Opportunity for payments revolution for the utilities sector

Unprecedented market turmoil has led to steep rises in direct debits across the energy sector. Yet some retailers have been heavily criticised by Ofgem after a review showed weaknesses in the way they were charging their customers direct debits. Marion King, chair and trustee of Open Banking Limited, believes there is a “payments revolution” waiting to happen in the utilities sector. Writing for Utility Week, King outlines the benefits of utilities adopting open banking into more of their practices.

Last year, the energy regulator Ofgem issued a warning to five energy companies calling for them to take ‘immediate and urgent action’ following a review showing weaknesses in the way they were charging customers Direct Debits. The report highlighted failings in processes, weak governance and controls, and an overall lack of a structured approach to setting these payments. While we know gas prices surged following the war in Ukraine, around 500,000 households experienced an increase in Direct Debit levels by more than 100%.

While the report did not accuse the firms involved of profiteering, it said there was evidence that many energy companies used customer cash as working capital, and in-credit balances represent a significant portion of company assets. Of greater concern was the fact that these increases were leading many people into debt. Many were also frustrated that the process of withdrawing in-credit balances was less than straightforward.

As someone who has spent much of their career in the payments industry, it’s not often that stories about the sector or Direct Debits become headline news. However, from my point of view, it demonstrated to me the shortcomings of payments as a whole. Not just in energy or utilities, but for many economic sectors.

In many ways, payments are a hygiene factor for all organisations. No one really cares how they work, providing they go through on time. Yet, there are interesting changes that are emerging that will transform the way we complete payments. They are being adopted by Government and other sectors and are also being trialled in the energy sector where they could have a major impact.

Open banking emerged in 2016 following a competition review by the Competition and Markets Authority (CMA) into retail banking. It observed several issues with the lack of competition in the personal current account and small business current account space and set out a blueprint for the nine biggest current account providers (called the CMA9) to follow.

One of the recommendations was the creation of the Open Banking Implementation Entity (OBIE) to build the infrastructure, set the rules and monitor the performance of the CMA9 banks when implementing open banking. In its simplest form, open banking allows a customer to safely and securely share data held by their current account provider with a third-party provider. For example, a growing number of banks and mortgage brokers now use open banking connections to validate a borrower’s income, eliminating the need to provide several years of bank statements. The process can now take minutes instead of days.

Yet, open banking is not just limited to data sharing. It’s also applicable to payment initiation too. The biggest adopter of open banking to date has been the Government – HM Revenue and Customs allows users to pay more than 40 different types of tax via open banking.

This is where it gets interesting. While open banking was originally limited to a few financial products, the government’s ambition is to extend this to more products – and more sectors – and is known as ‘Smart Data’. In essence, if you think about all the data held by organisations, it ultimately belongs to the end user. While open banking focuses on selected financial services, Smart Data applies more widely to customer data held by other sectors.

The Data Protection and Digital Information Bill contains the implementing provisions for Smart Data. I hope this will complete its progress through Parliament and become law as soon as possible, allowing us to begin the Smart Data journey in earnest.

There is now growing interest in the utilities sector and some strong examples of where it is being used effectively. United Utilities highlighted last year how open banking is being used to speed up the process that helps customers move onto its affordability tariff. A manual process that once took three weeks to complete can now be done in minutes. There are other similar projects taking place at the likes of Anglian Water and EON.

This takes us back to the humble Direct Debit – an efficient payment method, but one which is part of a legacy payment scheme. It’s open-ended, there’s a three-day payment cycle and it gives the customer little control.

The next phase of open banking will introduce smart, customer-controlled payments known as Variable Recurring Payments (VRPs) and these could put energy companies back on the right side of the regulator, as well as help hundreds of thousands of customers.

These ‘smart payments’ can be for specific amounts based on the energy, water or data customers have used. The key benefit is that the customer gets to set specific limits upfront which define the maximum amount to be taken over a given time period (for example, per year) and the end date of the permission. Customers can also check and change the exact value of payments dynamically (within the agreed limits), right up to the point of irrevocable payment. This flexible way to pay both benefits the customer and saves the provider money on transaction fees.

It’s vital that the Data Bill becomes law as soon as possible so that we can push ahead with bringing the benefits of open banking and Smart Data beyond finance and into other sectors that affect the daily lives of consumers and businesses.