VRP: The Beginning of a New Payments Revolution

Matt Parish from TrueLayer discusses Variable Recurring Payments (VRP) and hopes for the future when it comes to VRPs and Sweeping

In late July 2021, the UK Competition and Markets Authority (CMA) announced it would require 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. Why? First, it injects another element of competition into the retail banking market after years of discussion. Second, it lays the foundations for interesting use cases that will make money management, subscriptions, and much more a simpler process. That is exciting because it has the potential to move us from the first phase of Open Banking and into Open Finance. But why exactly are Variable Recurring Payments and sweeping such an important development?

VRP: Open Banking’s Direct Debit equivalent

You may already be familiar with how Direct Debit works, where businesses can collect payments of variable amounts from the same customer on a recurring basis, without needing to gain new permission for every payment. VRPs will essentially allow businesses to do something similar using Open Banking. 

VRPs are an additional Open Banking API that banks will now need to build, which enables third party providers (TPPs) to initiate a series of payments for a customer at variable amounts and intervals. This is obviously a change to the current Open Banking status quo where TPPs can only initiate single immediate payments and customers have to authenticate each payment separately.

It’s important to note that even with this additional capability, VRPs have been designed to ensure it maintains the central ethos of Open Banking of the customer being in control. They will be able to ask the 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.

So, what is sweeping?

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 onwards. That, of course, is still reliant on the CMA9 banks implementing the APIs on time and with sufficient quality. 

Primary use cases of sweeping

There are two key use cases that sweeping has been designed to support:

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 or investment accounts, to maximise its potential.

However, they currently have to rely on payment methods like Direct Debit to move the money, which takes 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 the 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 using another account with a positive balance.

There is so much potential that can be unlocked with just these use cases. It would also be hugely beneficial for non-CMA9 banks, who see the value of building these APIs for their customers, doing so along similar timelines to the CMA9.

What happens next?

While the current requirements for VRPs only apply to sweeping, the work that the banks need to do now 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 several 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:

• Repeat invoices.

Given the benefits to consumers and businesses including subscription businesses, telcos, and utility firms, we believe the regulatory and market developments will unlock this functionality in due course.

At TrueLayer, we think it’s just the beginning of a payments’ revolution.

The article was originally published in The Paypers` Open Banking Report 2021.

About Matt Parish