There is a lot to like in Joe Garner’s Future of Payments Report but one of his top recommendations, namely Open Banking (without some form of Competition and Markets Authority style compulsion) can offer competition to cards for retailers, is too optimistic.


Joe Garner was commissioned by HM Treasury, part of the UK Government, to make recommendations on the future of UK consumer payments (read the report here).  It’s highly readable and has a fair analysis of the state of the consumer payments market in the UK and it has many solid recommendations.  A key problem he highlights is that merchants and retailers are frustrated with the costs of accepting card payments and the lack of digital alternatives.

“Open Banking can help improve both person-to-person bank transfers and provide an alternative to the card schemes, but only if the lack of consumer protection and commercial arrangements are addressed.” – Executive Summary, Page 10.

What Joe is saying, to address the retailers’ problem, is that Open Banking[1] should be the basis for an alternative to card payments for POS payments but, according to Joe, it needs two key developments to make it viable;

  • A regulatory framework covering dispute resolution and consumer protection.
  • A commercial framework whereby the ASPs (account service providers – mostly large UK banks) are given some compensation for the costs they incur in running the Open Banking services (currently they cannot charge for open banking payments).

I agree with Joe that these are necessary conditions but I do not believe they are sufficient to create an alternative to card payments.  I believe a degree of regulatory compulsion to force ASPs to continue to develop/ maintain Open Banking services will be required.  Let’s see why; firstly by looking at history.

No electronic means of payment has been substituted by another without regulatory compulsion.

The report highlights various countries where account to account payment schemes have grown successfully (e.g. Brazil, India, or M-Pesa in Kenya) but in these countries account to account payment systems were competing with cash, not cards.  They were not displacing an electronic payment.

The times when an electronic payment has been introduced to replace another electronic payment are relatively few.  SEPA was introduced to replace a variety of domestic electronic schemes in Europe but failed to take off until the EU brought in rules that required the switch off of the domestic payment schemes.  Similarly, the Faster Payments scheme in the UK only got a critical mass of payments because it was coupled with a requirement to replace the standing order payment systems.

Thus the historical evidence suggests his proposal will not work.  What might be the reasons behind the lack of success in substituting one form of electronic payment for another?

It is a lot of cost and hassle to give consumers and banks what they already have

Part of Joe’s rationale for backing Open Banking is that the banking industry has already invested about GBP 1.5 billion in it and so has broken the back of the development of providing the alternative capability to retailers.  The trouble with this argument is that payment schemes/ networks require a lot of expensive ongoing development and maintenance.  The two items highlighted by Joe’s report (dispute resolution and charging framework) will inevitably result in further system wide, expensive development projects and these are just the two that we can see at the minute.  There will be others in the future.  From a bank’s point of view, why would a bank be interested in the business case for a continuous stream of investments to do what they already can do? There is no “blue ocean” of unmet payment needs that they’re being asked to address with this technology, just replace some of the card payments.

The other big sunk investment is the knowledge and familiarity of consumers with POS payments by card.  The report (Page 35) admits that the consumer experience of account to account payments across the world is not as good as with cards one (in terms of speed and variety of locations supported).  Why would consumers go through the hassle of learning and keeping up with a different technology when they have one that works already?

If these were not challenges enough there is an even bigger problem to surmount.

The economics for banks look unappealing

There are a number of players who are involved in card payment processing that can loosely be grouped into three markets;

  • The card issuers – mostly the big four banks (Barclays, Lloyds, HSBC, NatWest) but also a range of other credit card companies, e-wallet providers and smaller financial institutions.
  • The card schemes – mostly Visa and MasterCard
  • The merchant acquirers – a much more fragmented market but Barclays, HSBC and Lloyds all have a significant share.

According to the Future of Payments report (page 66), the average cost that the merchant pays is 0.71% of the payment value.  Of that the scheme element, called the scheme fee, is complicated in that it has a fixed cost and a percentage but is of the order of 0.2% on average.  The issuer element, called the interchange fee, is capped at 0.2% for debit cards and 0.3% for credit cards and is 0.14% on average.  The remaining 0.37% is what the merchant acquirers get.

The large UK banking groups benefit from the interchange fees and to some extent from the acquiring income.  It is the large UK banking groups that have to provide the majority of the investment needed by the Open Banking scheme, as they own the bulk of the current accounts and card accounts that are used by Open Banking.  Unfortunately they benefit in large measure from the existing card schemes.  If the thesis is that the new schemes are to have less revenue per transaction from the retailer (otherwise why would the retailer be interested), to be attractive to the banks on a per transaction basis they would need to get a larger percentage of a smaller pie.  This does not seem at first sight likely.

Even if the bank did end up with a higher revenue per payment than with cards currently, the return on investment looks horrible.  The new scheme would not replace the banks costs of supporting card payments as nobody expects cards to be completely replaced.  For a particular bank, the same overall number of payments would have to be used to cover the costs of both the debit card infrastructure and the open banking infrastructure, nearly all of which are fixed costs more or less independent of payment volumes.  Thus, roughly speaking, the revenue for the bank is unchanged but the costs double.

Conclusion – “Cui Bono”

Lucius Cassius, whom the Roman people used to consider the most truthful and wisest judge, famously used this question (it means “who benefits?”) to identify the motivation and hence the guilty party in a crime.  It is clear from the above the big UK banks benefit from the status quo versus adding another payment mechanism.  It would be true even with Joe Garner’s recommendations.

If the UK feels, for payments-resilience and innovation reasons, that an Open Banking based electronic payment system is needed then it must regulate on an ongoing basis to make it compulsory for ASPs to provide and improve the Open Banking infrastructure.  If it relies on market forces and banks’ enlightened self interest then the banks, being rational actors, will do everything in their power to undermine such a scheme.

This should not come as a surprise; way back in 2000 the Cruikshank report found that the big UK banks operate a complex monopoly of the UK payment systems. Much has been done to address this but they still exercise a high degree of collective control.

[1] For an explanation of Open Banking consider this HBW article or Open Banking Limited’s website