When people look back at the story of Open Banking implementation in the UK, the launch of Variable Recurring Payments (VRPs) will be a prominent chapter.
But as the market explores new use cases for VRPs, what exactly are they - and how will they shape your business?
Sweeping changes across the payments ecosystem
VRPs are a new payment instruction that lets your customers connect authorised payments providers to their bank account to make payments on their behalf, in line with agreed limits. Advocates of VRPs say they offer greater control and transparency than existing alternatives, such as Direct Debit payments and card-on-file instructions.
Back in July 2022, the UK’s nine biggest banks – the CMA9 – were mandated to introduce VRPs for sweeping payments, which you may also see referred to as ‘me-to-me’ payments. Sweeping payments enable the movement of money between two accounts belonging to the same person or legal entity.
When consumers are in danger of falling into their overdraft, a sweeping payment can automatically transfer money from another account to keep the balance above zero – or they can also be used to pay back loans with excess funds in a bank account.
In April 2023, the Joint Regulatory Oversight Committee (JROC) published its recommendations for the next phase of Open Banking in the UK. A VRP Working Group (VRPWG) was created and recommended that non-sweeping VRPs should be introduced. Non-sweeping VRPs will move beyond existing limitations and allow merchants to conduct recurring payments across different accounts.
In its blueprint, the VRPWG identified three low risk use cases, including payments to regulated financial services firms, payments to regulated utilities, and payments to the government. More interestingly, it also highlighted e-commerce as a “stretch” use case, given the significant market size, potential for end-user benefits, and in recognition of the “more complex consumer protection considerations”.
Shifting the dial further – and balancing risk with rewards
The extension of VRPs is seen as the next step in developing new Open Banking tools and services throughout the UK. Market participants are now busy looking to create a framework that enables better market coordination and provides clear guidelines for consumers to use the technology.
In April 2024, London-based trade body UK Finance published a new study on model clauses that will help enable the introduction of VRPs for commercial use.
Importantly, the Commercial Variable Recurring Payments Model Clauses report was developed in close collaboration with banks and fintech firms, so the industry voice runs strongly throughout the piece.
When it comes to comparing commercial non-sweeping VRPs with existing payment methods, it’s clear they will give both merchants and customers more choices on how to make and receive payments. They grant customers the ability to manage parameters - such as payment frequency, maximum amount, and permission end date - as well as the flexibility to cancel payments or revoke third-party provider access as, and when, they choose.
And there are compelling use cases – for example, VRPs could enable your business to tap into the growing subscription economy by charging customers varying amounts based on their usage or consumption, which is particularly beneficial for services without a fixed monthly fee – such as subscriptions with add-ons.
However, as a merchant, you will have a number of queries regarding these new payment tools, including how much they cost, how quick they are, and whether customers are protected (at present, Open Banking payments don’t carry any purchase protection). There are also a number of challenges to navigate, such as:
A lack of public awareness. There is currently limited public recognition regarding the potential of VRPs, so in terms of driving their widespread acceptance as a payment method, we’re still very much at the beginning of the journey. Until education efforts bear fruit, customers will continue to make payments through Direct Debits and other trusted methods.
The threat of fraud. The risks of commercial VRPs are similar to those that impact Open Banking more broadly, including fraud. It’s therefore crucial that players in the payments ecosystem continue to make strategic investments in the latest fraud prevention software. For example, there is a system of messages in place for Open Banking transactions that can help reduce liabilities by sharing information between the different parties, which can be analysed by advanced fraud engines to reduce risks.
The need for an appropriate regulatory framework. The market still needs to define regulatory requirements around non-sweeping VRPs, because behind any payment product sits a strict rulebook that determines who is liable when mistakes are made. UK Finance’s study is a good starting point to create these sorts of standards – but there is still much to be done.
We’re seeing VRPs become a test case for a more commercial approach to Open Banking. Whilst VRPs promise a range of benefits, these benefits must reach all stakeholders. Once there is a firmer understanding of the rules for customer protection, and the costs involved, you can start thinking about how you can adopt non-sweeping VRPs to boost your business.
At payabl., we’re closely monitoring developments and are well placed to help the merchants we partner with to harness VRPs, and other new payment tools, in a way that works for them.