It seems scarcely that it’s been more than a year since the UK’s Competition and Markets Authority (CMA) decided to mandate the use of Variable Recurring Payments (VRPs) for sweeping use cases in the UK (payments between two accounts held by the same customer). With the implementation deadline now passed, the nine largest banks and building societies in the market are now required to make these services available to third parties.
VRPs are a form of payment instruction that allows a customer to give ongoing consent for a third party to initiate payments on their behalf. As the name suggests, VRPs are designed to support use cases in which payments need to be made repeatedly, and where the transaction amounts may fluctuate.
As with the current Open Banking Payment (OBP) model, VRPs are simply an on-ramp to the existing account to account infrastructure. In the UK, this will be the real-time Faster Payments rail by default.
Unlike transactions made using the current payment initiation APIs available in the UK, VRPs do not need to be authorised individually. While sweeping is the initial use case, VRPs can be used in a range of cases from improving the bill payment experience to potentially replacing the use of card-on-file transactions for digital commerce.
The requirement for the largest banks and building societies in the UK to launch VRP APIs has its roots in the CMA’s Retail Banking Market Investigation from 2016 (the report which ultimately led to the creation of the UK’s Open Banking framework). Account sweeping was identified as an action item for the industry to deliver improvements for customers in two ways:
Building deposits, by moving spare income into higher rate-bearing accounts.
Avoiding overdraft and similar fees by moving funds when balances fall above/below a certain threshold.
In essence, the intention is to provide customers with tools to better manage their finances. In addition, the CMA also expects VRPs to stimulate greater competition among banks and fintech providers in the market.
As with other areas of Open Banking, the rollout of VRPs will not be a big bang event. There are already several ways to automate payments into deposit accounts, such as using payment cards, standing orders, and direct debits. The economic incentives for moving away from the card on file transactions will make the case for migration of at least some of this traffic, but this will not lead to an overnight shift in volumes.
Nevertheless, the ability of VRPs to strengthen the value offered by PFM products will doubtless stimulate adoption. This will be particularly important in the current economic climate.
While there is a lot of interest in the potential for VRPs to change the payment landscape, the CMA mandate is limited only to sweeping use cases. Even then VRPs only apply to a narrow range of products, with e-money accounts (such as digital wallets) out of scope for example.
The good news for the industry is that VRPs for non-sweeping are a clear revenue opportunity.
Any financial institution wishing to engage in this space is free to agree to its own commercial terms with partners, which will allow banks to start to generate a return on the investments made to comply with the CMA mandate. NatWest has already made a move here and announced an agreement with GoCardless in May 2022.
The leading Open Banking infrastructure providers are also active here. Players including Plaid, Token, Yapily, Tink, and Truelayer have already launched their own VRP offerings to support the industry in building out use cases and propositions.
There is a long list of potential use cases for VRPs beyond sweeping. These are often referred to as ‘commercial VRPs’, with the most significant being to replace the card on file in digital commerce with a form of ‘bank account on file’ proposition.
However, it is difficult to see commercial VRPs scaling under a model requiring bilateral agreements between banks and third parties. The time and complexities involved alone make this unrealistic, and this will be a significant brake on activity in the short term. Indeed, the fintech ecosystem will see little business case to invest in VRP-based propositions unless there is an easy way to reach a critical mass of potential customers.
There are further challenges to consider when it comes to issues such as risk, customer protection, and dispute management, particularly in areas such as digital commerce. These vary considerably by use case, and this will more than likely drive a series of different price points depending on the transaction context.
These factors are well understood and there is broad agreement on the need for some form of standardised framework in the future. This will not be easy though, as each party in the value chain will have its own perspectives around functionality, risk, liability, and pricing. Nevertheless, the direction of travel is clear.
VRPs will pave the way for potentially significant changes in the UK’s payment sector. The impact will not just be limited to the UK either. Regulators, banks, and other Open Banking stakeholders around the world are watching closely to see how the VRP concept can be implemented elsewhere. In short, watch this space!
This article has been first published in the Open Banking Report 2022. Click here to download the report.
Kieran is a Principal Analyst in Celent’s Banking practice. His research focuses on the impact of technology-driven change in both the retail and corporate banking sectors, with an emphasis on the role that Open Banking, embedded finance, data and analytics, and cloud technologies have in transforming customer propositions and the long-term value chain in banking. An experienced analyst with close to 20 years in the industry, Kieran works closely with banks, vendors, and payment processors on their technology and business strategies.
For over 20 years, Celent has helped senior executives make confident decisions around their technology strategies. We offer objective advice, backed by a database of thousands of solutions and award-winning global best practice use cases. With real-life domain expertise, we also guide you through the maze of emerging tech in the pursuit of value. We are part of the Oliver Wyman Group, a wholly owned operating unit of Marsh McLennan.
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