As the UK positions itself as a global leader in Open Banking, regulators, fintech firms and the government see its potential to fuel economic growth. However, recent industry developments have sparked concerns over whether progress could stall.
Charlotte Crosswell OBE, Chair of the Centre for Finance, Innovation and Technology (CFIT), tells Payment Expert: “The CFIT inaugural coalition found that delivering Open Finance and personal data mobility could boost UK GDP by £30.5bn through increased SME lending and supporting vulnerable consumers.”
However, many stakeholders feared this progress was under threat when Visa recently proposed its account-to-account (A2A) scheme last year. Due to Visa’s large market share and involvement could hinder A2A adoption through high pricing or suboptimal customer experiences to protect its core card payments business.
In response, the Financial Conduct Authority (FCA) recently announced that Open Banking Limited will oversee a new independent central operator to coordinate how Variable Recurring Payments (VRPs) are managed – reassuring those who feared dominance by major payment players.
Advantages of VRPs
There are several reasons VRPs are so beneficial to consumers and thus threaten traditional payment methods. Crosswell explains that VRPs are an example of how the type of secure financial data-sharing, already enabled by Open Banking, can create a better user experience and an important alternative to direct debit and credit cards for SMEs and consumers alike.
Crosswell says: “Particularly where traditional payment methods have struggled to innovate at the pace required to meet the ever-evolving challenge of economic crime head-on, VRPs’ employment of robust security measures, including Strong Customer Authentication (SCA), helps reduce the risk of fraud, which costs the UK economy £6.8bn each year.”
The benefits extend further, with VRPs recognised as a solution for subscription services, as highlighted in the Government’s 2024 Smart Data Roadmap, which the HM Treasury pledged to consider CFIT’s wider recommendations on Open Finance.
Crosswell says that when compared to debit and credit card payments, VRPs “added transparency, control and flexibility empowers consumers to better manage their financial lives and SMEs to manage expenditures and plan for growth”.
Barriers to growth
Despite their potential, VRPs still face hurdles to widespread adoption. While the UK has made significant strides in implementing VRPs for sweeping (the process of automatically transferring funds between accounts), global adoption remains slow due to regulatory uncertainty and technological challenges
Crosswell highlights that other regions, compared to the UK, are either in the early stages of adoption or lack clear regulatory guidelines, leading to slower implementation worldwide. Additionally, Crosswell points out that the steep costs of technological adoption could deter lenders with established recurring payment models from fully embracing VRPs.
To succeed, Crosswell stresses that “regulators’ willingness to embrace regulations and set new standards has been an important contributor to the success of the UK fintech sector to date”.
She adds: “The same willingness will be key to the success of Open Finance and, therefore, the adoption of VRPs moving forward. Regulators and industry collaborators must break out of their siloes and communicate to ensure that widespread adoption of Open Banking schemes can succeed.”
For VRPs to thrive, she says: “Lenders must prioritise fostering an environment where collaboration is key. This is only possible when the industry has the right resources, access to capital, forums for discussion, and regulatory support behind it. We have already seen support for similar Open Banking schemes.”
CFIT’s role
While Crosswell looks outward to what regulators and lenders can do to support VRPs, she also looks inward at CFIT’s own efforts.
She asserts that CFIT was founded to “unblock barriers to growth in financial technology”, highlighting that the organisation is concerned with facilitating the innovation and implementation of technologies such as digital verification, Open Finance, and VRPs.
“Our soon-to-be-released blueprint for Digital Company IDs is the product of collaboration between over 70 organisations, demonstrating what industry, regulators, and technology providers can achieve in a short period of time,” Crosswell explains.
“By driving forward digital verification frameworks, the blueprint will lay the groundwork for fostering trust in the financial system and reducing compliance costs – both of which can also support the successful, widespread adoption of VRPs.”
The organisation is already helping address one of the biggest challenges VRPs seek to resolve; verifying companies – the need for seamless, secure payments that are reliable and trusted by all stakeholders.
Crosswell concludes: “With regulatory involvement in our coalition, CFIT has been able to align industry standards for digital verification systems. This will assist in laying out a framework that can support the delivery of VRPs – fostering market confidence and accelerating adoption.”
With CFIT aligning industry standards, and regulators working to remove barriers, the future of VRPs in the UK looks promising. However, continued collaboration will be key to unlocking their full potential on a global scale – a sentiment echoed by the FCA in its recent announcement.
“It is critical that the collaboration seen in 2024 across the industry continues this year,” the FCA stated.
“We thank industry for their continued support and engagement in the success of Open Banking so far and we will continue to work together constructively as we implement the next steps.”
