Open banking’s next big thing could replace direct debits

Variable recurring payments could fuel the next stage of open banking take-up in the UK

The dominant use of direct debit to make payments could diminish when UK consumers are offered more control of recurring payments from July through open banking-based variable recurring payments (VRPs).

Like the cheque before it, direct debit could see a huge decline in use as it is replaced by financial technology (fintech) alternatives.

VRPs will further fuel the take-up of open banking services in the second half of this year, when Competition and Markets Authority (CMA) rules come into force, mandating banks to offer VRP-enabling application programming interfaces (APIs).

According to recent data from the nine biggest UK banks that had to implement open banking, more than five million Brits are now using open banking services, with payments the most popular service.

VRPs will expand the reach of open banking, offering people more control over regular payments that automatically leave their accounts.

The rules were supposed to be launched at the beginning of this year, but banks were not ready, so it was pushed back to July. From then, said the CMA, banks must have VRP APIs available in relation to sweeping services, which automatically move money between consumer accounts, once permission is granted.

For example, a consumer could give permission for money to be moved from a current account to a savings account automatically if there are excess funds, or could move money from a savings account to a current account if funds run low.

VRPs will provide services similar to direct debit, but with more control for the consumer, who can automatically make payments of different amounts to suppliers, and set caps on payments.

“It sounds like it’s a very minor change, but it makes a huge difference for corporates receiving money and individuals paying it,” said Sean Devaney, vice-president banking at IT services firm CGI.

Direct debit currently enables people to make payments on a certain day each month for a variable amount, but according to Devaney, there are challenges. “As a consumer, you have no control over how much is taken out of your account and in these days of rising energy prices etc, there is a lot of nervousness that people could suddenly have large payments go out of their accounts,” he said.

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Devaney said VRPs will support the gig economy better, as well as pay-as-you-go services such as insurance.

“We also have a much bigger gig economy in Britain than we used to have and for a lot of those people, their monthly income is quite variable and also quite often doesn’t come in on the same day every month or week,” he added.

VRPs not only allow people to vary payment amounts, which direct debits already do, but enable them to cap how much is pushed out for any given payment. They also allow users to cap the total amount that is paid out over a certain period.

“You are putting a lot more control on payments,” said Devaney. “This is particularly important for people who face challenges around how much is going out of their accounts.”

Banks are building a set of open APIs that could, for example, allow third parties, such as utility companies or personal finance managers, to utilise them. When consumers sign up to a service, they will eventually be offered a VRP sign-up by the companies they are buying from, similar to existing direct debit sign-ups.

VRPs are part of the fintech-driven open banking revolution. Open banking services were made possible by the European Union’s Payment Services Directive 2 (PSD2), which came into effect in 2018.

PSD2 enables third parties to access the customer data held by banks via APIs – if customer consent is granted – and offer services using this information. For example, a company, with your consent, could take a payment directly from your account without you leaving its website.

In January 2018, UK banks were required to implement the CMA’s open banking regulations. This led to the development of APIs in banking to give consumers more control over their accounts. Through these APIs, third parties and multiple finance firms can use a consumer’s data to recommend the best service, including bank accounts. The end goal was to increase competition in a sector dominated by big financial services companies.

Devaney said that so far in open banking, all the development has focused on the CMA order, which has meant the banks have not been able to charge for the use of APIs. But for VRPs, this is a little different, he said. “They will not be able to charge for sweeping, but for other use cases, like bill payments and so on, they are able to charge. Whether they will or not is uncertain.”

Huge potential

Kieran Hines, analyst at Celent, said: “VRP has huge potential to bring new propositions for merchants and other businesses when it comes to how to offer customers more choice around how to pay, as well as potential efficiencies in managing in-bound payments.”

But he added: “It will take a bit more time yet for the momentum behind this to build, particularly as banks will need to agree commercial terms with any party wishing to use VRP for non-sweeping use cases.

“When it comes to sweeping, I would expect to see a more rapid impact that will enable smaller competitors to offer enhanced services to customers.”

New services will be developed after VRPs go live in July. For example, VRPs could support services such as insurance as you go, where customers are potentially making a large number of payments for a service as and when they need it. Devaney added: “If these types of market embrace VRPs, then I see the volumes really shooting up over the next 18 months. It all depends whether banks charge and how much.”

NatWest Bank announced recently that it will soon begin pilot testing VRPs with its open banking payments product Payit, which it developed alongside fintech TrueLayer, and plans for a commercial product to be ready by early 2023.

James Hodgson, head of NatWest’s Payit, said: “VRPs will revolutionise the way payments are made online and will look to replace current traditional payment methods such as direct debit and card on file.

“VRP introduces a mechanism to authorise future payments within pre-agreed limits, meaning consumers can benefit from a new level of payment automation, while experiencing greater transparency and control over their finances.

“As an early adopter of the new payment method, we are seeing a lot of excitement in the industry, with many customers contacting Payit about VRP.” 

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