.svg)
Payment initiation rules, pricing and mandated participation are still to be decided as the UK moves towards new regulations for variable recurring payments (VRPs).
The Payment Systems Regulator (PSR) has said it will publish revised proposals on the expansion of VRPs in the autumn this year, after receiving 39 responses to an earlier call for views.
The proposals will look to expand the use of VRPs as part of the PSR’s Phase 1 rollout of the new payment method, which covers regulated financial services, utilities and government agencies.
As identified by the PSR, the key issues that it intends to address are coordination of payment initiation agreements, mandated participation and pricing.
The PSR said there is clear support for its assessment that greater coordination is needed on payment initiation.
One solution, which is currently favoured by the PSR, is the publication of a standardised multilateral agreement (MLA), which VRP facilitators would be obliged to uphold.
“We continue to think that an MLA could be an efficient way of managing relationships between sending firms and payment initiation service providers (PISPs),” said the regulator.
“However, we acknowledge the concerns with our proposal on who could operate the MLA.”
In its call for views published in December last year, the PSR proposed an MLA specifying the required functionality for VRP pricing, dispute resolution and liability.
The regulator said it believes that an MLA would accelerate the expansion of VRPs by reducing the need for bilateral agreements between sending firms and payment initiation service providers (PISPs).
A standardised MLA would help to increase participation in VRPs, as it would reduce barriers to entry, particularly for smaller firms, the regulator added.
The PSR identified Pay.UK as its “owner of choice” for a future MLA, but these proposals received mixed views from firms.
Although firms generally agreed on the need for greater coordination, there were disagreements as to whether this should take the form of an MLA, and further disagreement as to whether this should be an industry- or regulator-led MLA.
In particular, a “large number” of payment service providers (PSPs) either opposed or were concerned about Pay.UK’s potential ownership of the MLA.
“Of those opposed to our proposal, most raised concerns around Pay.UK’s capacity to deliver the MLA on time and referred to competing demands currently placed on Pay.UK,” said the PSR.
As alternatives, respondents suggested that Open Banking Limited (OBL) or an entity under the Joint Regulatory Oversight Committee (JROC) could operate the MLA.
The PSR said it will “continue to develop our thinking” on which organisation is best placed to operate an MLA over the coming months.
Mandated participation, pricing
For the expansion of VRPs to succeed, the PSR said it is “crucial” for a sufficiently large number of customers to have payment accounts that can make VRPs during Phase 1.
The PSR proposed that the UK’s nine largest banks, as determined by the Competition and Markets Authority (CMA), should be mandated to participate in VRP implementation.
Known as the CMA 9, the regulator said that bringing these banks on board would be key to establishing a network effect that would in turn promote the usage of VRPs among their customers.
The PSR noted that, at present, there is nothing stopping these banks from implementing VRPs for outbound account-to-account payments, but there is little incentive to do so either.
Consequently, there are currently only “limited” agreements between sending firms and PISPs — a result that the PSR attributes to a lack of “sufficiently strong financial incentives”.
The PSR said about half of respondents agreed with its proposal on mandated participation, a quarter disagreed and another quarter were indifferent.
Banks within the CMA 9, in particular, objected to the proposal, while one in three respondents suggested that mandated participation should go beyond the CMA 9.
The PSR said it will consider other options over the coming months, including mandating all sending firms or mandating sending firms based on current account market share or Faster Payments transaction volume.
Similarly, about a third of firms agreed with the PSR’s position that VRP pricing may require regulatory intervention, due to the potential of large sending firms to act as a “bottleneck monopoly”.
However, as with mandated participation, large firms within the CMA 9 disagreed with this position.
Cost-benefit analysis
In future, the PSR believes that VRPs have the potential to challenge Direct Debit as the preferred payment method for subscriptions and utility bills.
Yapily, a UK open banking firm, said it “strongly supports” the regulator's efforts to expand the use of VRPs, pointing to their lower costs, higher speeds and greater security compared to Direct Debit.
Direct Debits are processed using the BACS clearing system, which has a three-day settlement cycle. They also penalise merchants if a customer fails to fulfil a Direct Debit mandate due to insufficient funds, with charges of up to £50 per failed payment.
VRPs, on the other hand, are processed and settled instantly using Faster Payments. They can also be processed at a lower cost than the 5p to 50p that BACS charges per transaction (plus additional fees that may be charged by the customer’s bank).
