The journey ahead for business leaders is uncertain: rising inflation, business costs, and waning customer demand are a threatening combination of factors that will challenge the resilience of businesses of all types.

Rising costs in the current climate are a near inevitability, and those charged with navigating this storm will seek cost-saving opportunities. Payment fees may well be a good place to start. 

We estimate that UK businesses currently spend a combined £2.25bn in processing fees each year; for direct debit, recurring card payments, and card-on-file payments. When put into context, the need to reduce the fees associated with any business's most crucial function – to accept customer money – is clear. There is a potential lifeline on the horizon, but we need regulatory intervention to help make it a viable alternative. 

Digital payments for the digital age

Variable Recurring Payments (VRP) hold the next major opportunity for open banking and the potential to radically reshape how people pay for goods and services. VRP allows people to authorise future payments of varying amounts directly from a bank account via open banking rails. These payments act as a replacement to direct debits, card-on-file payments and recurring card payments. But VRPs are also a significantly faster, secure and – crucially – cheaper alternative. In fact, our latest research found that VRPs could save UK businesses collectively £1.5bn each year in payment fees.

Currently, the Competition and Markets Authority (CMA) mandates VRPs for sweeping use only – where an individual authorises the movement of money from one owned account to another. This is helpful for customer onboarding and account funding across digital finance. However, it fails to leverage the full potential of this technology, which can also provide an improved way to manage active subscriptions, pay regular bills like utilities, and send money to businesses and other individuals.

To ensure businesses and consumers fully realise the benefits of VRP, the right regulatory framework is now needed to move things forward.

The cornerstone of any inbound regulation must be a VRP issuer fee cap, similar to card payments, to avoid banks charging fees that discourage businesses and consumers from adopting these payment methods. We understand that banks should benefit economically from this innovation as they play a key role in bringing it to life. However, in order for VRPs to reach their full potential, it should be free for consumers and regulators should ensure fair market pricing by introducing an issuer fee cap on transfer pricing (10bps) to encourage widespread adoption. 

Cost savings and beyond

Part of the reason that VRPs have so much potential lies in the fact that they offer far more than cost savings alone. Extending the use of VRP’s beyond what is currently CMA-mandated will mean businesses stand to achieve a host of operational benefits, alongside significant price savings.

One clear example is customisable payment experiences: think of Amazon’s one-click-to-pay functionality, applied across all ecommerce merchants. This may sound like a small change, but the power of improved payments journeys should not be overlooked. The majority (53%) of consumer spending now takes place online and digital payments are key to making the online buying process a seamless experience. In fact, 62% of consumers would avoid a merchant with a poor payment experience, with just 6% expecting to continue shopping with a merchant following a bad payment experience.

While businesses can help to attract and retain customers with improved payments, they can also build their own resilience. That is because money moved through VRPs is instant, owing to its use of the Faster Payments Scheme. Compare this to direct debits, which can take three to five days to clear; or invoices, which can take as long as 30 days. According to Barclays, three in five UK businesses are owed money from late payments. Slow fund settlement hinders cash flow and can end a business’s life, particularly small ones, even if it is profitable on paper. VRP usage is, at least in part, a solution to the problem. It’s clear which option is most helpful to companies wishing to manage liquidity and cash flow risks.

Next steps

We know that for regulation to be truly effective it must be constantly evolving to meet the needs of the stakeholders it serves. TAs the pressure on UK businesses increases, the ability to leverage VRPs will be key to managing costs and improving customer outcomes.  According to the British Chamber of Commerce, 50 percent of businesses are seeking to cut costs in response to the cost-of-living crisis, while 73 per cent are likely to raise prices. Businesses should therefore be the net beneficiaries of a fee cap on VRPs.

These savings would allow them to offset costs such as electricity bills, while also offering savings to consumers, allowing them to pass these lower costs on, or reinvest them back into the business.

This price regulation is also key for the health of the payments sector itself. Stimulating competition in this space will bring around yet further innovation and improved customer outcomes, as fees are driven down and new services developed. 

There is fantastic opportunity for UK businesses that could be beneficial to both them and the consumer now more than ever, but only with the right policy and regulation to support will we be able to ensure success for UK plc as it works to maintain its place as a global leader in the digital economy.