Open Banking: The three letters signalling a payments revolution

If you missed the latest open banking development in late July, the UK Competition and Markets Authority (CMA) announced it will require the nine biggest UK banks to implement Variable Recurring Payment (VRP) APIs to enable customers to sweep money between their accounts.

This is great news for both consumers and businesses. Why? Firstly, it injects another element of competition into the retail banking market after years of discussion. Secondly, it lays the foundation for interesting use cases that will make money management, subscriptions and much more a simpler process. That is exciting because it has the potential to move us from the first phase of open banking and into open finance.

But what exactly are Variable Recurring Payments and sweeping, and why are they such an important development?

VRP: open banking’s Direct Debit equivalent

You’re probably familiar with how Direct Debit works, where businesses are able to collect payments of variable amounts from the same customer on a recurring basis, without needing to gain new permission for every payment. VRPs will allow businesses to do a similar thing using open banking.

VRPs are an additional Open Banking API that banks will now need to build that enables third party providers (TPPs) like TrueLayer, to initiate a series of payments for a customer at variable amounts and intervals. This is a change to the current open banking status quo where TPPs can only initiate single immediate payments and customers have to authenticate each payment separately.

With VRPs, the customer will agree the payment parameters with the TPP, and authenticate the payment mandate with their bank upfront. From then on, payments will be initiated without the customer having to take any action.

It’s important to note that even with this additional capability, VRP maintains the central ethos of open banking of the customer being in control. They will be able to ask the TPP to cancel the recurring payments at any time. They will also be able to ask their bank to remove the TPP’s access, as an additional way to cancel.

So what is sweeping?

Currently the CMA has only required banks to provide VRPs for ‘sweeping use cases’ - the transferring of money between two accounts belonging to the same person. Sweeping payments are also referred to as ‘me-to-me’ payments.

The new requirement from the CMA means TPPs should be able to provide recurring me-to-me payments for any customer that banks with one of the nine biggest UK banks, from January 2022. That, of course, is still reliant on the CMA9 banks implementing the APIs on time and with sufficient quality.

The main use cases

There are two key use cases that sweeping has been designed to support:

● Intelligent savings Businesses like Chip and Plum currently use open banking data to monitor how much disposable income or spare money customers have in their accounts. They can then automate sending the money to savings or investment accounts, to maximise its potential.

However, they currently have to rely on payment methods like Direct Debit to move the money, which takes multiple days to settle and is expensive. Sweeping will mean that personal finance apps can rely on open banking as a payment method. The movement of money will be quicker, cheaper, and the customer will have more control.

● Smart overdrafts

Another key use case is smart overdrafts. An important component of the CMA’s open banking remedies addresses the consumer harms resulting from high interest rates that consumers are charged on overdrafts. Smart overdrafts will allow customers to ask TPPs to automatically pay off their outstanding overdraft in one account from another account with a positive balance.

There is so much potential that can be unlocked with just these use cases that it would also be hugely beneficial for non-CMA9 banks, who see the value of building these APIs for their customers, doing so along similar timelines to the CMA9.

What happens next?

While the current requirements for VRPs only apply to sweeping, the work that the banks need to do now to create and open up these APIs will create an infrastructure that could be used for much more. If the banks choose to use this infrastructure, we could see a number of use cases that go beyond ‘me-to-me’ payments and fall under the category of ‘me-to-business’ payments.

For example, these APIs could provide merchants with an important alternative to Direct Debit and credit cards, offering the same flexibility, but with lower fees, no chargebacks, immediate settlement, reduced risk of fraud and enhanced control for consumers.

This could potentially see VRPs used for several types of recurring payments, including:

● Regular household bills (eg utilities)

● Digital and physical subscriptions

● Card-on-file payments (eg ride-hailing apps)

● Repeat invoices

Given the benefits to consumers and businesses including merchants, telcos and utility firms, we believe the regulatory and market developments will unlock this functionality in due course.

Imran Gulamhuseinwala, the OBIE Implementation Trustee, stated that requiring banks to enable VRPs marks the final piece of functionality in the CMA’s open banking remedies package.

We think it’s just the beginning of a payments revolution.

The views and opinions expressed are not necessarily those of AltFi.