Is Open Banking Ready to Become the UK’s Payment Backbone?

In an era where geopolitical tensions are increasingly influencing financial flows, maintaining the integrity and sovereignty of national payment infrastructures has become more critical than ever. The recent US sanctions on Russia's banking sector and its exclusion from the SWIFT international payments network serve as a compelling reminder of how political decisions can rapidly disrupt financial ecosystems. Consequently, this raises the question: Is Open Banking prepared to step in as a sovereign alternative for the UK?

The Current Landscape of Open Banking

Open Banking, a system that provides third-party financial service providers open access to consumer banking, transaction, and other financial data from banks and non-bank financial institutions, has been heralded as a transformative force in the financial services industry. However, despite surpassing 200 million transactions in 2024, Open Banking still lags far behind traditional card payments, which saw 383 million credit card transactions in a single month.

Cultivating Consumer Confidence and Adoption

To truly compete with entrenched card payment systems, Open Banking must address consumer hesitancy by delivering robust functionality coupled with strong security measures. Initiatives are currently underway to bolster consumer trust. Open Banking Limited is working on consumer protection schemes similar to the safeguards provided by the Consumer Credit Act's Section 75. Furthermore, the Payment Systems Regulator has put forward a new liability framework for Authorised Push Payment (APP) fraud, set to provide a legal foundation for consumer redress. Although promising, these efforts are still in their infancy and have yet to be tested on a large scale.

Fortifying the Supplier Ecosystem

A resilient supplier network is key to a robust payment infrastructure. However, the financial sustainability of Open Banking service providers is precarious. The recent collapse of Vyne, a prominent player in the space, underscores the sector's vulnerabilities. Two primary challenges plague the market: intense price competition due to low entry barriers and the lack of direct merchant relationships, which relegates Open Banking providers to a secondary role rather than positioning them as primary payment channels.

Building a Future-Proof Framework

For Open Banking to emerge as a credible contender to card networks, a comprehensive and strategic approach is essential. Introducing modest commercial incentives, similar to interchange fees, could enhance its attractiveness to banks and merchants. Strengthening consumer protections and establishing clear liability frameworks would also build trust among users. Accelerating product innovation, especially in tap-to-pay and cross-border acceptance, is critical.

Most crucially, Open Banking should be recognized as an integral part of the UK's critical infrastructure. Just as energy and food security receive coordinated government attention, so should payment systems. With the appropriate reforms, Open Banking has the potential to provide the UK with a resilient, domestically anchored payment system, thus safeguarding national financial sovereignty amid a volatile global landscape.

Conclusion

While Open Banking holds considerable promise as a sovereign alternative to traditional card payment systems in the UK, significant hurdles remain. Cultivating consumer trust, ensuring supplier viability, and closing product gaps are essential steps in this journey. If these challenges are met with strategic foresight and regulatory support, Open Banking could play a pivotal role in securing the UK's financial infrastructure against future geopolitical disruptions.