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Your key questions answered about Variable Recurring Payments

Variable Recurring Payments (VRP) has been the source of a great deal of excitement in open banking in recent months.

Variable Recurring Payments - open banking

In this post, we will look at what VRP entails, implications of the most recent regulatory changes, and what we can look forward to in the future.

What is VRP?

VRP is a type of open banking payment that enables customers to make payments at recurring intervals of variable amounts of money. It works by enabling the account holder to connect an authorised payments provider to their bank account so the provider can make payments on the account holder’s behalf.

As well as the obvious benefit to the customer of automating a repetitive task, Open Banking regulations ensure that VRP only happens within agreed parameters, such as number and/or frequency of payments and the amount that can be paid out either as an individual payment or over a defined period.

Where, and for what, is VRP mandated?

VRP is mandated by the UK's Competition and Markets Authority (CMA) only at this stage, for the nine largest banks in the market. It is not yet mandated under PSD2 in the EU.

The first and to date only mandated use case for VRP payments are used primarily for a particular type of payment called “sweeping.”

This refers to the automatic transfer of money between a customer's own accounts, such as moving excess funds into a separate savings account or using them to repay a loan or overdraft account to reduce the cost of borrowing. The idea behind sweeping is to enable consumers to better manage their personal finances.

What is the future of VRP?

It is obvious that sweeping is only a limited use case of how VRP could potentially be applied.

However, at this moment in time, UK banks are not required to implement VRPs for use cases besides sweeping. Rather, for these other use cases the implementation of the VRP standards are optional and at the discretion of the banks.

A Proposition Paper published by the OBIE in November 2020 describes many use cases for VRPs, including automated payments for utility bills, connecting a bank account to a social network app for in-app authentication of payments, setting a limit of six months of payments for a new subscription, obtaining short term credit to avoid overdraft, then automating repayments to credit to minimise overdraft fees and borrowing costs, and many more.

But the broadest and biggest potential use case for VRP is as a general replacement for direct debit. Similar to direct debit, the account holder should be able to give a third party, such as a utility company, subscription service, or lender, permission to move money from their account to pay for their goods or services. Eventually, VRPs should be easier, cheaper, and more convenient than existing payment methods, embedding payments into a wider range of customer journeys.

Open banking payments is approaching its hockey stick moment

During 2020, four million open banking payments were made in the UK. By November last year, three million were made in a month. Open banking payments will increasingly become a standard payment method for consumers and businesses, and offer a range of benefits to both, including a smooth checkout experiences, lower costs and fraud, and faster settlement.

To stay up to date with the latest innovations and regulation changes in open banking, keep any eye on our blog or to find out more about open banking payments for your business, contact us.

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