How open banking can help the public sector cut costs

Richard Newman, OBL corporate affairs director sets out some of the key opportunities and use cases for open banking payments and data across the public sector.

Open banking is a simple, secure way to help consumers and businesses move and manage their money. Although it has been in use since 2018, the past two years has seen use expand dramatically, and it now counts more than 9.5 million active users in the UK.     

It enables two different types of services: a secure way to make payments (through Payment Initiation Services (PIS)); and the ability to set up secure data connections (via Account Initiation Services (AIS)), securely sharing data from an individual’s or firm’s bank account, such as a balance or transaction history, with FCA authorised or registered providers.

It’s built on the same secure systems used by banks and building societies and uses secure Application Programming Interfaces (APIs) to connect to the user’s bank account.

Regulated providers

Providers are normally regulated by the Financial Conduct Authority (FCA) and must follow strict rules to keep data secure. It’s an increasingly popular way to pay bills or for goods (particularly big-ticket purchases such as a car) or bills (such as tax or utilities), or access personalised financial products and services, such as budgeting or savings apps, and tailored loans. Many people will have already used open banking without realising it. It has proved particularly useful to the UK’s 5.6 million small businesses, many of which use it in tandem with their cloud accounts software.

Connecting their business bank data to their accounts software enables business owners and finance professionals to get a near real-time snapshot of their finances. This can help streamline cash flow, support forecasting, and help credit applications. Open banking also enables organisations of all sizes an alternative way to make and receive account-to-account (A2A) payments – to other businesses or customers – that can be more cost-effective than some card payments.

As payments are usually made in near real-time, it can also speed up settlement times compared to some other payment types, and ease the challenge of late payments, a common problem for many public sector organisations.

In this article, we explore some of the key opportunities and use cases for open banking payments and data across the public sector.

Tax collection

The UK is a world leader in open banking, and His Majesty’s Revenue and Customs (HMRC) was the world’s first tax authority to offer open banking as a way to pay tax. HMRC launched the service back in 2021, in conjunction with fintech firm Ecospend-Trustly.

The benefits are manifold. The ‘Pay By Bank Account’ option uses HMRC validated and pre-populated payment details, enabling self-assessment taxpayers to make payments direct from their bank account. This speeds up receipt of funds compared to cards and significantly reduces the risk of manual error. 

There are virtually no ‘suspense accounts’, where funds are unable to be allocated because of a mismatch in unique payment references, supporting cost and time savings, along with administrative efficiencies.     

Importantly for the public purse, the cost of an open banking payment is less than taking a card payment. It’s now possible to pay more than 40 different types of tax and duty via open banking, including PAYE, corporation tax, and VAT, and it’s now the third most popular way for individuals and businesses to pay their taxes, after bank transfers and Direct Debit. 

In January 2024, HMRC collected £3.5 billion of tax payments via open banking, an increase of 16 per cent from the previous year, and the value of transactions was 38.9 per cent higher.     

HMRC is currently developing a set of payment APIs which will enable taxpayers to make payments from third party platforms such as mobile banking apps. The plan is also to include a summary of agreed future tax liabilities, allowing individuals and businesses to plan for payments.

The government is also exploring how GOV.UK Pay – currently used across the public sector, from the NHS to police forces and the Ministry of Justice – could offer open banking as a payment option, giving people the option to pay for services via their banking app.

Cutting the cost of receiving rental payments

Open banking also has a part to play in supporting rent collection for local authorities, housing associations and educational institutions.

Offering open banking as a payment option enables cost savings on card processing fees, as well as reduced operational expenditure and time spent on administration. As with tax collection, reconciliation rates are improved by linking a payment with a unique identifier, reducing manual errors. Open banking payments can also help tackle rent arrears, a significant problem for local authorities and housing associations. Near real-time payment collections remove the delay in funds clearing, compared with some other payment methods, reducing the risk of arrears. 

By receiving payments in near real-time, organisations can also benefit from improved cashflow. Rent and deposit refunds and rebates can also be repaid quickly and securely via open banking.

Procurement via the Crown Commercial Service

A new service, launched by the Crown Commercial Service (CCS), the department that supports the public sector in delivering commercial value when procuring common goods and services, offers further opportunities for further cost savings.     

Its Open Banking Dynamic Purchasing System (DPS) operates as a ‘vehicle’ for central government and the public sector to source open banking services, helping to reduce the cost of receiving money into public sector organisations.     

By reducing the fees incurred by traditional debit card payments, it’s estimated that the DPS could help achieve savings of 70-80 per cent. The services will also help reduce the volume of fraudulent or in-error payments made throughout the public sector.     

Several firms in the open banking ecosystem have already been accepted on to the DPS, which means they are eligible to bid for AIS and PIS Request for Tenders issued by any UK public sector body that uses it. These include central government departments and public sector bodies, such as local authorities, education institutions, not-for-profit and charitable organisations.     

Firms listed on the DPS so far include Ecospend-Trustly, GoCardless, MoneyHub, NatWest Bank, OneID, and Ordo (the Smarter Request Company).

Speeding up debt advice

Local authorities often work closely with debt charities to refer residents for support and advice in managing their finances. Using open banking data connections to assess an individual’s finances can give debt advisers an up-to-date picture of a client’s finances and help with signposting them to relevant professional advisory services.     

In 2023, Citizen’s Advice Stevenage worked with PayPoint on a pilot project using PayPoint’s Financial Information System (FIS) Customer Support Tool. Clients complete a simple online consent form that enables debt advisers to quickly access a consolidated view of their incoming and outgoing funds within minutes, and provide actionable advice.     

This is far quicker than the equivalent manual assessment, which can be time-consuming and stressful for both clients and advisers. It also enables advisers to provide support faster, reducing the risk of debts increasing or becoming more serious throughout the consultation process.  

The future – open finance and beyond 

It’s clear that open banking has delivered cost savings and operational efficiencies across a wide range of public sector organisations and that there are myriad opportunities to expand these.     

Last autumn, the Chancellor announced a ‘Smart Data Big Bang’, a major expansion of data sharing schemes extending the benefits delivered by open banking data to key l economic sectors. These include energy (utilities and fuel), banking, finance, retail, transport, home buying and telecoms.     

These will deliver competition and innovation in these sectors, which in turn, will deliver further economic growth and cost savings to consumers, businesses, and, of course, the public sector. 

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