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The UK regulators’ Joint Regulatory Oversight Committee (JROC) has unveiled five high-level principles for banks and registered third parties to follow when agreeing a premium application programming interface (API) commercial model.
A new paper prepared by the JROC outlines the characteristics of a safe, sustainable commercial model for premium APIs.
The JROC, which was established by the Financial Conduct Authority (FCA), Payment Systems Regulator (PSR) and Competition and Markets Authority, believes that premium APIs will make way for new open banking products and services to be offered in the UK.
These include, for example, variable recurring payments (VRPs), which JROC believes will provide a range of benefits for both businesses and consumers, such as potential cost savings, greater flexibility and control over payments.
The new paper offers guidance that JROC hopes will help ensure that the prices banks and other payment providers charge third-party providers (TPPs) for open banking services remain competitive and fair.
“Premium APIs should be underpinned by a sustainable, safe, commercial model that results in prices that are fair value, transparent and promote competition,” the JROC says in its report.
“We consider this will further support long-term investment, innovation and competition in open banking and significantly contribute to the JROC’s objective to move to a sustainable economic model for open banking to continue its growth.”
In the paper, the JROC’s five principles set out that fees and charges for premium APIs should:
- Broadly reflect relevant long run costs of providing premium APIs.
- Incentivise investment and innovation in premium APIs.
- Incentivise take up of open banking by consumers and businesses and use of network effects.
- Treat TPPs fairly.
- Be transparent.
What will this mean?
In setting out the reasons driving these principles, the JROC has also tried to iron out potential bugbears for both account servicing payment service providers (ASPSPs), which are typically the banks, and TPPs.
For example, the JROC has said that charges for premium API access need to broadly recover directly attributable and efficiently incurred economic costs, while ensuring fair value for TPPs.
“This means that premium API prices should not recover more than directly attributable and efficiently incurred costs, nor allow for higher-than-competitive returns.”
The level of charges for premium APIs should enable banks to earn a return over the long run that compensates for the risks incurred and rewards for success.
“This will help ensure that open banking is sustainable and continues to expand its range of services and the number of users,” the report says.
The JROC also warned that charges should also ensure that TPPs are equally incentivised to continue to invest and innovate, and should not prevent investments and innovation that would benefit businesses and customers.
The JROC urges banks to consider the advantages and disadvantages of volume-based tiered pricing to increase take-up of premium APIs.
This could take the form of volume discounts to TPPs with large transaction volumes, or who provide multiple services using different premium APIs.
Alternatively, the JROC suggests that account providers could give discounts to TPPs with smaller volumes to help them expand and compete.
“Each ASPSP should consider its individual market position or power and any implications that this may have for its pricing policy,” the paper says.
In setting these fees, however, the report warns that TPPs need to be treated fairly.
“Although we want to encourage take-up of premium APIs and open banking, we do not want this to be done in a way that gives certain TPPs unfair competitive advantages over others and that may ultimately harm merchants and customers by limiting competition in the sector,” the paper says.
According to the JROC, there may be “rational and objective economic reasons” why different TPPs pay different prices, and why prices may vary for access to different data or services provided by the access provider, that ultimately benefit customers and businesses.
For example, prices could differ due to differences in underlying costs of supplying certain TPPs versus others, differences in costs of providing different services, and the need to recover costs in the least distorting way to maximise the use of open banking services.
This month, the JROC also announced the launch of two new working groups — the variable recurring payments working group chaired by the PSR and the future entity working group chaired by the FCA.
Going forward, it is hoped by the regulators that this joint paper will support the VRP working group in developing a safe and sustainable commercial model for non-sweeping VRPs as a pilot and test new premium APIs.
