Building better payments: why the economics matters as much as the technology

As Frontier’s work for Open Banking shows, the key to making innovation work lies in the economic incentives.

We look at why commercial models are just as important as tech to building the future of payments – and the approach regulators and industry should take.

The payments landscape is evolving

Payments underpin almost all commercial activity in the UK. The system is essential to the growth of businesses and the economy. And largely, it works well.

But as the digital economy evolves, the payments system is facing challenges – including ageing infrastructure, costs and sometimes limited choice.

Regulators and policymakers – like the Financial Conduct Authority, the Payment Systems Regulator and the Bank of England – recognise these challenges and know how vital payments are to the UK economy.

That’s why, in November 2024, the government launched its National Payments Vision (NPV). The NPV aims to create a “trusted, world-leading payments ecosystem delivered on next generation technology, where consumers and businesses have a choice of payment methods to meet their needs.”

The UK is upgrading its payments infrastructure

The NPV aims to strengthen the UK’s payments infrastructure, while supporting the development of new ways to pay. It spans initiatives across the spectrum of payments, from everyday retail to house purchases. Examples of these initiatives include:

• Open Banking: Expanding account-to-account payments so consumers can pay merchants directly from their bank accounts, bypassing cards.
• Stablecoins and retail Central Bank Digital Currency: Ongoing work by HM Treasury and the Bank of England to test how digital forms of money could complement existing infrastructure.
• Regulated Liability Network: Exploring a shared ledger for central bank money, commercial bank deposits and other regulated digital money, to improve speed, transparency and interoperability.
• Interbank Infrastructure Renewal: Upgrading the infrastructure for future digital payments, building on the Bacs and Faster Payments systems.

Why commercial models are as important as tech

These initiatives are a valuable investment in the future of payments. But while building the technical infrastructure is essential, creating the right commercial conditions is vital too.

Payments are an interconnected ecosystem. Each transaction involves several participants: consumers and billers on the demand side, and banks, payment service providers and network operators on the supply side.

For the system to work effectively, everyone must be incentivised to use it. Providers need a commercial case to deliver, promote and invest, while users and merchants need to see the value in adopting. 

What our work for Open Banking showed 

The NPV recognises this need for the right commercial models. And Frontier’s work for Open Banking Limited is helping to build the principles behind them.

Our study looked at the best way to design a commercial model for a particular new product: Commercial Variable Recurring Payments (cVRPs). These allow businesses to authorise third parties, like payment providers or platforms, to initiate recurring payments with variable amounts, via Open Banking. They’re attractive because they offer the potential for more transparency and control to payers than direct debits or card-on-file arrangements.

Our study focused on ‘low-risk’ use cases, like utility bills. We considered several important design choices:

Our study focused on ‘low-risk’ use cases, like utility bills. We considered several important design choices:

• Who should be charged (payer, payee, or payment service providers)?
• Should prices be a fixed fee, or a percentage of the transaction value?
• How many prices should there be – a single price for all banks, or bank-specific pricing?
• How should pricing evolve over time?
• What is the appropriate price level?
  
  

How to get commercial models right

Incentive compatibility was vital to these design choices.

Charge the payer, for example, and you might discourage adoption, since alternatives like direct debits are free. The price level has to strike a balance too: low enough for billers and payment service providers to use the service, but enough to also incentivise adoption and investment from banks and other providers.

For cVRPs, we arrived at a set of pricing options that make different trade-offs between each side of the market. The new cVRP scheme operator will make a final choice on where to balance those considerations.

But commercial models will not be one-size-fits-all. Their design will depend on the market in question – transaction size, frequency, risk and use cases will differ between payment systems. In some cases, a working commercial model may emerge through market forces. In others, more coordination will be necessary. These factors will also vary by market and stage of development.

Commercial models must be embedded from the start

Our work on cVRPs highlights the importance of economic incentives: even the best-designed technical solution will struggle to succeed without a viable commercial model.

The early phases of Open Banking were focused on technical and regulatory requirements. Only more recently has attention turned to the commercial models that support the infrastructure.

There are positive signs that this is changing. The Bank of England’s early blueprint for Central Bank Digital Currency examines commercial considerations and the private sector’s role in innovation, while UK Finance’s work on the Regulated Liability Network includes fee structures and funding models.

As regulators and industry continue to innovate, they must embed commercial incentives from the start – to ensure there is appetite to invest, scale and adopt new payments once the technology is ready.