Eyes on the prize - payments regulation needs a re-focus

In March 2024, there were 16 million account-to-account (A2A) payments made in the UK, powered by open banking. If the future of payments is A2A, then the future is here now.  Adoption is accelerating dramatically as businesses embrace this new and cost-effective way to accept consumer payments without the complex intermediary layers associated with card payments.

A2A payments use open banking technology to move funds directly between participating bank accounts. It is fast, secure and user-friendly. It is the first and only payment method built in, and designed for, the digital era.

But there is more to be done. The existing legislation that created this opportunity for innovation stops short of enabling businesses to accept A2A payments on a recurring basis - for example, for subscriptions, bill payments, and 1-click shopping - known as variable recurring payments (VRPs). Unlocking recurring A2A payments powered by open banking is the critical next step towards delivering competition in retail payments. It’s a key building block in creating a ubiquitous payment option that isn’t card-based.   

The next steps of open banking must also be more equitable for the banks, who provide critical infrastructure that supports A2A payments and should be properly incentivised to invest in its growth and evolution. Banks receive an interchange fee when they process card payments. They should receive something similar when they process A2A payments. 

Slow progress from regulators and a lack of clarity for the market is currently preventing this. 

While the PSR’s five year strategy is committed to increasing competition in retail payments, including through supporting A2A payments, its approach to getting recurring A2A payments off the ground does not seem aligned to that strategy. 

The PSR’s proposed pilot for variable recurring payments is focused on finding a direct debit replacement for government, utility and financial service payments, rather than a competitor to cards in retail payment use cases. 

The PSR should reassess and re-focus. There is much more value to unlock by enabling A2A payments to better compete for retail payments with cards, especially in ecommerce. This should be the starting point of the pilot, not direct debits. 

Both open banking providers and banks have been asking for a model that allows banks to be paid for ‘premium’ functionality like recurring payments.

The PSR has proposed that the pilot is offered free of charge. Market participants are now worried about the long-term commercial viability of VRP, because the free model creates market expectations that will be difficult to reverse in future phases.

The PSR should change its approach and allow banks to charge for processing these payments, and work closely with industry on the development of a pricing model.

The efficiency of A2A payments means that even where banks are remunerated, there will still be cost savings for merchants versus card payments. 

As digital payments continue to evolve and grow, VRP stands out as a solution that could better balance the economic incentives of banks and merchants while enhancing the payment experience for consumers. The PSR’s next steps are crucial. A re-focus on ecommerce and a fair commercial model will be key.