Home Payments Open goal for fintech: governments capitalise on open banking for payments

Open goal for fintech: governments capitalise on open banking for payments

Global Government Fintech Lab 2023 panel session three: Rachel McLaren, Nazim Gasimzade and Siobhan Benita (moderator)


Governments’ use of open banking to make and receive payments was the main topic discussed by UK and Azerbaijani representatives during a session on ‘Government Payments’, Ian Hall writes

Public authorities across the world are increasingly embedding technology-based solutions to transform the way they process and make payments.

This is a trend both in respect of improving internal systems, for example breaking down paper-wedded silos; and improving interactions with citizens, for example overhauling public authorities’ websites and exploring the potential of open banking.

The Global Government Fintech Lab 2023’s ‘Government Payments’ session featured perspectives from Rachel McLaren, head of open banking payments at the UK’s HM Revenue & Customs (HMRC), and Nazim Gasimzade, director of Azerbaijan’s State Treasury Agency.

McLaren provided a window into HMRC’s procurement of a fintech solution to enable the department to receive payments via open banking – a government use case for open banking that apparently makes the UK department a global pioneer.

Gasimzade discussed fintech initiatives in Azerbaijan, focusing his opening remarks on how authorities are using open banking to improve the efficiency of outbound payments.

OPEN BANKING: EXPLAINED Open banking, and its sibling concept open finance, are being encouraged by governments worldwide, in different ways and at different speeds, as a means of boosting innovation and competition in financial services. It is a reference to users sharing their data with third-parties (for example, fintech companies). ‘Open’ refers to open application programming interfaces (APIs): software intermediaries that allow two machines to interact. ‘Open APIs’ are APIs made publicly available to software developers. Global Government Fintech’s focus is on its potential to improve public service delivery.

Rachel McLaren

HMRC’s open banking journey

McLaren began by describing HMRC’s primary objective when embedding open banking within its operations as being to simplify tax payments for customers (individuals and businesses).

The input of wrong reference numbers (for example by mis-typing) – something that is technically impossible if taxpayers, when paying their tax online, select the option to pay by open banking – causes “issues” for both taxpayers and HMRC.

“The easier it is for customers to pay us, they’re going to be more compliant,” McLaren said, explaining how the open banking button (which is labelled ‘pay by bank account’) ‘pre-populates’ the relevant fields with the correct information.

“When we introduced it [open banking] we did it quite slowly because we were the first ones to do this for government,” she explained, adding that the option for tax to be paid by open banking was introduced without advertising or marketing activity (and also that the Covid-19 pandemic accelerated interest). It was also important, she said, that the webpages visited (by customers paying by open banking) had the look and feel of the main HMRC site to ensure customers “felt safe”, and also HMRC that could also use those pages for related “messaging”.

HMRC created global government fintech history on 24 March 2021 when it introduced its ‘Pay by bank account’ option (button) for people making online self-assessment tax returns  – believed to be the first time any government in the world had embedded open banking within its own operations. Global Government Fintech reported earlier this year that HMRC had completed its rollout of open banking across all tax payment types capable of supporting it.

McLaren told the Lab audience that HMRC has now received more than 5.5 million tax payments – worth a total of about £13.5 billion (almost $17bn) – through open banking since the department introduced the option (Global Government Fintech reported figures of 4.5 million tax payments worth about £12 billion in February 2023).

She went on to describe open banking-related developments that have been implemented by the department, including the enabling of open banking-facilitated payments through HMRC’s mobile-phone app and the addition of QR (quick response) codes to “some of our more secure [customer] journeys” to enable customers to pay taxes by “using biometrics and then [further] authentication” (through smart-phones).

“We’re not stopping there,” she continued, saying that HMRC wants to “keep building on open banking and the opportunities that open banking provides.”

The department is planning to introduce future-dated payment “shortly”; is “keeping an eye on” variable recurring payments” (VRPs); and wants to make greater use of technology to interact with customers who pay HMRC by visiting a bank branch in person (“we [HMRC] don’t have that interaction with them when they do that”, she said).

RELATED ARTICLE UK fintech’s centre forward: a fireside chat with Ezechi Britton – the chief executive of the (UK) Centre for Finance, Innovation and Technology (CFIT) took part in a fireside chat at the Global Government Fintech Lab 2023 during which the HMRC example was mentioned as an example of how government(s) can help their fintech sectors in the most direct way: investing in/procuring fintech solutions

Nazim Gasimzade

Azerbaijan: open banking for court refunds

Gasimzade kicked off by describing authorities in Azerbaijan, a former Soviet republic with a population of just over 10 million people, as “trying to catch up with everything that fintech offers” and “striving to provide as many digital solutions as possible”.

He set out how state authorities have sought to create a strong institutional environment for digital payments and presented four ‘pillars’ of an open banking system (as per an Azerbaijan open banking ‘roadmap’ developed in 2021): ensuring effective management; creating a legislative framework; creating an ‘interoperable technological environment’; and accelerating implementation.

The State Treasury Agency (which operates under the Ministry of Finance) has sought to use the “tools and opportunities” created by fintech, in particular open banking. The agency had mapped out “processes that require a high [volume] of manual [work] versus the risk of fraudulent transactions”, as well as mapping its “pain points against what open banking offers”.

In contrast to the UK HMRC example, which is about payments to government, Gasimzade said Azerbaijan was using open banking for payments from government (to citizens) in relation to ‘court fees’ (“it is no secret that the government is quick to collect money and fairly slow in refunding money – that’s, I guess, true for many governments if not all of them,” he joked). If the court rules that money must be returned to a citizen, authorities are able to use the citizen’s national ID number (“very similar to a social security number”), “send a request to the open banking system, get back their [bank] account number and refund the money”, he explained.

“It would take us, on average, about 16 days [to make a payment to a citizen] before we had the system because we had to send letters, inquire about their account number, get the account number right, put it into our system and pay the money and refund them. Now the whole process gets done in under three days, which is significant for us,” he said.

He also highlighted the launch of an instant payments system (introduced by the central bank in 2020). This has meant that the closure of banks on weekday evenings and during weekends was no longer an impediment to government payments (both payments in and – since May 2022 – payments out), and that the system “offers reduced transaction fees as well”.

RELATED READING Global Government Fintech’s Open Banking/Open Finance topic section

‘We talked to a lot of fintechs’

To kick off the Q&A, McLaren was asked about HMRC’s internal thinking that led to the department’s procurement of the open banking software solution from a fintech company (Ecospend, which has since been acquired by Sweden-headquartered Trustly).

“We did a lot of homework before we actually went through the procurement process,” McLaren said. “We really didn’t know what we needed at the time. So, we talked to a lot of the fintechs for them to tell us what they could do, what we needed, what we needed to look for,” she explained.

“Then we just went through our normal legal procurement process, which was to tender through OJEU [the Official Journey of the European Union – EU rules on public procurement have since ceased to apply in the UK after its departure from the bloc], through the RFP [request-for-proposal] process, and we had quite a few fintechs apply,” she said. “We talked to them all, and from our specifications, we decided which ones fitted the bill – that’s how we ended up with Ecospend.”

The company’s contract runs to 2024. HMRC is “about to start looking at the new contract,” McLaren said.

UK’s NS&I follows HMRC’s lead in embracing open banking tech – an article (2 June 2023) on NS&I (National Savings & Investments), a UK state-owned savings bank, also engaging Ecospend to enable the use of open banking to enable people to make payments (similarly, this is also via a ‘pay by bank account’ option when making online payments)

Open banking ‘becoming more accepted’

McLaren was also asked about the extent to which promoting ‘open banking’ was challenging given that many people will, quite understandably, not understand what this means (and indeed ‘open’ is precisely the opposite of how most people would view their personal banking arrangements): it is precisely for this reason that the online button is labelled ‘pay by bank account’ as opposed to ‘pay by open banking’.

“Yes, we did have an awful lot of discussions, we did have a lot of discussions with customers as well. Definitely there was nervousness around that term,” McLaren responded, referring to an apparent perception that HMRC staff would be using open banking to pry into customers’ bank accounts.

“But I think open banking has developed so much over the past couple of years and become so much more ‘out there’,” she continued. “People do seem to be starting to understand it. So, although we don’t use it in our language [with] our customers, it is still a terminology that we use for the whole of the open banking, because it is becoming more well known and more of an accepted term.”

McLaren was asked about the extent to which the UK public sector more broadly was interested in open banking.

“I know that the other government departments involved in disbursements are sort of looking at open banking – where they are on their progress, I’m not sure,” she said. “They’ve talked to us, and I know some of the local departments are looking at their payment strategies now – and maybe looking at writing open banking into their payment strategies,” she continued. “I know that some are a lot closer to actually providing open banking payments for themselves (for their departments) than others – I would say ‘watch this space’.”

RELATED ARTICLE UK government backs open banking with £100m-per-year eight-year supplier plan – an article published on 14 June 2023 (about four weeks after the Lab) on plans by the Crown Commercial Service to create a ‘dynamic purchasing system’ for open banking services for use across central government and the public sector

Government payments and CBDCs

The session concluded with a question for Gasimzade about whether a central bank digital currency (CBDC) could be introduced in Azerbaijan and, if so, how that could be used for government payments.

Gasimzade described himself as “one of the biggest proponents” of CBDC.

He could envisage a particular benefit to Azerbaijan in the context of payments sent abroad through a programme in the Ministry of Finance (“under the umbrella of the Ministry of Education”) that sees students leave the country for education all over the world (the ministry covers living and tuition fees).

“All of this exchanging from our national currency to US dollar back to the currency of the country where they [students] are: we’re all obviously losing money every step of the way. Digital currency would solve this problem in a blink of an eye,” he said.

In addition, he pointed out that settlement in digital currencies would “happen pretty much instantly” and that “the cost reduction can be fairly significant… so, there are a lot of benefits to that”.

“Certainly, this is a hot topic,” he concluded. “It’s being discussed in Azerbaijan. But how soon it will get done, will it get done? Those are the things that I have no definitive answer to right now.”


Watch the session in full (it runs from about 03:07:20 to 03:40:50 if clicking on the full-day event video) =>


Overcoming obstacles: governments simplify payments with fintech – a write-up of the ‘How can fintech help government payments?’ session at the Global Government Fintech Lab 2022