Bank Regulation

UK Financial Authority On The COVID-19 Pandemic's Impact On Open Banking

The pandemic has accelerated consumer preferences for contactless payments, leaving merchants scrambling to process higher volumes while remaining compliant with rules for strong customer authentication (SCA). In the latest Merchants Guide To Navigating Global Payment Regulations, Maha El Dimachki, head of payments for the U.K. Financial Conduct Authority, discusses how new open banking strategies are being drafted to help merchants adapt to these changing payment realities.

The COVID-19 pandemic may not have completely rocked open banking initiatives worldwide, but it certainly rattled their foundations. Both merchants and consumers in regions such as the EU and the U.S. were confronted with a financial ecosystem where digital, touch-free forms of payment skyrocketed in popularity. Merchants facilitating both in-store and online payments needed to quickly adapt to new payment behaviors, even in countries like the U.K., where financial trends have been inching away from traditional payment methods like cash and checks toward cashless transactions for several years.

The pandemic’s onset had an obvious impact on this continued shift, but it also brought the regulations that govern these digital transactions further into the spotlight, said Maha El Dimachki, head of payments for the U.K. Financial Conduct Authority (FCA), in a recent interview with PYMNTS. Both merchants that need to process contactless or online transactions quickly and the FIs responsible for their security found themselves reexamining the rules attached to these transactions.

“The social distancing and lockdown rules have accelerated existing trends toward digital, in particular electronic payments,” El Dimachki said. “It remains to be seen to what extent that acceleration will persist as social distancing and lockdown rules are relaxed, although — given the levels of decline of cash and increase of electronic payments — we think it is unlikely to return to pre-COVID-19 levels. It is also a situation that has seen the importance of a strong, resilient payments infrastructure and landscape working well for the economy in a seamless way.”

Creating this infrastructure is essential to ensure open banking can continue to progress. The pandemic has also shone a light on how SMBs are perceiving the rules already in place — notably SCA. Examining this perception and what it means for the rule’s future application is therefore essential to open banking’s future.

Helping SMBs Navigate COVID-19 

The pandemic has certainly affected open banking within the U.K., but commitment to this initiative and to creating online support for financial tools remains strong, El Dimachki said. The use of online payments also accelerated within the last few months due to the closure of brick-and-mortar locations, and such transactions are being handled on open banking platforms.

“The development of open banking has continued … during the pandemic, although the speed of development may have slowed a little,” she said. “That being said, we have also seen open banking being used to help consumers and businesses during the crisis, for instance, to facilitate evidencing revenues for self-employed [individuals]. In addition, a number of these firms have lifted fees to help their customers or facilitated the use of open banking, such as payment initiation, for making donations to charities.”

The continued faith in open banking makes it clear that the view of banks, regulators and presumably merchants is one in which digital payments take a more starring role in the U.K.’s financial space. This includes methods such as contactless payments in-store, which were already popular prior to the pandemic but experienced a rush in adoption as health concerns over cash, checks and even plastic card payments grew. Helping SMBs process higher volumes of contactless payments is therefore a top priority for regulators, El Dimachki explained.

“Last March, we welcomed the increase of the industry threshold for contactless payments from £30 to £45,” El Dimachki said. “It is important to note that reduction in financial crime, including all types of fraud, is a key priority for us at the FCA, and we will monitor the development of contactless cards as well as new innovations for the benefit [of] consumers.”

This also means that processing such payments compliantly is more critical than ever for merchants that wish to remain active participants in the country’s economy. This comes with challenges, however, such as SCA compliance. SCA requires SMBs to authenticate the identities of consumers who make online or contactless purchases above certain purchase limits to assure these transactions’ security — authentication that can potentially cause friction for consumers and lead to purchase abandonment.

Examining the SCA question

The COVID-19 pandemic has brought up questions surrounding SCA that harken back to its first days in 2019, when uncertainty on how it would affect merchants’ ability to accept payments was widespread. This renewed uncertainty saw regulators such as the European Banking Authority (EBA) raise that limit to €50 ($56 USD). The FCA itself responded by expanding its deadline for SCA compliance. Firms in the U.K. now have until Sept. 14, 2021 to fully comply with the regulation, El Dimachki clarified, as opposed to the Dec. 31, 2020, deadline that EU merchants will need to meet.

“The FCA has not made any changes to existing rules,” she said. “However, the FCA has provided flexibility in some areas. … Considering the challenges faced by the industry, and, in particular, [those faced] by merchants, we have also provided a further six months for the industry to implement SCA for online shopping card payments.”

This will hopefully provide SMBs with the time they need to comply with the rule, yet the decision’s long-term impact could prove most interesting for open banking. It is now clear that the pandemic has had a significant effect on contactless payments’ growth in the U.K., but the extended deadline also shows that SMBs’ issues with SCA are still impeding its expansion. Such a rule must be in place to ensure consumers can securely transact online, and the regulatory standards surrounding these payments are only more critical as online payment volumes expand.

“We expect firms that operate and innovate in this space to understand the importance of meeting their obligations for a resilient financial system,” El Dimachki said. “We expect firms to safeguard customer funds and deliver high-quality, fair-value products and services to consumers. We will therefore act swiftly where firms fail to meet safeguarding and other regulatory requirements.”

Finding a payments middle ground — particularly concerning SCA — that can address the need for security without causing consumers to abandon online or contactless purchases is therefore paramount. This is especially the case as the U.K. leans further into a touch-free environment, with SMBs needing to adapt if they wish to retain or grow their customer bases. Regulators like the FCA will need to work closely with SMBs to ensure future open banking regulations or shifts can respond to these changing needs with the necessary accuracy.



The September 2020 Leveraging The Digital Banking Shift Study, PYMNTS examines consumers’ growing use of online and mobile tools to open and manage accounts as well as the factors that are paramount in building and maintaining trust in the current economic environment. The report is based on a survey of nearly 2,200 account-holding U.S. consumers.