of Open Banking and represent a secure and powerful method of providing your customers with the ability to offer a frictionless payment experience. With further payment revolutions on the horizon, now is the time to invest.

Article first published in The Treasurer.