Do we need this pilot? Our response to the PSR’s consultation on expanding variable recurring payments

In January 2022, the Payment Systems Regulator (PSR) set out a five year strategy with the aim of promoting effective competition in payments. The strategy noted that interbank payments, including open banking, had “the greatest chance of providing a credible alternative for retail debit payments”. 

Fast forward to 2024, and the PSR’s concerns around competition in payments have heightened, with the PSR setting out concerns that Mastercard and Visa have likely raised fees to an unduly high level, at the expense of UK businesses. 

A key focus of the PSR’s work to address this lack of competition is to enable new functionality for open banking, in the form of variable recurring payments (VRP), which will enable open banking to compete on a level playing field with cards. 

That’s why, at the end of last year, the PSR published proposals for expanding VRP. In this article, we’ll summarise our response, and that, while efforts to expand VRP are welcome, we think a different approach should be considered. 

To fully understand why we think the PSR needs to change its approach, you first need to know what the current proposals are.

What exactly is the PSR proposing? 

Due to restrictions in the regulatory framework for open banking, VRP is currently limited to ‘sweeping’. Sweeping allows account holders to set up recurring payments between accounts they own, but does not allow recurring payments to businesses or organisations. 

The PSR wants to move beyond this limitation, and has made proposals for ‘phase 1 pilot’ of expanding VRP, which would enable variable recurring payments for a limited number of use cases: 

• Regulated utilities e.g. paying for gas, electricity or telecoms 

• Local and national government e.g. paying council tax

• Regulated financial services e.g. mortgage repayments 

The PSR has set out four main proposals to enable phase 1. We unpack these proposals below:

1. A multilateral agreement (MLA)

This would be a contractual framework to regulate the relationship between parties in a VRP payment, i.e PISPs and sending banks. It would contain a single standard set of rules governing required functionality, dispute resolution, liability and price. The PSR proposes that this would be managed by Pay.UK, the operator of UK interbank payment systems, including Bacs and the Faster Payments Service (FPS). 

This is a departure from the current open banking model, where access to open banking APIs is not governed by contracts, but legislation sets out how parties should interact and Open Banking Limited provides API standards and guidelines. The main driver to put in place an MLA is to: 

• cover any perceived gaps in current legislation that need to be addressed when going beyond sweeping and the current open banking framework 

• Enable value exchange between sending banks and PISPs — which is not possible in current open banking due to the prohibition on contracts in PSD2

2. Setting a central price for VRPs based on a cost recovery model for the sending firm 

The PSR is proposing that, for the pilot, value exchange between PISPs and sending banks would be based on sending banks covering relevant incremental costs. 

The PSR has stated that, for the pilot these costs are likely to be minimal, and the charge banks pay for sending faster payments (currently ~1p) may be the only relevant incremental cost. This leads the PSR to its third proposal: 

3. Setting the price sending firms can charge payment initiation service providers (PISPs) at zero

The PSR is proposing to remove the FPS charge, which would mean sending banks have little to no incremental costs. 

As a result, the PSR are proposing to set the price PISPs pay to initiate VRP in the pilot at zero. This would be consistent with “existing arrangements for other open banking use cases and makes this proposal simpler and more practicable to implement”. 

4. the participation of the nine largest banks in the UK (the CMA9) in the MLA 

In order to incentivise uptake and ensure coverage, the PSR proposes to mandate the 9 biggest UK banks (CMA9) to participate in the pilot. This would follow the precedent of open banking in the UK, where the CMA9 are required to support the open banking standard. 

What do we think about the proposals? 

1. Focus on substituting debit cards, not direct debits 

The recent Future of Payments Report recommended that to address merchant dissatisfaction, open banking payments should be developed to give retailers choice beyond card schemes. But the proposed pilot focuses on use cases where direct debit is the main payment method. 

We are concerned that trying to develop a commercial framework for VRP as a direct debit substitute, will distract from and delay progress towards enabling VRP to compete with debit cards in the retail space, as an alternative to card on file. 

We think there can be a workable commercial model where VRP substitutes debit cards, where both banks and PISPs are remunerated, while still delivering cost savings and product benefits to businesses. This would drive competition in line with the PSR’s strategy. 

In looking to develop a commercial model for VRP, the PSR should focus on substituting debit cards with VRP, not direct debits 

2. Maintain momentum 

We support the PSR’s ambition to pilot the expansion of sweeping in Q3 2024. It is crucial to maintain open banking momentum by unlocking new functionality as soon as possible. 

Open Banking Limited has experience of extending the scope of open banking. It led a managed roll out of variable recurring payments for sweeping from 2021. This same approach could be taken to extend VRP beyond sweeping to include new use cases from Q3 2024, and wouldn’t be dependent on development of a commercial model or MLA. 

To maintain momentum the PSR should simplify the implementation of the pilot, allowing Open Banking Limited to run a managed roll out of additional VRP use cases, decoupling the pilot from development of the commercial model 

3. Foster industry collaboration 

We believe in a commercial model where PISPs remunerate sending banks for access to payment functionality. This is key for the sustainability of open banking, and to incentivise the development of a high quality payment product that businesses and consumers will adopt. 

We think the PSR should begin work with industry, as soon as possible, to develop a commercial model for VRP for retail payments. This could take learnings from SPAA MSG, an EU initiative which developed a pricing schedule for ‘premium APIs’ in the EU. 

The PSR should set a credible deadline for the completion of this work and be closely involved to assist with any roadblocks or coordination issues

In conclusion: Do we need this pilot?

We do need a pilot in Q3 2024 that extends VRP functionality to help maintain open banking momentum and expand reach, but the use cases proposed for this pilot don’t lend themselves to developing a commercial framework to address competition in retail payments. 

The commercial model should be decoupled from the pilot, which should run in parallel to a focused collaboration between industry and the PSR enabling fair value exchange for VRP retail use cases. 

If you’re a merchant who is looking for a recurring payment method, get in touch with our open banking experts, and we can help you decide whether VRP is the right alternative payment method for your business.