Change, as the adage goes, happens in two parts: first gradually, then suddenly. We can see this playing out in Open Banking’s sudden but rapid growth. More than 5 million people in the UK now use Open Banking-based services or platforms to move and manage their money, with half a million more being added every six months. Over 3.5 million payments using Open Banking were made in January 2022, compared with 5 million… in all of 2020.
It wasn’t always so. Early efforts to raise awareness and use of Open Banking lacked regulatory drivers. Arguably, customers weren’t ready either. It took the Second Payment Services Directive (PSD2) to catalyse providers and the wider industry. And while the vision “Make payments safer, better and increase consumer protection” seemed straightforward, The Competition and Markets Authority (CMA) and The Open Banking Implementation Entity (OBIE) saw Open Banking as an opportunity to exceed EU regulations (and increase competition and innovation).
Solving the recurring authentication conundrum
Readers will be familiar with Open Banking payment initiation; with an entirely new payment flow that operates separately from the traditional intermediaries like card schemes and acquirers and with money moving from account to account. Today, the most common Open Banking payments are Single Immediate Payments (SIPs) and these payments do exactly what it says on the tin.
Successful payments: the number of successful payment initiations made by third party providers using account providers’ (ASPSPs) Open Banking API
Source: Open Banking Implementation Entity.
Notes on the data: Successful payment initiations are based on data submitted by account providers (ASPSPs) to Open Banking since July 2020: July 2020 - 9 providers, 19 brands; September 2021 - 9 providers, 18 brands.
Whilst Open Banking allows payments to be initiated by third parties, customer consent is required for each payment. It’s like having a Direct Debit you have to authorise whenever it’s due. This is a feature of Strong Customer Authentication (SCA) – payers must authenticate and confirm every Open Banking payment.
But tackling fraud need not come at the cost of efficiency. The solution: an enhancement that allows consumers to approve recurring payments with a single, one-off consent that securely authorises third parties to initiate payments from their bank account on an ongoing basis. That enhancement is called Variable Recurring Payments (VRP). Mimicking the functionality of Direct Debits could catalyse the same kind of tipping point contactless payments enjoyed when TfL switched on contactless acceptance, accelerating Open Banking payments mass adoption.
What are Variable Recurring Payments?
There are the two main applications of VRPs:
Sweeping VRPs: the automatic transfer of money between accounts held in the same name. Users would set the conditions i.e., “if current account balance at Bank A falls to £100, transfer £500 from Bank B”. The Competition and Markets Authority (CMA) has mandated that the 9 banks under the CMA Order implement VRPs for sweeping and see the ability to move money between accounts to earn a higher rate of interest, or access cheaper credit as essential enablers of smarter finance. And as they could protect consumers from unnecessary overdraft fees, regulators expect the transfers to be free.
Commercial VRPs: similar to a Direct Debit or card-on-file payments, merchants authorise third-party Payment Initiation Service Providers (PISP) to initiate payments from their customers’ accounts, enabling them to deliver a seamless, embedded payment experience – for example, via wallets that use VRPs to pay directly from bank accounts
VRPs could help unlock significant value for consumers and small and medium-sized businesses (SME) in the form of:
Lower overdraft costs: 20 million consumers and 1 million SMEs could save up to £600 million a year
Better interest rates: up to 40 million consumers and 6 million SMEs could benefit up to £1,200 million each year
Increase in financial resilience: up to 11 million consumers could start a saving habit.
VRPs offer the potential to transform payments using familiar payment rails with safe and simple authentication technology. They provide merchants with a flexible alternative to Direct Debits or cards, offer lower fees, no chargebacks, immediate settlement, reduced risk of fraud and enhanced control for consumers. This could potentially see VRPs used for several types of recurring payments i.e., household bills, subscriptions, or lodged/card on file payments. Though not a new concept, VRPs could be seen as the missing part of Open Banking.
Taking Open Banking to the next level
Whilst the sweeping element has been mandated, other elements are over and above the regulatory ask. But that’s where opportunities are to be found; this was highlighted last year when NatWest and TrueLayer made the first Open Banking VRP payment, demonstrating the value of industry collaboration – so crucial if Open Banking is going to fulfil its potential.
Open Banking payments are already changing the way consumers and businesses pay and get paid, and as experience shows, merchants that get the user experience right will see reduced cart abandonment and higher sales.
We now need to test the underlying APIs to ensure they deliver on their promise for consumers; the core technology and regulatory building blocks are now in place we are now on a journey to make Open Banking become … well, banking.
Lee McNabb, Head of Payments Strategy and Research