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Variable recurring payments (VRP) is coming to the market in the next couple of months in the form of sweeping, but this is only the beginning, say experts who argue it will shake up the status quo.
Although the adoption of open banking has been relatively slow in the UK, many experts believe that 2022 will be a standout year when open banking finally takes off, thanks, in part, to the arrival of VRP.
VRP allows third-party providers (TPPs) to automatically move money from a person’s bank account based on predefined parameters.
The technology is considered to be one of the most significant developments in open banking to date.
It gives consumers much greater control over their finances and it offers an easy and convenient solution to support changing consumer habits, such as the increasing popularity of subscriptions from streaming services to vegetable boxes.
Sweeping benefits
VRP will first come to the market in the form of sweeping in the next couple of months.
Last July, the UK Competition and Markets Authority (CMA) mandated VRP to be used for sweeping use cases, which enables TPPs to move money between two accounts owned by the same person.
Sweeping will introduce smart savings, whereby a third party can automatically move money to the consumer’s account that offers better interest rates.
The CMA ordered the nine biggest UK banks (CMA9) to implement the VRP APIs for sweeping by this month.
NatWest has been one of the leading players in the space, having built its VRP API for sweeping already in 2021. It made the first sweeping transaction in a live environment in December and, in May, it carried out the first non-sweeping customer payment via VRP.
Lloyds is currently in the testing phase, Archi Shrimpton, senior manager of open banking at the Lloyds Banking Group, confirmed at a Payments Association webinar on VRP, adding that the bank is “working very hard” to meet that deadline.
The biggest challenge is “having the right people on the ground that are able to deliver it alongside all of the other things that you want to deliver to your customers outside of open banking”, Shrimpton said.
“The market for engineers is hot.”
Nonetheless, Shrimpton said that Lloyds expects to be live on the market with sweeping within the next couple of months.
Beyond sweeping
Although sweeping is the main use case of VRP at the moment, panellists on the Payments Association webinar agreed that there are more opportunities on the horizon for VRP than sweeping.
“Even early on, the first time we looked at sweeping and the VRP standard back in 2017, we were talking about how VRP could be a solution for standing orders, direct debits, etc. and there were far broader use cases,” said Stephen Wright, head of regulation and standards at NatWest‘s Bank of APIs.
In an increasingly subscription-based world, VRP can give much greater control over recurring payments than current card-based methods or card-on-file transactions.
For example, consumers may find transactions on their bank statements or credit card bills they did not expect or may find it difficult to cancel them.
By allowing consumers to set up pre-defined parameters, VRP can put consumers back in control, Wright said.
Another use case would see the same VRP technology replacing direct debits. As VRP will run on Faster Payments rails, it will be processed instantly, therefore reducing the three-day settlement cycle of direct debits and enabling better liquidity management for merchants.
In addition, VRP can reduce one of the biggest frictions in open banking payments: strong customer authentication (SCA).
For example, SCA is not required if the payment remains under certain thresholds set previously by the consumer. These parameters are the maximum number of transactions in a given period, the maximum value of a single transaction, and the total value of all transactions in that period.
By allowing SCA to be delegated to TPPs, VRP enables a one-click payment process for trusted beneficiaries.
“Initially there will be a lot of focus on VRP and sweeping being used to replace existing subscriptions and build payment top-up use cases and then it will be very exciting to see where it goes beyond that,” Wright said.
