The Right Balance? Payments Insiders React To CMA’s VRP Clarification

March 17, 2022
The UK's Competition and Markets Authority (CMA) has published its standards for what sweeping can and cannot be used for when variable recurring payments (VRPs) are introduced in July this year.

The UK's Competition and Markets Authority (CMA) has published its standards for what sweeping can and cannot be used for when variable recurring payments (VRPs) are introduced in July this year.

The CMA has now made known how sweeping can be used by open banking players, following its decision in July 2021 to mandate the use of VRPs as the mechanism for implementing sweeping.

Sweeping is defined as the automatic transfer of money between a customer's own accounts, such as moving excess funds into a separate savings account or using them to repay a loan or overdraft account.

Although the mandate was originally supposed to be implemented at the end of January this year, it has since had a revised deadline of July set by the CMA, as announced in November last year.

“The recent CMA clarification on sweeping VRP brings much more certainty about what is expected from market participants,” said Dmitrii Barbasura, former chief executive of Salt Edge and a member of the Forbes Finance Council. “It clearly opens up not only the retail customer segment to new market developments but covers SMEs as well.”

In combination with existing account information services, sweeping VRP can allow near real-time analysis and movement of the funds directly covering overdrafts, credit products, lending and saving propositions where customers will receive immediate benefits, Barbasura continued.

It is progress and it is well-timed in terms of the state of the market at the moment, according to Will Billingsley, co-founder of ApTap, an open banking software company. “Anything that the regulator can do to enable fintechs, financial institutions and other parties to help consumers manage their money is important right now.”

Can do, no can do

The competition watchdog has stressed that it only has the powers to mandate the practice to address problems identified in its 2017 retail banking market investigation.

In a letter addressed to the Open Banking Implementation Entity’s (OBIE) chair, Charlotte Crosswell, it sets out its position on the payment method.

Here, the CMA has said that sweeping can be used to move money:

  • Between current account providers, including to avoid falling into an overdraft on one of them.
  • To accounts that are used for unbundling overdrafts from a current account and other alternative forms of credit that closely compete with overdrafts.
  • To accounts that are used for loan repayments as part of a service that provides alternative forms of credit to an overdraft.
  • To a credit card account.
  • To a cash savings account that is capable of paying interest.

However, it cannot be used for making e-commerce purchases as well as moving money to:

  • Accounts that are used to purchase cryptocurrency and other similar assets.
  • Use online gambling and gaming services.
  • Accounts used to make foreign exchanges or international money transfer services.
  • Use investment products, including pensions.

“The CMA clarification is largely in line with what we expected,” said Ciaran O’Malley, vice president of financial services and e-commerce at Trustly. “The CMA has always been tightly aligned to the Order and we would have been very surprised if they have deviated significantly.”

While speaking to VIXIO, he pointed out that if they had diverged, there would have been a considerable number of challenges from the banks.

“The decision on pensions is nonetheless a missed opportunity,” he said. “While retail banks have stepped back from pensions and investments since the financial crisis and MiFID II, these are key functions of retail banks within society.”

To define retail banking as current accounts and cash savings would appear to miss a core aspect of financial life, as well as disregard a core way of saving, O’Malley argued.

“It must be noted though that if the CMA had defined pension and investments within scope, there could have been a legitimate argument that AIS should be extended to these products which would have been very controversial.”

Commenting on the clarification, Billingsley told VIXIO: “Overall, I’d say its a positive step and the conclusions are fair, but I do hope that this allows fintechs, financial institutions and others some wiggle room to explore other use cases that have been defined as out of scope or not included at all.”

Now that the OBIE has received the letter, it will progress plans beset on the financial institutions who are subject to the CMA Order — known as the CMA9 — and third-party providers (TPPs) to test sweeping using VRPs in a managed rollout.

“We welcome the clarity provided by the CMA today and look forward to the new Sweeping propositions coming to market later this year," said Crosswell.

Delivering better outcomes continues to be a key focus of our innovative ecosystem and sweeping is a great example of how consumers and small and medium enterprises can make their money work harder with better interest rates and overdraft alternatives, she continued.

VRP progress so far

The progress of VRP engagement in the UK, as well as open banking, draws cautious optimism from experts in the field.

“We need to be patient,” said Billingsley. “As a sort of parallel, we’ve seen contactless really come into its own somewhat recently, over a decade after launch.”

For example, contactless payments were first introduced in the UK in 2007, but it was not to the middle of the next decade that they really started to take off.

For him, open banking is really just getting started. “I think VRP can act as a catalyst, as it has real potential to offer tangible, value-driving services to consumers, financial institutions and merchants.”

“The UK is clearly the market leader in Europe,” said O’Malley. “However, as almost no other countries have recurring solutions even close to live, this is not a bold statement.”

In terms of product specifications, the OBIE has done a very good job, he continued. “The product balances the benefits of moving to instant payments and higher settlement certainty with the need to set limits to protect customers and make them consider the true cost of a £9.99 a month subscription.”

Practically, however, the fragmented approach to commercial access to VRPs creates a significant challenge, O’Malley suggested. “While Natwest is doing a limited pilot and other banks are starting to move forward, to be more than a Proof of Concept and be useful to merchants, a VRP product must have 80 percent consumer coverage and a compelling commercial model.

“Ultimately, we are awash with fintechs and banks doing proof of concepts for PR, what we need is a compelling and broadly available product that merchants can rely on,” he argued.

The question of whether the UK will succeed in VRPs is, in O’Malley’s view, down to how open banking in the UK will be governed going forward. “There is an economic benefit from further open banking and open data innovation but it needs the legal power to bring such innovation to market.”

This is where the future of the OBIE, which is being considered at the moment, is crucial.

“If the go-forward OBIE does not have any legal mandate to force banks to deliver new services then the UK's position as an open banking innovator will fade,” he said.

He continued: “I would therefore support primary legislation enshrining rights to data and core services, such as payments and telecoms, with a technical standards body to convert these rights into API specifications across key services like banking, utilities, and telecoms.”

But, O'Malley concluded, this is not something that we can expect in the short term.

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