a win for open banking, but it’s only the first step

Undoubtedly, the Competition and Markets Authority’s (CMA) ruling making Variable Recurring Payments (VRP) mandatory for sweeping – the automatic transfer of money between a consumer’s own accounts for saving or repaying a loan – is a huge milestone for open banking.

Variable Recurring Payments are an extension of the open banking payment initiation service

It also represents the most meaningful impact open banking will have on consumers so far. But what’s truly exciting is that it’s just the first piece of a much larger puzzle.

Unpacking Variable Recurring Payments for sweeping

While there’s been a lot of excitement around the CMA’s ruling, it’s worth unpacking VRP for sweeping. Variable Recurring Payments are an extension of the open banking payment initiation service and allow authorised payments providers (PISPs) to initiate payments on consumers’ behalf.

These payments can vary when it comes to frequency and value and don’t require each individual transaction to be authenticated by Strong Customer Authentication.

As a ‘push’ payment, VRP offers all the benefits of a normal open banking single payment, without the friction for consumers.

In comparison, direct debits require the payee, usually a business, to ‘pull’ the payment from a consumer’s account, which necessitates a contract between the business and consumer before any funds can be taken. Setting this up is often a complicated process and can be costly for businesses.

Sweeping is the first, and currently only, mandated use case for VRP. In this context, sweeping refers to the automatic transfer of money between accounts held by the same consumer; normally to ensure money is available for any outgoing transactions or to earn a higher interest rate.

The biggest retail banks now have until January 2022 to implement sweeping.

Improving consumers’ financial health

By enabling VRP for sweeping, third-party providers can help consumers avoid overdraft fees, top-up other accounts they have and save money – all automatically.

This is one of the most significant milestones for the open banking roadmap and a true enabler for improving the financial health of consumers in the UK.

Take savings. Say you use a personal financial management app to set up a VRP to sweep any leftover funds in your current account on the 27th of every month into a savings account. This saves you time as you don’t have to manually move money between bank accounts and relieves the stress of potentially going overdrawn.

As the sweep happens automatically, you’re also now earning interest on any idle cash in your account, for the maximum amount of time possible. This means people can save time and create much better savings habits in the long run.

Looking to the next puzzle piece

VRP is the critical enabler for open banking payments as it will unlock numerous subscription and pay-on-demand use cases currently only supported by direct debit and standing orders.

However, to maximise VRP’s potential, it should be extended to use cases where both accounts aren’t owned by the same person. This has to become a formalised part of the open banking roadmap. We need to allow consumers to pay businesses directly from VRP and so enable PISPs to complement direct debits in powering the subscription economy.

The introduction of VRP for sweeping is a huge moment for open banking in the UK. As brilliant as it is though, we must do more. As an ecosystem, we’re only at the beginning of the journey. This marks the first piece in the puzzle of better financial wellbeing for everyone, and it’s exciting to see where the next few years will take us.

About the author

Rebecca Danks is a product manager at Open Banking infrastructure provider Yapily.

Rebecca holds an MBiolSci in Biochemistry and Microbiology from The University of Sheffield and previously worked at Nationwide Building Society.