Open Banking and Direct Debit: Strange bedfellows or perfect partners?
Issue 372 | 18 August 2022
Variable Recurring Payments
In this edition of Payments:Unpacked we unpack the “new (payments) kid on the block” - Variable Recurring Payments (or VRP’s).
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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 with 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.
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.
Open Banking Entity (OBIE)
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 such limited application in its first iteration has caused confusion.
This first use of sweeping 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 currently being launched.
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.
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 (sweeping) VRPs states that:
Sweeping 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.
Sweeping 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.
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 currently being launched, 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.
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
Unpacking VRP’s 2.0
Having introduced the concept of VRP’s and highlighted the difference between VRP 1.0 (sweeping) and VRP 2.0 (non sweeping use cases) the rest of this briefing provides a selection of third party sources who have got something to say about VRP’s 2.0.
Rather than seeking to provide an exhaustive list this briefing seeks to provide a varied selection of third party resources to help unpack the transformative opportunity of VRP’s here in the UK.
VRP’s according to the Open Banking Implementation Entity
Variable Recurring Payments (VRPs) are a pioneering payment instruction that lets customers safely connect authorised payments providers to their bank account to make payments on their behalf in line with agreed limits.
The Competition and Markets Authority (CMA) mandated nine UK banks (the CMA9) to implement a VRP open banking API to enable easier sweeping of funds from a customer’s current account to another of their accounts.
This new way to pay could herald a new era in consumer and business banking. VRPs offer more control and transparency than existing payment alternatives, such as Direct Debits and card-on-file instructions.
In contrast, VRPs offer ongoing permission to take payments, within agreed rules, enabling a more seamless and secure way to pay for goods and services.
The article also explores how VRPs can help:
Enabling customers to control payment limits
Enabling smarter saving
Offer cheaper short term credit
Non-sweeping VRPs have not been mandated by the CMA, so the CMA9 are not obliged to provide these payment services. However, there are clearly opportunities for non-sweeping VRPs which could help businesses and consumers to:
Manage regular bills such as utilities payments.
Manage subscription services.
Help businesses to pay their tax, by putting tax aside and VAT at the point of invoice collection.
Remove the headache of indemnity claims associated with Direct Debit.
In this Payments:Unpacked podcast we are joined by Sean Devaney from CGI. Sean helps us unpack the Open Banking initiative called Variable Recurring Payments (or VRP's).
Unpack Variable Recurring Payments with Sean as he explains:
Are VRP's the end of Open Banking?
What is a VRP?
What do the banks need to do to introduce VRP's?
Will VRP's be chargeable?
The whats and the whens around the hottest topic in payments
Source: Salt Edge
While open banking has been leading major disruptions in digital banking, its first big-time innovation may have just occurred. I’m talking about Variable Recurring Payments (VRPs) – a new lower-cost way of making payments using bank APIs, happening in real-time, and it comes as a more secure alternative to Direct Debits and card-on-file for recurring payments.
In their article Salt Edge explore:
What are the current issues around Direct Debits?
Why is it more beneficial to use VRP over Direct Debits or card-on-file recurring payments?
The road to VRP: what does it take to make it happen?
Predictions: when will VRP get mass adoption?
How will Variable Recurring Payments (VRPs) affect Open Banking?
CGI and Ordo got together for a UK Finance hosted webinar, focusing on the relationship Variable Recurring Payments (VRPs) will have with Open Banking.
Philip Skinner of CGI was joined by Craig Tillitson of Ordo and Phillip Mind of UK Finance to discuss the industry and external factors that will shape the development and adoption of VRPs and look ahead to how you can make sure that your business and your customers are best placed to benefit from VRPs.
Webinar (on demand): How will Variable Recurring Payments (VRPs) affect Open Banking?
Open banking and Direct Debit – Strange bedfellows or perfect partners?
In this podcast Richard Ransom, Strategic Customer Success Manager of Bottomline, debunks the topic of Open Banking and its impact on Direct Debits, something that has been a fear around the globe.
Will Variable Recurring Payments kill Direct Debits?
Open Banking is behind the emergence of the Variable Recurring Payment or VRP. Under Open Banking, a Payment Initiation Service Provider (PISP) provides a service to facilitate access to a customer's bank account that is then used to transfer funds on the customer's behalf. A VRP uses a PISP to set up recurring payments under rules and constraints. This system differs from the traditional bank debit system that handles recurring payments
Under a direct debit system, the bank uses a 'pull method' where a business can request regular payments based on a pre-completed mandate set up by the bank customer.
A VRP uses a push-based model and differs in the mechanism used, i.e., Open Banking, with a centralized consent to pay mechanism. Importantly, this mechanism places the customer at the core of the transaction.
VRP uses the Faster Payments service, so fund transfers are near-real time. This is great for retailers. In addition, VRPs are fully digital, so no paperwork is needed, unlike a direct debit mandate. This saves the customer time and potentially reduces fraud and manual error risks at this juncture in the user journey.
VRPs are customer-centric, placing the control of finances in the hand of the consumer. The VRP system allows granular control with customers setting maximum payment amounts, consenting to regular payments, and being able to cancel payments instantly.
Variable Recurring Payments, and how they can accelerate innovation
Tink have been considering how VRPs can accelerate innovation.
Less fraud, less payment risk, and safer commerce for consumers and businesses – can VRPs actually deliver on all of these promises? We think yes. Get to know all about Variable Recurring Payments and why it has the potential to change the face of consumer payments.
Tink explore what VRP flows could look like and how it has the potential to upend online payments by offering a more secure, convenient and cost-effective alternative.
Variable Recurring Payments - the driver of account-to-account payments becoming the norm?
The Payments Association have published an insights webinar "Variable Recurring Payments - will they be the driver of account-to-account payments becoming the norm?"
The Payments Association promise that you'll learn about the importance of VRPs to the industry, and where they could be an opportunity for you.
Token are conducting a VRP survey
In 2021, Token and Open Banking Expo ran the first industry-wide survey of its kind on Variable Recurring Payments and Sweeping.
Twelve months and many industry developments later, Token are seeking feedback and perspectives on Variable Recurring Payments, sweeping, and the future of payments.
This survey only takes 5 minutes to complete, Token will share the results in a forthcoming survey report in a few months' time.
Survey: Tink VRP survey.
The truth about Variable Recurring Payments
Vyne have been asking questions about VRP’s - When will Variable Recurring Payments (VRPs) be ready to use? Will they kill off Direct Debits? Will the payments landscape be changed forever?
In their blog Vyne have shed some light on where things stand and what is actually possible, and share a potential timeline so you’ll be ready when VRPs start making their mark.
What, when and why
Customer payment flows
To sweep or to to sweep?
Non sweeping case studies
What the timeline could look like
The silver lining of greater control and flexible payments right now
Consumers now expect a seamless checkout experience in a way that suits them. VRP can help address these challenges, but with some time until mass market availability we’re excited to bring friction-free checkout alongside flexible payment options to merchants today through Request with Vyne.
William Hand, Senior Product Manager @ Vyne
And Vyne finish their blog off with a great case study - where Vyne worked with Mainstage Festivals to deliver a monthly instalment payment method, giving customers more flexibility when paying for their festival tickets. Instead of paying for their ticket in one go, customers can pay for the initial deposit and split the remainder over time, completing each payment using Vyne’s Pay with bank solution.
Paying the final 50–70% in instalments is a real win for customers; it’s great that we can give customers the option of paying in instalments.
ROB TOMINEY – CHAIRMAN + CO-FOUNDER MAINSTAGE FESTIVALS
Nat West are preparing to pilot
NatWest's open banking payments tool, Payit, has hit the £1 billion in processed payments milestone. Launched in June 2020, Payit was the first open banking payments solution launched by a UK lender, allowing businesses and consumers to send and receive money securely without having to share any bank details.
It has now handled more than five million payment transactions, averaging £200 in value, removing the need for a card for a slicker, more intuitive customer journey, whilst reducing exposure to fraud and limiting transaction fees.
NatWest is now preparing to pilot Variable Recurring Payments functionality which is set to replace Direct Debit and card-on-file payments. Once securely set up, it will allow consumers to authorise Payit to make ongoing payments to a business within agreed parameters.
GoCardless launch Variable Recurring Payments
Source: The Paypers
UK-based A2A payments provider GoCardless has rolled out Variable Recurring Payments. This means GoCardless’ ‘Instant Bank Pay’ feature will now support one-off and recurring transactions through open banking.
Developer docs are live and a sandbox will be unveiled in the coming weeks for merchants to test their VRP readiness as banks begin to introduce the new technology to the public.
The news comes as Pillar, a fintech platform breaking down credit borders, becomes an early adopter to choose GoCardless to support its payments for a new and more inclusive era of credit across the globe.
Pillar is developing a new global financial platform which will provide immigrants with access to credit products when moving to a new country. By offering VRPs as a key part of its payment functionality, Pillar will provide customers greater control over their finances through the ability to set payment parameters and make and cancel recurring payments instantly.
Customers will also enjoy a more seamless payment experience: VRPs enable them to authenticate recurring payments with a single click, eliminating the need to re-authenticate or re-authorise every transaction.
Plaid launches Variable Recurring Payments
Source: The Paypers
UK-based Open Banking network and payments platform for digital finances, Plaid, has launched a new form of Open Banking payments, Variable Recurring Payments (VRP).
The news comes after thorough analysis of the UK market which shows that VRP could save businesses in the country up to GBP 1.5 billion in fees, with the proper intervention from policymakers.
Plaid has launched its own VRP product to enable recurring, future money investment between accounts of the same owner using a single authorisation. The feature can be used in place of existing popular options like card-on-file and direct debits to allow businesses to authorise future payments directly from a bank account with one authorisation, having access to instant settlement and a customisable payment experience with minimum fees.
One of the first customers to deploy Plaid’s latest VRP feature is Expensify, a payments super app that helps both businesses and individuals around the world to simplify the way they manage their finances. By deploying VRP, Expensify clients can automatically pull varying repayments from their customers’ business accounts to settle card balances.
Curve are looking to VRP to bring down costs and improve services for customers
All-in-one card and financial app Curve has tapped TrueLayer to deliver automated variable recurring payments for customers.
Under the collaboration with TrueLayer, Curve customers will be able to make purchases via instant bank transfer using the Curve all-in-one card. They will also have the flexibility to set up a recurring payment mandate for future purchases. For customers of its credit product, Curve Flex, recurring payments will automatically sweep funds from their linked current account for scheduled repayments.
The payment consent is tied to the customers’ bank account and doesn’t expire until it’s revoked by them, for example, when the Curve Flex balance has been paid off.
Yapily signed first VRP customer
Open banking platform Yapily has launched its variable recurring payments (VRP) product and signed one-click payments platform Volume as it first customer.
VRP allows businesses and consumers to use open banking for recurring payments of varying amounts, without the need to re-authenticate every transaction.
Volume will be using Yapily's product to provide its merchant customers with analternative to standing orders and direct debit payments over time.
VRP has triggered the next wave of disruption at the checkout. It is the direct debit equivalent of open banking, except where the movement of money is quicker, cheaper, and the customer has more control. This has the potential to be transformative for any business. At Volume, we are on a mission to remove hidden fees at the online checkout for both consumers and merchants, and Yapily is helping us to turn that vision into a reality
Simone Martinelli, founder and CEO at Volume
Yapily is also targeting the UK's largest banks - mandated by the Competition and Markets Authority to introduce VRP - through its year-long partnership with Ozone API.
Together with Yapily, we have everything a bank needs to switch on and monetise this opportunity. Now the CMA VRP for sweeping deadline has passed for the UK’s nine largest banks, it’s our mission to ensure that no bank gets left behind.
Huw Davies, co-founder and chief commercial officer at Ozone API
TrueLayer have unveiled a VRP API
TrueLayer has unveiled a recurring payments API capable of dealing with both sweeping and non-sweeping use cases.
The mandated approach (Sweeping VRPs), while beneficial, only supports payments between an individual customer’s accounts, limiting the ultimate potential of VRP. We are proud to announce the industry's first recurring payments API that goes beyond that mandate to deliver comprehensive payment options that will create a better customer experience.
Matt Parish, product lead for VRP at TrueLayer,
TrueLayer says it is collaborating with select banks around non-sweeping, offering businesses recurring payments to their customers for a range of services, including utility bills, subscriptions and other forms of digital payments. Using VRP through TrueLayer enables the amount being collected to vary without needing the account holder to re-consent every payment - for example, utility bills with a fixed payment date but different amounts due each time.
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