Our response to the Payment Systems Regulator’s consultation on expanding VRPs

• GoCardless supports the Payment Systems Regulator’s (PSR) intention to expand Variable Recurring Payments (VRPs) beyond sweeping to commercial use cases in the financial services, utilities and Government sectors.

• Current account coverage that provides a baseline to build on will be vital for Phase 1 of the roll-out to succeed. We believe this points to ensuring >90% of current accounts are able to support commercial VRPs.

• We do not agree with the PSR’s proposal to set at zero the price payment initiation service providers (PISPs) are charged, even for Phase 1. All ecosystem participants must have an incentive to invest, innovate and deliver a strong payer and payee proposition from the outset. In practice, this means that banks must be able to charge PISPs like GoCardless more than zero but less than the cost of debit card interchange.

• We need greater clarity on what comes after Phase 1 so we and merchants considering adopting VRPs can plan accordingly.

In 2019, VRPs for sweeping use cases were introduced in the UK. It meant that people had an easier way of making ‘me-to-me’ payments, such as paying off a credit card.

However, the potential benefit of VRPs to consumers would be enhanced significantly if they could be used for purchasing products and services from merchants. This is what the Government and regulators committed to doing last April in their ‘Recommendations for the next phase of open banking’ report.

Wind forward eight months and the PSR issued a consultation on proposals for a Phase 1 roll-out of VRPs to commercial use cases in the financial services, utilities and Government sectors, starting Q3 2024.

GoCardless was delighted to respond to this consultation to reflect our views and those we hear from our customers. But what did we say? Here are the highlights:

Mandatory bank coverage…

The PSR is proposing to obligate the CMA9 (the nine banks mandated by the CMA in 2017 to support the delivery of open banking) to take part; the logic being that they have already got VRP application programme interfaces (APIs) up and running for sweeping use cases. Extending them to commercial use cases should be relatively straightforward.

It’s clear that mandating account servicing payment service provider (ASPSP - but think ‘bank’ as 9 times out of 10 they are) participation in Phase 1 will be crucial for establishing a baseline service. Broad bank coverage will ensure the benefits of VRPs can be experienced by the majority of UK current account holders, and we think 90% would be a good target to hit. If participation is optional, some banks will likely remain in discovery mode and leave merchants, consumers and PISPs in limbo, stultifying progress.

However, we believe a more dynamic approach to selecting which banks must provide the relevant APIs should be taken. The CMA9 group was defined by market share measured nearly a decade ago, but times have changed and the neo-banks have made significant inroads into retail banking. A point-in-time assessment just doesn’t make sense as bank coverage needs to start high and get higher, not potentially regress as new challengers enter the market.

…but also commercial incentives

To date, most banks have tended to treat open banking as a compliance obligation imposed by regulators rather than an exciting new business opportunity. As a result, the quality and resilience of the APIs they provide is often suboptimal.

The PSR is suggesting that banks should not be able to charge PISPs for Phase 1 of the commercial VRP roll-out. We believe this is the wrong approach, and it appears other stakeholders like Open Banking Limited agree. Banks should be able to charge so that they have an incentive to invest, innovate and deliver a strong proposition to customers. The fees just need to be capped at a level that means merchants pay less than they currently do for card acceptance, encouraging them to adopt open banking-powered payments. Making these, and all forms of account-to-account payments, a genuine competitor to cards in the UK is a strategic objective of the PSR after all.

If we don’t bake pricing in for Phase 1, what will we have learnt for Phase 2 when the artificially low pricing is removed? We need to grasp the nettle now and provide a genuine test environment that we can learn and iterate from ahead of a broader roll-out of VRPs.

Alongside this, we support the PSR’s suggestion of a multilateral agreement that tidies up other issues between banks and PISPs, such as liability and dispute management.

Beyond Phase 1

The proposals aren’t clear if, how and when Phase 1 will end or what a transition to Phase 2 will look like. That makes it challenging for merchants to plan ahead, even with GoCardless’ assistance. We want to see much more clarity on next steps so that the whole open banking ecosystem can allocate resources accordingly, which in turn will support a more sustainable trajectory for commercial VRPs into the market.

Summary

The PSR’s proposals are a solid starting point for how they, in partnership with the industry, can make years of discussion about commercial VRPs a reality. However, we believe that refining the pricing proposals and ensuring that an up-to-date list of banks support the PSR’s objectives would improve the likelihood of Phase 1 succeeding.

We look forward to hearing the outcome of the PSR’s consultation in a few months’ time and hope that our views, and the views of key stakeholders like Open Banking Limited, provide food for thought.