It's not every day you hear a company ask for money for something. But in our response to the upcoming launch of commercial variable recurring payments (VRP), we're doing exactly that. To understand why we want banks to charge us, we need to start from the beginning.
In 2016, the Competition and Markets Authority (CMA) introduced a new competition remedy imposed on the UK's nine largest retail banks. The intention was to encourage competition and innovation by making banks' data sets, historically kept locked in their systems, available to third-party fintechs. Enter open banking.
Implemented well, open banking is a win-win: it gives financial services providers a better understanding of the customer journey, allowing them to create new product offerings to increase their market appeal. For businesses, these innovations reduce time spent on manual tasks and reduce the cost of payments, improving their bottom line. And for consumers, competitive options from financial service providers present better ways to spend, borrow and invest.
Product Director, GoCardless.
Fintechs take control
Six years on, open banking payments in the UK have grown exponentially (albeit from a small base), doubling in the first half of 2023 compared to the first six months of 2022, before reaching a record 14. 5 million payments by January 2024. These are impressive milestones, but when you consider that more than 45 billion payments were made in the UK in 2022 alone, this is still just a drop in the bucket.
For any technology, it's a long journey to truly mass adoption, and we've only just taken the first steps. This is especially true for a technology like open banking that requires multiple parties to align and move in the same direction.
The industry recognizes the potential of open banking. In its latest market analysis, the Payment Systems Regulator (PSR) recognizes that if the UK wants 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 lower-cost alternative to card schemes while improving the payment process for payers, but there are still many issues to be addressed. One of them is to create the right business incentives for all members of 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 VRP launch.
Make way for VRPs
VRPs are powered by open banking, delivering the familiar and trusted payment experience of direct debit, with greater speed and security. They are expected to be game-changers: consumers will have more control over their payments, businesses will be secure, instant settlements and payment fees will be lower.
VRPs were introduced in the UK in 2019 for widespread or “person-to-person” use cases. This provides an easier way to transfer money between two accounts owned by one person, such as transferring money from your savings account to pay off a credit card. For consumers, being able to pay a third party, for example, when purchasing products and services, would increase the benefit of VRPs, and that is where commercial VRPs come into play. The Government and regulators committed to introducing commercial VRPs last April and we are looking forward to the start of 'Phase 1' later this year.
Despite the value they will bring to businesses and consumers, a consultation issued by the PSR suggests that UK banks will have to provide commercial VRPs for free in Phase 1. This may seem like great news for service providers Payment Initiation Service (PISP) like GoCardless. But in the long run, it will hinder progress.
Driving future payments
For commercial VRPs to become competitors to card payments, all stakeholders involved must be incentivized to invest and innovate. This means changing the perception of open banking from a compliance obligation to an exciting new business opportunity, increasing the quality and resilience of the APIs banks offer.
We need to select which banks will provide the most relevant APIs. Since the CMA9 group was created in 2016, neobanks have become more involved in retail banking. Bank coverage should start high and increase, rather than remain low.
If banks are incentivized to play their role, leading innovators in the open banking space (PISPs and AISPs like GoCardless) can test the robustness and quality of newly created APIs. We need all stakeholders to commit to Phase 1 if we want to build a stronger Phase 2 and ultimately drive mass implementation of VRPs. But to encourage widespread adoption, merchants must be given financial incentives, meaning fees must be lower than current card acceptance costs.
Beyond Phase 1, more clarity is needed on next steps so that the open banking ecosystem can allocate resources accordingly, which will clear the path for commercial VRPs.
Implementation of merchant VRPs must be done correctly to realize their potential and improve the overall payment experience. Incentives to drive in the right direction from the beginning will create a smoother path for the future. But this means making PISPs pay. We, for example, are ready.
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