Sweeping Variable Recurring Payments: A new frontier of Open Banking
After the Joint Regulatory Oversight Committee (JROC) published the “Recommendations for the next phase of open banking in the UK” on April 17th 2023, which EDC commented on the last month’s newsletter here, it is worth having a closer look at the possible Open Banking use cases to understand how the future payment landscape might look like.
Variable Recurring Payments (VRPs) are a new payment method gaining traction in the world of Open Banking. But what are VRPs exactly and which use cases can they satisfy? VRPs are payments made automatically on a regular basis, whose frequency and amount can vary, differently from fixed recurring payments.
VRPs use a push-based model, as the payment transaction is triggered by the payer. This makes them different from a direct debit which is a “pull payment” banking transfer, i.e., pulling funds from the consumer’s account (the payer) to another account (the payee), such as an energy utility provider.
The first use case to be available was sweeping VRPs, which are real-time payments from two different accounts of the same person (“me-to-me payments”). They could be considered the smarter version of direct debit and are expected to replace it.
In the UK, VRPs were introduced in 2021. The Competition and Markets Authority (CMA) mandated the nine largest banks as part of the Open Banking initiative to enable me-to-me payments by implementing a VRP Open Banking API. Six of the nine are live today (as of May 2023): Barclays, HSBC, Lloyds, Nationwide, NatWest, and Santander - have started offering sweeping VRPs to their customers via their Internet banking platforms.
Benefits of sweeping VRPs
The benefits of sweeping VRPs are numerous, including:
- Control: Customers are in better control to safely connect authorised payment providers to their bank account to make payments on their behalf in line with agreed limits and defined timings of the payments. As a result of these consumer controls, VRPs offer better financial management. They are great for maximising savings, for example, by monitoring the movements in a bank account and sending spare money to saving accounts. Moreover, they can be used to avoid overdrafts because the consumer controls in the VRP can be set to maintain a positive balance.
- Time savings: VRPs are less time-consuming than other payment methods since strong customer authentication is required only on the first transaction, and the transfer is real-time.
- Cost savings: VRPs are free to consumers.
Usage and Feedback
The number of people who started using VRPs is not available yet, due to the relative novelty of the concept. For now, UK banks are not sharing information about the number of customers who are using Open Banking.
Also, user feedback is not yet available, but the general consensus, especially among financial institutions, is that this technology will bring more benefits to consumers. These are mainly related to the time savings enabled by the reduced manual intervention necessary to transfer money from one account to the other. Since sweeping VRPs are transfers happening between two different accounts of the same person, it is reasonable to think that not many concerns, such as fraudulent bank transfers, will be raised. However, users need to be able to cancel a VRP they set up in real-time to always maintain control over their funds. If this condition is met, the advantages of this new payment method can only encourage more usage.
The future potential of VRPs
Since the JROC is pushing for the implementation of the Open Banking ecosystem, in the next few months, it is likely that other use cases will be possible. For example, sweeping VRPs can be used to manage debt, with excess funds automatically transferred to another account to pay outstanding debts. Vulnerable customer segments can also benefit from this technology: for example, it can allow the family of a vulnerable person to transfer money between the individual's accounts. This can be useful to manage the vulnerable person's funds while ensuring their financial independence to the extent desired.
Despite the applications for sweeping VRPs already offering several benefits to users, it is likely that they will not deliver the transformative impact that Open Banking has the potential to convey. Indeed, considering sweeping VRPs’ potential limitations is essential. Most importantly, consumer adoption poses a significant challenge: this technology risks go unnoticed, as it competes with existing ad hoc bank transfers and faster payments that consumers are already comfortable with. Robust marketing strategies will be necessary for banks to create awareness of sweeping VRPs, also targeting specific client groups, for example, vulnerable customer segments. Furthermore, to achieve the real value of Open Banking, the focus should shift to non-sweeping (or commercial) VRPs, which will enable a broader - and more interesting – range of use cases, such as moving funds to third-party businesses and merchant accounts. Differently from their sweeping counterpart, this technology has the power to realise the revolutionary change that Open Banking promises to generate but can only be fully realised with more participants in the ecosystem offering and accepting it. This is what the JROC is working on, with plans to make non-sweeping VRPs widely available by the end of 2024.
The content of this article does not reflect the official opinion of Edgar, Dunn & Company. The information and views expressed in this publication belong solely to the author(s).