With the introduction of the Payment Services Directive 2 (PSD2) on 13th January 2018 came a breadth of opportunity for the financial services ecosystem, encouraging more competition and the development of innovative services and products for consumers as a result.
Fast-forward to 2021; a critical year for open banking’s journey. In the UK alone, last year adoption reached 4.5 million regular users whilst the market increased from 12.2 million to 18.8 million individuals across Europe.
So what can we expect for the open banking landscape in 2022?
Unlocking the potential of VRP
Accelerated by the FCA’s decision to scrap the 90-day reauthorisation requirement in the UK, I expect 2022 to be the year that the industry unlocks the true potential of Variable Recurring Payments (VRP). A type of open banking API, VRPs enable consumers to make regular payments of a varied amount without needing to re-authenticate the transaction. Household bills are a great example of how this can be used effectively on a day-to-day basis.
Right now, the CMA requires the UK’s big nine banks to build their own VRP API for sweeping by July 2022, enabling consumers to apply VRPs when making me-to-me payments (transferring money between two separate bank accounts owned by the same individual, for example).
However, as more banks adopt VRP APIs, if they can commit to VRP beyond sweeping this has the power for consumers to make recurring payments to any merchant without the need for re-authentication — offering more convenience, control, and security. Subscriptions and in-app payments will become seamless. E-commerce will advance. And in the future we can expect this to evolve into a fundamental shift away from card-on-file towards account-on-file transactions.
RIP card, long live A2A?
In fact, many across the industry have predicted 2022 to be the year that card payments will expire. Whilst the decline of cards will in reality be much more gradual, certainly existing Strong Customer Authentication (SCA) rules that will become a legal requirement in March 2022 aren’t helping the case for card payments, adding more friction to the consumer checkout.
As the card payment experience becomes more cumbersome, we can expect to see rising demand for alternative payment methods, such as account-to-account (A2A) transactions.
Powered by open banking infrastructure, A2A payments enable consumers to make real-time payments directly from their bank account to another, eliminating the potential of card fraud for the consumer and reducing lengthy settlement times for the merchant. This has significant potential to transform the retail payments landscape in particular.
Certainly, A2A payments are gaining momentum across the industry. Just last week the Payments Systems Regulator listed unlocking A2A payments as a priority action area in its 5-year strategy. On top of this, Amazon’s rejection of VISA’s high card fees in 2021 — despite the news that they are working together on a last-minute deal as of today — could be the catalyst for A2A payments becoming mainstream this year as e-commerce platforms continue to look for alternative payment options for consumers.
Open banking momentum will reach an inflection point
If 2021 was the year that open banking took flight, 2022 will be the year it becomes mainstream. At some point over the next 12 months, we can expect open banking momentum to reach an inflection point. At this stage, open banking will transform from a ‘must have for the future’ into a ‘must have for today’.
When it does, we will be one step closer to a truly open financial ecosystem. We can expect to see more regulators working closely with national governments to create a consolidated approach to implement open finance in 2022, with both the future framework of open finance from the European Commission and Smart Data legislation in the UK to be discussed this year.
There’s a long way to go, and a lot of work to do. But I’m confident that the industry is moving in the right direction — and look forward to reflecting on all that has been achieved this time next year as we celebrate open banking’s 5th birthday.
