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Why VRPs will supercharge open banking adoption

The introduction of Variable Recurring Payments for 'sweeping' heralds a new era for open banking adoption, writes Duncan Barrigan, Chief Product & Growth Officer at GoCardless.

a chess board with pieces

Photo by Gladson Xavier

Recent figures from the OBIE reveal there are now more than five million active users of open banking in the UK. Last year there was a staggering 60 per cent increase in this figure versus the end of 2020, marking 2021 as open banking’s most significant year for growth yet. Payments were key in reaching this milestone, and it’s easy to see why. Open banking-enabled payments have provided merchants and consumers increased security, an improved customer experience, and reduced costs, making them a credible alternative to card payments. 

Of course, open banking has not been without its critics, with claims that it’s failed to live up to expectations. However, the numbers are hard to ignore. Consumers and merchants alike are excited by the innovations, and this will only continue as we look at what’s to come. Once we hit the July CMA deadline which mandates Variable Recurring Payments (VRP) for sweeping, the adoption curve for open banking will follow an even steeper incline -- and with more interesting use cases to come, VRPs have the potential to supercharge open banking take-up over the next few years.

VRPs for sweeping

Sweeps are “me to me” transfers - money moving between accounts that belong to the same person, such as from a current account to a savings account. Once they come into effect, they will revolutionise the way people manage their savings and investments. 

Historically, consumers have been forced to transfer money manually, or through direct debit and card payments. These create a variety of issues such as a delay between sending and receiving money, or having to approve the transaction each time. By setting rules to automate the movement of funds, consumers will be able to automatically make their money work harder without the hassle. This means they can pay down debt faster or put spare money to work in an investment account straight away, without having to lift a finger. 

At a time where so many are looking for new ways to save, it’s easy to see the appeal of sweeping. 

VRPs in eCommerce

While the new mandate only covers sweeping for now, there is huge potential for VRPs in an eCommerce setting. As it stands, card-on-file transactions leave a lot to be desired for merchants, from high processing fees to the risk of fraud or failed payments, all of which could result in purchase abandonment and customer churn. 

In contrast, VRPs can offer businesses a cheaper and more secure alternative to cards. And the more merchants that support bank payments, the more likely we are to see greater consumer adoption. 

VRPs will come into their own in cases where payers have an ongoing relationship with a merchant. One use case could be allowing customers to set spending parameters with their favourite brands. For example, a customer could create a rule to spend up to £100 per month with a food delivery service. After an initial authorisation, that business could collect payments, potentially for a different amount each time up to the monthly maximum, without requiring the customer to authenticate every transaction.

The introduction of Strong Customer Authentication (SCA) rules later this month could also prove to be a turning point. Previously, one-click checkout was common for card payments, but SCA requires merchants to add friction into the journey through extra verification. Merchants that have already implemented SCA have reported drops in conversion -- and soon it will be required for nearly all transactions. VRPs will then have the upper hand: Because authentication via an online banking account is built into the payment flow, VRPs are SCA-compliant by design, with no extra steps needed. This will make them much more appealing to consumers in an eCommerce environment.

Barriers to adoption

It is, of course, still early days and there are a few barriers that may stand in the way of short-term, rapid VRP adoption. Firstly, there is the issue of consumer protection. Bank debit and card transactions are well-established with long-standing protections in place, but that’s not yet the case for VRPs. This won’t be an issue for sweeping as this only covers “me to me” transfers. However, without the necessary protections in place, consumers could lack the confidence to swap their card payments for VRPs in eCommerce transactions. Industry players need to address this critical area.

The second barrier is cost. We currently don’t know how VRPs will be charged, and the costs involved for merchants could potentially slow adoption. Also, setting fees too high could make VRPs unusable for collecting low-value transactions.

The start of a new era

The introduction of VRPs for sweeping feels like the beginning of a new era for open banking adoption. With the promise of making it easier to save and invest, I expect that many will take advantage of VRPs once sweeping is in place. But as a self-professed ‘payments geek’, it’s the use cases outside of sweeping that excite me most. Altogether, it looks like the growth of open banking users will continue to rise at a healthy rate for years to come.

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

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