The Joint Regulatory Oversight Committee (JROC) report is a milestone in the story of Open Banking in the UK. It sets out a strong and positive vision for the future, not least providing a roadmap for the delivery of non-sweeping Variable Recurring Payments (VRP). The report also recognises the success of Open Banking and the value it has delivered so far, as well as the growth in usage among both consumers and SMEs. I was particularly glad to see the JROC acknowledge the smart moves we’ve made in the UK, such as implementing a single standard and setting up the Open Banking Implementation Entity (OBIE) to oversee the ecosystem.
Yet the next steps for the “future entity” which will replace the OBIE are far from clear and I am disappointed that we still lack clarity around how the funding model is going to work. The co-founders of Ozone API first met whilst working with the OBIE to deliver the first Open Banking standard. Nearly seven years on, we are still some way from establishing a model which pays for the entity who oversees the Open Banking standards, infrastructure and regulations. I am concerned that it has taken us so long to get this far. Other markets in the Middle East, in Latin America, and Central Asia are moving much more quickly. It would be a shame if the UK fell behind simply because we’re taking too long to come to an agreement that works for all players.
JROC and funding the future entity
In the UK, the Competition and Market Authority (CMA) set up the OBIE in 2016 to deliver Open Banking. To date it has been funded by the CMA 9 (Allied Irish Bank, Bank of Ireland, Barclays, Danske, HSBC, Lloyds Banking Group, Nationwide, Natwest Group and Santander) – who were all subject to a CMA order which fired the starting gun on Open Banking.
The JROC report sets out a plan to design a future entity to replace the OBIE, indicating that its membership should be more broadly-based, with “proportionate funding” and liability arrangements.
JROC set out three options for funding the entity:
- Tiered membership model with payment based on metrics such as turnover, number of customers or the size of a business.
- A “pay as you go” model for the use of services such as premium API standards that go beyond regulatory requirements.
- A hybrid model comprising of a tiered membership scheme and a pricing framework for premium services as well as other commercial revenues.
The report also said that commercial revenues generated from the provision of services such as confirmation of payee (CoP) will become potential sources of income that could “complement” the model and “have the potential to scale over time”.
What’s missing from the JROC Report?
JROC kicks the can down the road on a few key points. Firstly, the term “proportionate funding” is imprecise and does not really answer key questions. Who is going to pay for an entity that builds the standards and infrastructure as we move to Open Finance – and on what basis? We don’t yet know how much it will cost to fund this entity and neither do we have a clear definition of its role. The JROC could have specified a scheme with a commercial framework at its core so that there are simple, transparent pricing models which cover premium or paid APIs. It has also missed a trick when it comes to building a funding model which incentivizes financial institutions.
Whilst we’re debating who pays for the future entity and the ongoing development of standards, other markets are already building on standards and improving them at a rapid pace. A model being considered in other territories involves firms paying for the central infrastructure – which is not just the technology, but also the people, processes and entity which manages it all. If firms are using Open Banking to grow their business, it makes sense that they should have to pay for the entity and any infrastructure. Over time, we should help and encourage a model which would enable firms to gain some level of limited access without charge – a ‘freemium’ model, but where there is a cost to accessing APIs and providing services. So if fintechs, whether they are TPPs or aggregators, have to pay for access, banks can either directly or indirectly earn revenue from that access – hopefully creating some extra funds to pay for an entity.
Also in other territories, we are seeing the arrival of a construct called ‘service requests’, where banks and financial institutions can effectively start to enable embedded finance through an open API interface. This can be used to deliver services such as account opening, applying for a new facility, adding new users into an account, or many other financial services which can all be instigated with APIs – and which can then be embed into other experiences.
Overall, while the JROC Report is a very positive step forward, it has missed a trick by failing to extend the vision to consider how all parties can benefit from a revenue model. Put simply: the banks need to make some money out of Open Banking (and Open Finance). The report does talk about promoting additional services using non-sweeping VRPs as a payment – which is a sign that we will get there eventually. Yet it misses key points about how the entity can play a part in paying for itself and does not introduce a simple type of scheme in which firms that engage in both sides of data-sharing pay for it. If this was implemented, over time a revenue share model can be developed.
We’re certainly glad to see the UK grappling with important questions which are key to the future of Open Banking as it evolves into Open Finance and beyond. Yet time is of the essence. We need to go further and faster if we want to maintain the UK’s leadership position – starting by clearly defining a funding model for the future entity.