Recurring Payments: 50 Years of faithful service
After over 50 years of faithful service we are well versed on the subject of the Bacs Direct Debit. With 4.6 billion DD’s processed each year they are the pre-eminent form of collecting regular payments efficiently and cost effectively from our bank accounts.
To date viable alternatives to Direct Debit have been limited to card based payments using a Continuous Payment Authority (higher cost and more friction), Standing Orders (a relic of 1970’s payments) and the consumer pushing a payment via Online banking (requiring consumer effort and introducing uncertainty of when the payment will be paid).
However we are, perhaps, less well versed on the subject of Variable Recurring Payments – or, given everything in payments needs a three letter acronym, VRP’s.
Together other new initiates such as Request to Pay (RtP), it is possible that VRP’s are about to enter the centre stage and disrupt the way we pay for the goods and services that we purchase on a recurring basis.
Enter the new kid on the block
The Cambridge Dictionary describes the the new kid on the block as:
Someone who is new in a place or organisation and has many things to learn about it.
The Open Banking Entity (OBIE) description of a VRP is:
A VRP will allow customers to safely connect authorised payments service providers (PISPs) to their bank account. Providers can then make a series of payments on a customer’s behalf within agreed parameters, offering more control and transparency than existing alternatives.
VRP’s 1.0 – Sweeping possibilities
In the UK, the first use of VRP’s will be for sweeping funds between accounts however, not surprisingly, the introduction of a new payment type with limited application in its first iteration has caused confusion.
This first use of VRPs follows a Competition and Markets Authority (CMA) mandate in July 2021 for the use of Variable Recurring Payments (VRPs) as the mechanism for implementing Sweeping within Open Banking.
Sweeping is defined as the automatic transfer of money between a customer’s own accounts. As a side note it is important to note that the CMA mandate was made despite the objections of some of the country’s biggest banks (the “CMA9”).
Although other banks can participate, the introduction of a Sweeping based VRP has been mandated on the banks known as the “CMA9” and will be free to use, free to access and is due for launch in summer 2022.
The confusion on the definition of a Sweeping based VRP has led the Financial Conduct Authority (FCA) to clarify what a “VRP Sweeping” payment can and cannot be used for when introduced later in 2022.
In its clarification the CMA has stated that it only has powers to mandate the practice to address problems identified in its 2017 retail banking market investigation.
The FCA’s clarification on the mandated use of VRPs states that:
VRP’s can be used to:
- move money between current account providers, including to avoid falling into an overdraft on one of them
- move money to accounts that are used for unbundling overdrafts from a current account and other alternative forms of credit that closely compete with overdrafts
- move money to accounts that are used for loan repayments as part of a service that provides alternative forms of credit to an overdraft
- move money to a credit card account; and move money to a cash savings account that is capable of paying interest.
VRP’s cannot be used to:
- make e-commerce purchases
- move money to accounts that are used to purchase cryptocurrency and other similar assets
- move money to use online gambling and gaming services
- money to accounts used to make foreign exchanges or international money transfer services
- money to use investment products, including pensions.
As you would expect the Open Banking Implementation Entity (OBIE) is both looking forward to the introduction of VRP’s and the clarity that the FCA has provided in respect of VRP Sweeping:
We welcome the clarity provided by the CMA today and look forward to the new Sweeping propositions coming to market later this year.
Delivering better outcomes continues to be a key focus of our innovative ecosystem and Sweeping is a great example of how consumers and SMEs can make their money work harder with better interest rates and overdraft alternatives.
Charlotte Crosswell, OBIE Chair and Trustee.
VRP 1.0 Use cases
A number of use cases for VRP Sweeping have been identified – these include building up savings (together with unlocking funds in bank accounts that earn little or no interest) and preventing overdrafts (i.e. covering an short term deficit in a bank account with funds from another account that has a positive balance).
Whilst Sweeping is the UK’s first use of Open Banking based VRP’s it is clear that there will be many calls for the ‘game changing’ opportunities of VRPs to be explored.
Stating that the use of VRPs for Switching and the FCA’s clarification is a ‘step in the right direction’ Maria Palmeiri at Yapily’s cautions that “only when policy mandates move beyond Sweeping will VRP be a true game-changer. As more VRP APIs become available, more innovative use cases for open banking will be realised.”
Whereas the introduction of a Sweeping based VRP has been mandated on the banks known as the “CMA9” is free to use, free to access and due for launch in summer 2022, the implementation of VRPs for other types of payments (VRP 2.0) will be optional for all banks, has the potential to be a ‘charged for’ service, requires a underlying contract and will be launched at the discretion of individual banks.
In a recent edition of Payments:Unpacked we covered the news that NatWest is to begin pilot testing of its variable recurring payments product Payit in a live customer environment in the first half of 2022, with plans to scale to a commercial product ready by early 2023.
It is set to revolutionise the way payments are made online and will look to replace current traditional payment methods such as Direct Debit and Card on File in the future. VRP introduces a mechanism to authorise future payments within pre-agreed limits, meaning consumers can benefit from a new level of payment automation, while experiencing greater transparency and control over their finances.
James Hogson, head of Payit
NatWest state that it has worked on this initiative with Open Banking infrastructure provider TrueLayer.