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

As global political tensions continue to escalate, the security and independence of national payment infrastructures have become a pressing concern. The recent geopolitical developments, such as the US sanctions on Russian banks and the subsequent removal from Swift, serve as stark reminders of how vulnerable payment systems can be. These actions caused disruptions in cross-border services for banks in countries like Armenia, Georgia, and Kazakhstan. The resulting chaos in remittance channels and limited financial access underscores the potential for political maneuvers to destabilize payment ecosystems rapidly.

The UK’s Payment System Dependency

For the UK, a nation heavily dependent on US-centric card networks like Visa and Mastercard, the situation is far from hypothetical. With the UK’s former Switch scheme and Vocalink now under US ownership, the dependency has reached near-complete levels. This raises a crucial question: Could Open Banking emerge as a sovereign alternative to these dominant card networks?

Current Status of Open Banking

Open Banking, while promising, is not yet ready to stand as a full-fledged alternative. Although its usage has been increasing, with over 200 million transactions recorded in 2024, it still lags behind the dominance of card payments, which saw 383 million credit card transactions in just September of the same year. For Open Banking to reach critical mass, it must win consumer trust with robust functionality and credible security measures.

Building Consumer Confidence

Efforts to cultivate consumer confidence are underway. Open Banking Limited is developing consumer protection schemes similar to Section 75 of the Consumer Credit Act. Additionally, the Payment Systems Regulator introduced a new liability framework for Authorised Push Payment (APP) fraud in October 2024 to provide a legal structure for redress. However, these measures are still in their infancy and untested on a large scale.

Strengthening the Supplier Ecosystem

A strong payment infrastructure requires a resilient supplier ecosystem. Yet, the financial viability of Open Banking service providers remains uncertain. The collapse of Vyne, a prominent player in the sector, highlights this fragility. Two primary weaknesses hinder market sustainability: low entry barriers leading to intense price competition and thin margins, and the lack of direct merchant relationships relegating Open Banking to a secondary role in merchants' payment strategies.

A Path Forward for Open Banking

To effectively rival traditional card networks, Open Banking needs a comprehensive strategy. Introducing modest commercial incentives similar to interchange fees could enhance its appeal to banks and merchants. Additionally, enhancing consumer protections and establishing clear liability allocations would build trust. Accelerating product innovation, particularly in tap-to-pay and cross-border acceptance, is crucial.

Most importantly, Open Banking should be recognized as part of the UK’s critical infrastructure. Just as energy and food security receive governmental focus, so too must payment systems. With the right reforms, Open Banking could evolve into a resilient, domestically anchored payment system, ensuring national financial sovereignty in an increasingly volatile global landscape.

In conclusion, while Open Banking is not yet ready to become the UK's primary payment backbone, strategic improvements could position it as a viable alternative. By addressing current challenges and building a robust framework, Open Banking has the potential to secure the UK's financial future amidst growing geopolitical uncertainties.