Turning Open Banking into… banking: the next evolution in payments promises big gains for businesses and their customers

Change, as the adage goes, happens in two parts: first gradually, then suddenly. We can see this playing out in Open Banking’s sudden but rapid growth. More than 5 million people in the UK now use Open Banking-based services or platforms to move and manage their money, with half a million more being added every six months. Over 3.5 million payments using Open Banking were made in January 2022, compared with 5 million… in all of 2020.

Solving the recurring authentication conundrum

Readers will be familiar with Open Banking payment initiation; with an entirely new payment flow that operates separately from the traditional intermediaries like card schemes and acquirers and with money moving from account to account. Today, the most common Open Banking payments are Single Immediate Payments (SIPs) and these payments do exactly what it says on the tin.

Successful Payments – The number of successful payment initiations made by third party providers using account providers’ (ASPSPs) Open Banking API

Whilst Open Banking allows payments to be initiated by third parties, customer consent is required for each payment. It’s like having a Direct Debit you have to authorise whenever it’s due. This is a feature of Strong Customer Authentication (SCA) – payers must authenticate and confirm every Open Banking payment.

But tackling fraud need not come at the cost of efficiency. The solution: an enhancement that allows consumers to approve recurring payments with a single, one-off consent that securely authorises third parties to initiate payments from their bank account on an ongoing basis. Mimicking the functionality of Direct Debits could mirror the tipping point contactless payments enjoyed when TfL switched on contactless acceptance, accelerating Open Banking payments mass adoption. That enhancement is called Variable Recurring Payments (VRP).

What are Variable Recurring Payments?

There are the two main applications of VRPs:

VRPs could help unlock significant value for consumers and small and medium-sized businesses (SME) in the form of:

• Lower overdraft costs: 20 million consumers and 1 million SMEs could save up to £600 million a year
• Better interest rates: up to 40 million consumers and 6 million SMEs could benefit up to £1,200 million each year
• Increase in financial resilience: up to 11 million consumers could start a saving habit

VRPs offer the potential to transform payments using familiar payment rails with safe and simple authentication technology. They provide merchants with a flexible alternative to Direct Debits or cards, offer lower fees, no chargebacks, immediate settlement, reduced risk of fraud and enhanced control for consumers. This could potentially see VRPs used for several types of recurring payments i.e., household bills, subscriptions, or lodged/card on file payments. Though not a new concept VRPs are the missing part of Open Banking.

Open Banking payments are already changing the way consumers and businesses pay and get paid, and as experience shows, merchants that get the user experience right will see reduced cart abandonment and higher sales.

We now need to test the underlying APIs to ensure they deliver on their promise for consumers; the core technology and regulatory building blocks are now in place we are now on a journey to make Open Banking become … well, banking.