Since the UK’s Competition and Markets Authority (CMA) fired the gun on Variable Recurring Payments (VRPs) – the mechanism it has selected to let people automatically move money between their bank accounts – the UK’s big nine banks have been busy building the open banking infrastructure to make it happen.
‘Sweeping’, as the concept is known, is due to become reality in the second half of 2022. It is designed to help people avoid unplanned overdrafts, stick to their repayment schedules and save more by triggering simple money transfers between accounts. (Here’s a bit more background on VRPs.)
One business that is wasting no time exploring the benefits of VRPs is Chip, a savings and investment app.
As Chip’s Vice President of Product, Niamh Greally, explains, transferring money by card is far from ideal. “Customers don’t understand that their card payment can take two to three days to reach us, and then the same amount of time before it lands in their savings account; and up to five days if it's going into an investment product. All that time they are not earning interest and so not getting the returns they expect.”
VRPs will help Chip’s customers by making their fund payments instantaneous, ensuring their money gets to work faster.
Sweeping itself is not new – in the UK, customers can set up regular transfers between accounts through Direct Debit – but open banking VRPs stand to supercharge sweeping by fixing the fundamental issues with Direct Debits and cards. Simply: it’s cheaper, faster and easier to use.
But ‘sweeping’ use cases may only be scratching the surface. VRPs have the potential to go beyond so-called ‘me-to-me’ money transfers, to become a more convenient, more secure and a less costly way for people to pay for all sorts of things.
And for merchants it could mean lower fees, fewer chargebacks, immediate settlement and less fraud. That adds up to VRPs being a preferred way to pay.
The range of non-sweeping use cases for VRPs is enticing. Anything being currently paid by Direct Debit (think club memberships, insurance premiums, entertainment subscriptions) can be done better with VRPs.
Irregular payments, both in terms of frequency and value, are also in scope as VRPs allow users to set spending parameters (such as limits) and to choose a comfortable level of control. Imagine setting up a VRP with Amazon where you could define upfront how much you wanted to spend with them over a period of time – and update these parameters at any time through your banking app.
Fliss Berridge, Director and Co-founder at Ordo, says that ecommerce stands to benefit. “VRPs enable a one-click checkout, giving shoppers a smooth exit journey.”
The offline world can equally profit. Take everyone’s favourite habit of grabbing a coffee. By setting up a VRP with the shop owner, you could use a QR code (or similar authentication software) to identify yourself and walk out with coffee in hand, avoiding any overt payment steps.
Convenience with control
In the payments world, convenience and control are often presented as opposing forces. You can make payments as easy as possible, but you might have to accept more fraud; or choose more oversight, but accept the friction.
Take card-on-file payments. Saving a card with a website speeds up a payment, but how many of us can honestly say we know which of our cards are saved with which sites?
With open banking, there’s no such worry. Instead of having your card details flying around the Internet, with open banking you have a list of VRP transaction parameters that you have previously set up. You know that anything outside of that scope – other vendors, higher spend, different timeframes – won’t be processed.
Alongside this transparency comes flexibility – the ability to adapt the parameters of a VRP in line with changing needs and habits. Compare that with the bluntness of a Direct Debit, where the only options are to continue or cancel (not to mention the week or so it takes to set up a new agreement.) As Fliss Berridge points out: “VRPs are dynamically changeable, right up to the moment that a payment has been made.”
Making it happen
The challenge now, for banks and third-party payment processors (TPPs), is scaling VRPs for mass adoption. Part of that is conceptual – in other words, agreeing a standard definition for what ‘sweeping’ is, and is not.
Stephen Wright, NatWest's Open Banking Lead, suggests there will be grey areas – enabling international money transfers for example or topping up a gambling account.
Another challenge is functional. For example, banks need to build the ledgers that will hold the payment mandates and ensure that it integrates with the wider payment and banking ecosystem to enable VRPs to be fast and secure.
Banks also need to consider how they will engage with TPPs to grant access to VRPs for use cases outside of sweeping. Multilateral frameworks could accelerate the rollout of VRPs, suggests Stephen, “so for a bank, you’re not having to go through the same governance each time, and repeat that for the next party, and so on,”
Scale that up beyond the big nine banks that have so far been mandated to offer VRPs, and the challenge becomes even tougher. Included in that cohort will be risk averse institutions, compliance processes and consumer protection programmes.
Bringing them altogether will be difficult, but doable. Competition and cooperation will need to rub shoulders. Existing standards and protocols will need fleshing out. And banking silos must be avoided. Ultimately, this will require some level of collaboration to get everyone on the same page, and bring in the critical mass of banks that are needed to take VRPs – be it for sweeping, or for other use cases – mainstream.
For merchants who want to make use of open banking VRPs to take payments, it doesn’t need to be complex or time-consuming. Companies like TrueLayer can help – if you’d like to discuss how VRPs could make your payments and customers lives easier, get in touch.
This conversation took place during a panel discussion at the Open Banking Expo in November 2021.