It’s not every day you hear a business ask us to pay for something. But in our response to the upcoming rollout of commercial Variable Recurring Payments (VRPs), we’re doing just that. To understand why we want banks to charge us, we need to start at the beginning.
In 2016, the Competition and Markets Authority (CMA) introduced a new competition measure, imposed on the UK’s nine largest retail banks. The intention was to encourage competition and innovation by making banks’ data sets, which have traditionally been locked in their systems, available to external fintechs. Enter open banking.
When implemented well, open banking is a win-win-win situation: it gives financial services companies a better understanding of the customer journey, allowing them to create new product offerings to increase their market attractiveness. For businesses, these innovations reduce time spent on manual tasks and lower the cost of payments, improving their bottom line. And for consumers, competitive options from financial services providers offer better ways to spend, borrow and invest.
Chief Product Officer, GoCardless.
Fintechs are taking the wheel
Six years later, open bank payments in Britain have grown exponentially (albeit from a small base). They doubled in the first half of 2023 compared to the first six months of 2022, before reaching a record high of 14.5 million payments in January 2024. These are impressive milestones, but when you consider that over 45 billion payments will have been made in the UK alone in 2022, this is still just a drop in the ocean.
For any technology, it’s a long journey to achieve true mass adoption – and we’ve only just taken the first steps. This is especially true for a technology like open banking, which requires multiple parties to all align and move in the same direction.
The industry recognizes the potential of open banking. In its latest market research, the Payment Systems Regulator (PSR) recognizes that if the UK is to break the card-based duopoly, open banking is the way forward. This echoes what Joe Garner highlighted in his government-commissioned Future of Payments Review last year.
Open banking has the potential to create a cheaper alternative to card schemes while improving the payment journey for payers, but there are still many issues that need to be addressed. One of these is creating the right commercial incentives for everyone in the ecosystem. Banks have previously been criticized for treating open banking as a compliance task rather than a commercial activity – and without these incentives they will continue to do so.
That’s why GoCardless is asking banks to charge us for the upcoming rollout of VRPs.
Make way for VRPs
VRPs are powered by open banking and offer the familiar and trusted payment experience of direct debit, with added speed and security. They will be a game changer: consumers will have more control over their payments, businesses will become more secure, instant settlements and payment costs will be lower.
VRPs were introduced in the UK in 2019 for large-scale or ‘me-to-me’ use cases. This provides an easier way to move money between two accounts owned by one person, such as transferring money from your savings account to pay off a credit card. For consumers, the ability to pay a third party, for example when purchasing products and services, would increase the benefit of VRPs – and that’s where commercial VRPs come into play. The government and regulators committed to the introduction of commercial VRPs last April and we await the kick-off of ‘Phase 1’ later this year.
Despite the value they will bring to businesses and consumers, a PSR consultation suggests that UK banks will have to offer free commercial VRPs in Phase 1. This may sound like great news for Payment Initiation Service Providers (PISPs) like GoCardless. But in the long run it will hinder progress.
Encourage future payments
For commercial VRPs to become a competitor to card payments, all stakeholders involved must be encouraged to invest and innovate. This means that the perception of open banking must change from a compliance obligation to an exciting new business opportunity, increasing the quality and resilience of the APIs that banks provide.
We need to select which banks provide the most relevant APIs. Since the CMA9 group was founded in 2016, neobanks have become more involved in retail banking. Bank coverage should start high and go higher, rather than staying low.
If banks are incentivized to play their role, then the key innovators in the open banking space – PISPs and AISPs like GoCardless – can test the robustness and quality of the newly built APIs. We need all players to commit to Phase 1 if we want to build a stronger Phase 2 and ultimately drive the mass rollout of VRPs. But to drive widespread adoption, merchants must be financially incentivized, which means costs must be lower than current card acceptance fees.
Beyond Phase 1, more clarity is needed on next steps so that the open banking ecosystem can allocate resources accordingly, which will make the path clearer for commercial VRPs.
The rollout of commercial VRPs must be done right to realize their potential and improve the overall payment experience. Incentives to drive in the right direction from the start will create a smoother path for the future. But this means PISPs have to pay. In any case, we are ready for it.
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