Hello Fintech Friends,

If you are based in London don’t forget to sign up for our very own London Fintech Breakfast for great food, networking and more! It’s a great way to keep an ear to the ground and we love to see new faces each month!

For the week in stats, skip to the bottom; for my op-ed, read on. As some might have noticed by now, we here at TWIF have an exciting announcement. Nik and the team have been quietly building for the last few years, and we are delighted to announce that TWIF has been acquired by Plaid. More on that in the coming weeks, but for now, nothing will change from an editorial perspective. And on that note, let's get into this week's news!

Since the launch of Open Banking in the UK some eight years ago, it has been a somewhat controversial addition to the UK payments ecosystem. Lauded by early adopters as a key requirement to prevent industry stagnation, it has been criticized by banks for being an unnecessary burden that made customers less secure. Open Banking has objectively struggled with adoption in its brief history, with adoption being significantly slower than anticipated and record amounts of Authorized Push Payment (APP) fraud. It would seem the banks had a case. Far from being the key to a promised land, critics argued that it was a solution in search of a problem, another tool in an already overcrowded toolbox. Toolboxes, by the way, exist because of the plethora of edge cases one experiences while maintaining a house. Let’s be honest, 99% of things need a hammer, a flathead screwdriver, a nail, and a screw. Everything else is just because of some random edge case that will happen once in a lifetime. But it is the aggregate of these use cases that makes a toolbox valuable. In this case, Open Banking has been sadly lacking.

Visa and Mastercard, through their lengthy existence, have had to come up with tools to weather any storm. Whether it was acceptance rates, fraud (friendly or legitimate), settlements above authorization limits, age of consent checks, refunds, rewards, or anything else, the card schemes became both the gateway to the world of payments and the arbiters of it. Their solutions, some elegant and innovative (mag stripe, 3DS, chip and PIN), others punitive (rolling reserves, chargeback limits, and chargeback fees), all served to increase ecosystem integrity; penalizing the network for allowing bad behavior and rewarding good behavior at scale via interchange. Above all, always ensuring trust for the user, they built a platform of near ubiquity and trust. Today, issuers and acquirers across the globe can cater to nearly any payment need you can think of, having encountered every scenario there is, likely millions of times. As a result, the card schemes became the de facto arbiter of payments: a proxy-regulator. The schemes, by design or by evolution, assumed the role of judge, jury, and executioner. Along the way, they implemented a variety of measures, processes, obstacles, and insurances to ensure the integrity of the ecosystem. This was a hard-won journey and not without its scandals. From a counterfeiting boom in the '70s and '80s to the Knuckle-Buster scandal, fraud became so rampant that it culminated in the US in the Credit and Debit Card Counterfeiting and Fraud Act of 1984. Similar acts and measures happened in concert across the globe as this new technology ushered in a wave of innovation, with legitimate uses surfing above and sharks lurking just below.

Wave after technological wave washed over them, and they emerged stronger each time. It’s now harder to think of a place to go on holiday than it is to worry about how you will pay when you're there. Like English, cards have become the default international payments language. The point of all this is to highlight that no new payment method can reach adoption without having an answer to all of the above: to protect merchants and users, to incentivize them, and to ensure they are accessible wherever needed. All that, and then to operationalize processes against every single non-happy path there is, is no easy task. But that’s what adoption takes. And if you don’t have the answers to them, you don’t get to win. Thus far, Open Banking’s numbers show it just hasn’t won.

A report by UK Finance on the state of payments in the UK illustrated that of the 5.6 Billion UK FasterPayments (the primary scheme OpenBanking initiates through) just 4% were via OpenBanking.
It’s a use case dependent product rather than a useful one. I concede that the use cases are growing. But higher on the supply side than the demand where the incentive for the merchant to avoid card related fees is likely higher than the incentive for the payer to care how they pay.

OpenBanking has always lacked a ‘killer app’ and, as a result, simply hasn’t been able to work out the formula on the demand side of the equation. It has been relegated to an ‘alternative’ payment method, something used in obscure circumstances where the merchant likely wishes to reduce their acceptance costs rather than worry about checkout conversion. But all of that might finally be about to change. One of the key challenges to the adoption of anything at scale is the convenience that it offers.

Open Banking has always struggled with a dual issue: lacking an incentive for users to adopt it while also not being as convenient as its alternative, Direct Debit. For readers unfamiliar with the concept, the UK Direct Debit (DD) is one of the most popular payment schemes. It is a component of the clearing system known as the Banker's Automated Clearing System, or BACS for short. It is the default method for citizens of the British Isles to pay their bills. Yes, to some extent, you can pay for things with a card, like monthly subscriptions. But for the significant expenses, the ones at the base of Maslow’s hierarchy of needs, like mortgages, utilities, insurance, lottery, and Premier League viewing, it's DD all the way. And all of these basic needs require basic functions:

1. The ability to vary the amount they charge over time.
2. The ability to charge payments on a recurring basis.

OpenBanking has always failed here. It’s a once and done - a one time deal. Nobody wants to deal with a payment instruction any more than absolutely necessary. If you want to pay for your mortgage by setting up an instruction, you likely DON’T want to set that instruction up again the following month. Or the one after. And so with this crucial limitation even the early adopters, keen to try anything new, would scarper back to the safety and convenience of a DD.

However that all changed last week when GoCardless (recently acquired by Mollie) announced the first ever recurring ‘pay by bank’ transfer on behalf of energy supplier Jellyfish Energy/. This landmark transaction was completed as part of a ‘live testing’ exercise with banks, proving the viability of open banking payments beyond the sweeping functionality introduced in 2022.

One small step for the OpenBanking, one potential giant leap for the adoption. At scale this removes the key disadvantage of OpenBanking vs Direct Debits. And it brings up questions around perpetual indemnity vs the existing open banking statute of limitations.

Already we have seen the UK’s typically Instant Faster Payments (a crucial advantage open banking has over its 5-day-snail-alternative DD) threaten to become Fastish Payments allowing business payments to take up to 4 days if fraud is suspected. It would be a cruel irony if the thing that ended up replacing Direct Debits (speed) ended up being sacrificed as it finally gains adoption.

But beyond that, as I have mentioned numerous times before, the political climate is increasingly one of isolationism and independence. Whilst energy independence is top of mind, payments independence is not far behind. Both the UK and EU have raised the alarm on being dependent on payment systems entirely controlled from outside their borders. Visa, Mastercard, Amex, Stripe and most other major payment institutions are born and raised in the US.

But OpenBanking by design has been a regionally independent effort. The UK corralled its banks to deliver. And the ECB likewise. Whilst they may not have liked it, they now for the first time since before SWIFT, UK and European Banks have a truly indepdent rail that that can operate outside of foreign influence. And as a result I think we can expect more and more brands to announce moving payment flow to OpenBanking.

It’s faster than a card payment. Cheaper for the merchant. It’s soon to allow for repeating transactions. All we need to be convinced of is the incentive for the consumer now. But where there’s a Bill, there’s a Pay.

Thanks for reading and please find another week of fintech financing events below!

Have feedback for us? Let us know. Find me at @danpatcronin, @twifintech, and at LinkedIn

Want to sponsor a newsletter? See our sponsorship information here.

News coverage written and provided by Daniel Cronin

Revolut conservatively banks over 60% of the Republic of Ireland

Want to sponsor a newsletter? See our sponsorship information here.