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Earlier in August, the Payment Systems Regulator (PSR) published a response to its December call for views on variable recurring payments (VRPs) and their expansion in the UK.
The call for views set out initial proposals on how the PSR could support the Phase 1 expansion of VRPs to regulated financial services, regulated utilities sectors, and local and central government.
The PSR’s latest publication summarises stakeholder feedback on the expansion of VRPs, revealing support for better coordination, but concerns about the need for a multilateral agreement (MLA) and, within that, a central price.
Although stakeholders supported some level of mandated participation, they advised not focusing solely on the CMA9, the group of banks that were compelled to create open source application programming interfaces (APIs) in the initial rollout of open banking in the UK due to their significant presence in the market.
The PSR has said that, going forward, it will explore different pricing methods and consider alternative interventions such as price transparency or reporting requirements.
The regulator also plans to share updated proposals and a draft cost-benefit analysis for stakeholder feedback in the autumn.
The bigger picture
The UK’s PSR has had its sights on VRPs for some time now.
Enabled through open banking, the PSR says that VRPs will allow customers to safely set up recurring payments of varying amounts (for household bills, for example) with greater visibility and control compared to existing payment methods, such as direct debit.
Ultimately, the PSR is trying to use VRPs as a way to improve competition and drive better value and outcomes for consumers.
It is also not surprising that the PSR, a competition regulator, wants to see VRPs take off in the UK, as this would lower the barriers to entry to fintech companies and challengers, in the same way that the original CMA Order and the revised Payment Services Directive (PSD2) were supposed to.
VRPs could, for example, empower fintech companies and smaller businesses to offer innovative payment solutions without requiring complex and costly infrastructure, fostering a more competitive market.
This, in turn, could make way for the development of new business models such as usage-based billing and flexible subscriptions, leading to greater consumer choice and improved services.
Why should you care?
The impact of VRPs will differ across the payments ecosystem, and there are reasons to care both good and bad.
Payment initiation service providers (PISPs) could, for example, be big winners in light of VRPs having a successful mass adoption, as VRPs are essentially a form of payment initiation.
PISPs facilitate direct payments from a customer’s bank account to a merchant or service provider, bypassing intermediaries such as card networks, and this positions them at the core of VRP transactions.
The adoption of VRPs could spawn new revenue streams for PISPs by enabling them to offer flexible, automated payment solutions that can cater to various transaction types, including subscription payments and utility bills with variable amounts.
PISPs and others should begin to think about how they can build partnerships with banks and merchants alike to increase opportunities for VRP adoption.
What is also necessary is consumer education, as although the PSR and others such as UK standard setter Open Banking Limited are pushing for VRPs to be a genuine choice in the payments ecosystem, often consumers in the UK have been shown to stay with their incumbents, as is evident in cases such as account switching, which has struggled to take off despite incentives.
However, at the same time, more widespread adoption of VRPs is something that card schemes and incumbent banks should take seriously, as this threatens not only their status quo but revenue streams as well.
If VRPs became a serious disrupter, they would enable direct payments from bank accounts to merchants, bypassing the need for card networks. There has been some evidence of successful use cases for account-to-account payment methods like this already. For example, HM Revenue & Customs has rolled out a Pay By Bank Account option for tax payments, which has gone down well with users.
A successful adoption of VRPs could significantly dent the transaction volume handled by card schemes and could lead to a decline in interchange fees and other transaction-based revenues that are the thrust of their business models.
For incumbent banks, PISPs initiating payments directly from customers' bank accounts could also reduce their control over the payment process. This could weaken their role as the primary facilitators of recurring transactions, and with more payments managed by third parties, banks risk losing direct interactions with customers, limiting opportunities for cross-selling and upselling of other financial products.
As with the card schemes, traditional recurring payments, such as direct debits, also generate significant fee income for banks. VRPs could erode this revenue stream by delivering alternatives that bypass banks' fee structures. Incumbent banks may also face increased pressure to lower fees or offer more competitive pricing for their payment services to remain competitive in the face of potentially more cost-effective VRP solutions.
Card schemes and banks could, however, lean into this competition by leveraging their incumbency, whether that is by using their data to provide fine-tuned financial management tools to their customers, or by investing in and developing technologies that are compatible with VRPs to stay ahead of the curve.
