Variable Recurring Payments and sweeping: everything you need to know
You may have seen an exciting open banking development in the news in late July. The UK Competition and Markets Authority (CMA) has required the nine biggest UK banks to implement Variable Recurring Payment (VRP) APIs to enable customers to sweep money between their accounts.
This is great news for both consumers and businesses.
But what exactly are Variable Recurring Payments and sweeping, and why are they such an important development for businesses who collect online payments?
What are Variable Recurring Payments (VRPs)?
You’re probably familiar with how Direct Debit works, where businesses are able to collect payments of variable amounts from the same customer on a recurring basis, without needing to gain new permission for every payment. VRPs should allow businesses to do a similar thing using open banking.
Specifically, VRPs are an additional Open Banking API that banks will now need to build. With VRPs come functionality that enables third party providers (TPPs) like TrueLayer, to initiate a series of payments for a customer at variable amounts and intervals.
This is a change to the open banking status quo where TPPs can only initiate single immediate payments and customers have to authenticate each payment separately.
With VRPs, the customer will agree the payment parameters with the TPP, and authenticate the payment mandate with their bank upfront. From then on, payments will be initiated without the customer having to take any action.
Customers will have a lot of control over these payments. They will be able to ask their TPP to cancel the recurring payments at any time. They will also be able to ask their bank to remove the TPP’s access, as an additional way to cancel.
What is sweeping?
At the moment, the CMA has only required that the banks provide VRPs for ‘sweeping use cases’. Sweeping enables the transferring of money between two accounts belonging to the same person. Sweeping payments are also referred to as ‘me-to-me’ payments.
The new requirement from the CMA means TPPs should be able to provide recurring me-to-me payments for any customer that banks with one of the nine biggest UK banks, from January 2022.
What are the main use case for sweeping?
There are two key use cases that sweeping has been designed to enable:
Intelligent savings
Businesses like Chip and Plum currently use open banking data to monitor how much disposable income or spare money customers have in their accounts. They can then automate sending the money to savings accounts to maximise its potential.
However, they currently have to rely on payment methods like Direct Debit to move the money, which can take multiple days to settle and is expensive.
Sweeping will mean that personal finance apps can rely on open banking as a payment method. The movement of money will be quicker, cheaper, and the customer will have more control.
Smart overdrafts
Another key use case is smart overdrafts. An important component of the CMA’s open banking remedies addresses the consumer harms resulting from high interest rates that consumers are charged on overdrafts.
Smart overdrafts will allow customers to ask TPPs to automatically pay off their outstanding overdraft in one account from another account with a positive balance.
Over time, we could also see other me-to-me use cases as VRP APIs become available.
What else could VRPs potentially be used for?
The current requirements for VRPs only apply to sweeping, but the work that the banks need to carry out to create and open up these APIs will create an infrastructure that could be used for much more.
If the banks choose to use this infrastructure, we could see a number of use cases that go beyond ‘me-to-me’ payments and fall under the category of ‘me-to-business’ payments.
For example, these APIs could provide merchants with an important alternative to Direct Debit and credit cards, offering the same flexibility, but with lower fees, no chargebacks, immediate settlement, reduced risk of fraud and enhanced control for consumers.
This could potentially see VRPs used for several types of recurring payments, including:
Regular household bills
Digital and physical subscriptions
Card-on-file payments (eg ride-hailing apps)
Repeat invoices
At TrueLayer, we believe that regulatory and market developments will unlock this functionality in due course.
What will happen next?
As of late July 2021, the CMA has given the nine largest banks in the UK six months to build VRPs to enable sweeping. We will then see TPPs use these APIs to build products and features involving intelligent savings and smart overdrafts, which require sweeping to be most effective.
We also hope that non-CMA9 banks will see the value of building these APIs for their customers, and will do so along similar timelines to the CMA9.
Imran Gulamhuseinwala, the OBIE Implementation Trustee, believes that requiring banks to enable VRPs marks the final piece of functionality in the CMA’s open banking remedies package. We think it’s just the beginning of an open banking payments revolution.
To learn more about open banking payments, how they can help your business provide a better payment experience and how they compare to other payment methods, take a look at our complete guide to open banking.