At a time when many of us would normally be counting down the days until a summer break, the UK is about to see a potentially significant change to its open banking infrastructure. It scarcely seems possible, but it’s almost been 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). As a result, the nine largest banks and building societies in the market are required to make these services available for third parties by the end of the month.
VRPs are a form of payment instruction that allow 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 more than once, and where the transaction amounts may not be fixed.
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, the default payment rail will be the real-time Faster Payments network.
Unlike transactions made using the current payment initiation APIs available in the UK though, VRPs do not need to be authorised individually. While sweeping is the initial use case, VRPs can be applied to a range of use cases from improving the bill payment experience to potentially replacing the use of card-on-file transactions for digital commerce.
A brief history of VRPs
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 address to better serve customers in two ways:
- Building deposits, through moving spare income into higher rate-bearing accounts.
- Avoiding overdraft and similar fees by moving funds around when balances fall above/below a certain threshold.
In essence the intention is to provide customers with tools to better manage their finances. The ability to set and amend rules around parameters such as transaction limits, payment dates, or even the source of the funds being moved can all be built into VRP propositions. This offers a far greater level of control and flexibility than customers currently experience with Direct Debit, standing order or card payments made under a continuous authority.
In addition, the CMA also expects VRPs to stimulate greater competition among banks and fintech providers in the market.
Sweeping changes ahead?
As with other areas of open banking, the roll out 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 card on file transactions will make the case for a 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 the adoption of these tools. In addition, customers struggling in the current economic climate are also likely to turn to PFM and similar services in greater numbers.
The commercial opportunity for banks
While there is a lot of interest in the potential for VRPs to change the payment landscape, the reality is that the CMA mandate is limited only to sweeping use cases. Even then VRPs only apply to a narrow range of products, with eMoney 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 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. Others are likely to follow in the months ahead.
There is more work to do
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 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 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 and dispute management, particularly in use cases relating to digital commerce.
These factors are well understood though, and there is broad agreement on the need for at least partially standardised frameworks in the future. Indeed, the Payment Systems Regulator is involved in shaping discussions around creating a multilateral agreement to support use cases in digital commerce. 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.
While VRPs will not be an overnight success, they will pave the way for potentially significant changes in the UK’s payment sector in the future. In short, whether you’re on a sun lounger or in the office, watch this space!