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There is optimism among payments players that this year will deliver innovation for the open banking ecosystem, with variable recurring payments (VRPs) at the top of the list.
In VIXIO’s soon to be published 2023 report, "Surviving and Thriving In Challenging Times", open banking was rated the number one business opportunity among senior compliance professionals at payments firms.
“The key themes that I see coming up will include a shift in focus from account information to payments,” said Giles Rowlinson, senior payments manager at Flywire. “We will see a ramping up, both in the UK and EU.”
According to Rowlinson, European banks are being driven towards real-time payments and both sides are really keen to find competition for cards. “They see payment initiation as a good route to that.”
But it is fair to say, in the EU at least, that in the five years since the revised Payment Services Directive (PSD2) has entered into force across all member states, success has been varied.
In the UK too, which has often been seen as a leader for open banking, there are concerns about just how much has been achieved.
"The CMA's [Competition and Markets Authority] technical roadmap is at an end, but that just means the technical implementation is done, not that open banking is done,” said Andrei Cazacu, EU policy lead at TrueLayer.
There is a lot more to be done to improve the infrastructure and to create new services, he said. “The reaction from industry shows that it isn't the end of the road."
There is a firm belief among market leaders that this year will deliver more innovation and more use cases for open banking.
"Open banking continues to progress, and we're starting to see payments increasing in this space,” said Kush Shah, senior product manager at Bottomline Technologies.
Over the course of the year, market adoption and pressing use cases will be a key theme. “Increasing consumer flexibility and empowering consumers with financial control is where 2023 will go,” he continued.
“I think 2023 will be a very exciting year,” said Todd Clyde, chief executive of Token.
Use cases
"Last year, we saw good growth and consumer adoption. This trend is expected to continue,” said Jens Olsson, a Swedish fintech advisor. “Open banking and account-based-payments provides a level of efficiency that is reflected in the cost of the payments vis-a-vis other payment methods.”
“The era of cards is ending. Over the next year, we will see more businesses and consumers adopt the new forms of payments unlocked by open banking,” speculated Helen Child, founder of Open Banking Excellence.
Child touted Pay-by-Bank as one of these options.
In 2021, for example, HM Revenue & Customs introduced a Pay-by-Bank option for self-assessment taxpayers.
Just one year later, it had processed more than 1m payments worth more than £3bn, and meanwhile an estimated one in 20 tax payments to HMRC requires intervention due to money being sent to the wrong account or other errors.
“Since open banking has been introduced, this problem has not just been mitigated but solved entirely,” said Child. “With Pay-by-Bank, there is no chance of taxpayers typing in the wrong numbers and making other simple mistakes.”
Olsson predicted that 2023 will be a pivotal year for open banking. “We will see if open banking based services can be distributed in a challenging macro context, such as by leveraging cost-efficient and modern payments that entails lower cost for merchants.
“Many companies are looking into keeping the levels of profit margin during 2023,” he continued. “For companies within e-commerce, having a cost efficient and consumer friendly payment method is instrumental as it will reduce cost while improving the return rate of consumers, ultimately increasing revenue and impacting the profit margin.”
Olsson suggested that open banking-based payments have an important role to play here. “For many companies, these payment methods can be a good solution for addressing profit margin, all else equal, instead of increasing the prices for goods which we saw in 2022.
“Open banking can thus be an instrumental solution for staying competitive as they can contribute to less price increase for an e-commerce merchant vis-a-vis their competitors.”
Variable recurring payments
One theme that market participants are certainly banking on is the success of VRPs.
“If financial institutions and fintechs work together, we have a tremendous opportunity to create a balanced, practical approach that will deliver on the promise for VRP to enhance consumers’ and businesses’ financial lives,” said Clyde. “Get it right, and VRP will ignite explosive growth for open banking-enabled account-to-account (A2A) payments.”
Rowlinson, meanwhile, suggested that VRP could be a “disruptive”.
“Although open banking payments have increased dramatically, they are still limited by the single nature of them as payers must authenticate the payment every single time,” he said. As VRP use cases come into focus, there is the potential to take on traditional transfer methods like direct debit."
Last year, the Competition and Markets Authority (CMA) legally defined VRPs and, at the end of July 2022, the CMA9 (Britain’s nine biggest banks) were mandated to introduce VRP for sweeping — the automated movement of money between accounts.
“VRP is another form of payment which will become more popular in 2023,” said Child.
For example, NatWest is already leading the way on non-sweeping VRPs, including its use to enable charity donations and rental payments. “We will see more and more use cases in 2023 as we move away from cards and towards the future of payments.”
"We will see more use cases for VRP, with billing and premium methods taking force this year,” said Shah. “It is about bringing these to market so consumers and businesses benefit."
What could be a contentious issue is that the use cases for VRPs will come at a premium.
“VRP is the first chance for banks to charge for open banking, and good or bad things could happen here,” said Rowlinson. “The potential benefit here is banks delivering a useful service with their full focus, but critical to its uptake will be where the transaction price is set.”
Banks are well positioned to be able to offer an innovative way to allow their customers to make seamless payments at a lower cost than a traditional card payment, he continued. “I expect if they find a way to strike that balance we'll see uptake by consumers.”
VIXIO’s "Surviving and Thriving In Challenging Times" report will be published on February 14.
