Open banking in Europe is maturing. PSD2 legislation has driven this development across Europe, with the Financial Data Access (FiDA) and PSD3 now on the horizon, this may be the year we start to see the full potential of open banking and even open finance.
This is an excerpt from the
Future of Digital Banking in Europe 2024 report.
There promises to be continued growth in open banking. Forrester projects usage of open banking in the Netherlands will growth from 7% of adults in 2021 to 29% in 2027. In France and Spain this is projected grow from 8.5% and 9.8% to 36% and 41% over the
same period
In speaking to commentators, an area which promises to provide more growth within open banking is Variable Recurring Payments (VRP).
VRP: improving the lives of users
VRP builds on open banking technology, they are open banking’s next step. VRP act similarly to direct debits, transferring money from one account to another at regular intervals under specific mandates set by the payer. However, unlike direct debits, they
settle in real time, account details do not need to be shared, and are customisable.
There are two main types of VRP, sweeping and commercial. Sweeping VRP is currently available in the UK and are not yet available in Europe.
Andrew Boyajian, head of product, payments and CX at Tink, said that he expects over the next few years for VRP to “realise its full potential”.
Francesco Simoneschi, CEO, TrueLayer shared this sentiment. He stated that this technology “is poised to revolutionise financial services in the coming years. By enabling customers to authorise regular payments with variable amounts – such as grocery subscriptions
or charity donations – VRP streamlines transactions, puts users in control and enables easier financial management.
Simoneschi added to this with their own experience: “We’ve seen that it’s an innovation that banks are competing to offer to their customers. TrueLayer is actively working with NatWest and other players in the ecosystem to make this a reality.”
VRP: Developing use cases
The UK is leading the way in this area, with the Competition and Markets Authority (CMA) already mandating the CMA9 (Lloyds, Barclays, Nationwide, RBS, Santander, Danske Bank, HSBC, Allied Irish Bank and Bank of Ireland), are to implement VRP. This means
Europe could learn from the steps that the UK makes, allowing them to build on any of the successes, or failures, seen in sweeping VRP.
Boyajian argued: “The rollout of VRP for non-commercial ‘sweeping’ uses (payments between a consumer’s personal accounts) is well underway in the UK. Sweeping VRP lets consumers and businesses move funds between their own accounts on an automated basis,
with the funds settled in seconds.”
A survey by Token.io, in the diagram above, highlights the benefits of VRP which senior leaders from banks, merchants, payment providers and technology providers saw. However, for both Boyajin and Simoneschi, the real benefits of VRP are seen in the use
cases created through commercial VRP.
Boyajian argued that the current user experience of services such as top-ups and bill payments, can be “clunky and awkward”. He said: “VRP transforms that experience and turns the payment process into a competitive advantage for businesses.”
Simoneschi gave some examples of use cases: “By creating a tech-enabled alternative to payment methods, VRP technology offers customers unparalleled convenience and control over their finances. Customers can manage subscription services, utility bills and
other recurring expenses all in one place by giving a third party provider the ability to initiate regular payments of differing amounts.
“Once customers have set the initial parameters of the VRP, it carries on in the background but, unlike Direct Debit and ‘card on file’ payments, can easily be amended. Being managed through mobile banking apps, this provides a user-friendly alternative
to manual data entry currently required by direct debits.”
Boyajian argued that VRP offer customers greater financial control by setting parameters. “Commercial VRP enables users to review and change, or even cancel any subscription in a few clicks through their bank app, ensuring maximum transparency and control
for consumers. This is crucial for improving financial health, by avoiding ‘set and forget’ subscriptions and helping more vulnerable consumers avoid overdraft fees.”
He added: “Commercial VRP could make a massive impact on European banking by solving for any kind of fixed or variable recurring payment (beyond personal account transfers), such as a streaming subscription or paying utility bills.”
VRP: regulatory room for growth
Looking to regulatory considerations, as the UK’s open banking journey is ahead of Europe’s, so are its VRP. The UK’s Payment Systems Regulator (PSR) began a consultation at the start of this year to expand VRP in the UK.
Commenting on this, Simoneschi said: “The PSR should build an ecosystem that works for all parties, incentivising banks to monetise VRP beyond just meeting minimum regulatory requirements. As digital payments grow, VRP are becoming a way to better meet the
needs of banks and merchants and make payments easier for consumers. The PSR consultation has the opportunity to encourage new business models and set new standards for safe and efficient financial transactions.”
As European regulators continue to build on their open banking architecture, VRP will likely become an increasingly serious consideration. They will be able to learn from the steps that the UK makes to create a smooth transition.
Simoneschi stated: “The regulatory landscape is moving quickly and it is vital that new frameworks balance the need for enhanced consumer protection with promoting competition and incentivising innovation.”
Looking forward, the growth and implementation of VRP across Europe are ready to enhance the open banking landscape significantly, driving forward a new era of financial convenience and control for consumers and businesses alike.