Insight: Ruling on VRPs is major Open Banking milestone

23 Aug 2021

The Competition and Markets Authority’s (CMA’s) recent ruling making variable recurring payments (VRPs) mandatory for sweeping is a huge leap in the right direction for Open Banking and its evolution into open finance.

Not only will this have the biggest meaningful impact on consumers to date when it comes to Open Banking, it’s a pivotal moment for the industry as a whole. VRPs will unlock so much potential and we’re only just getting started.

Building better financial habits with VRP

VRPs for sweeping will allow consumers to build and better manage personal finances. With OBE data revealing seven in 10 of those financially impacted by Covid-19 are struggling to pay their bills, with an average shortfall of £553 per month, and many turning to credit to fill the gap, tools and services for consumers to improve their financial habits are sorely needed.

Stepping in to provide this much needed support, VRPs for sweeping means third party providers can automatically help consumers avoid overdraft fees, top-up other accounts and save money, all while generally earning higher interest rates.

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 separate savings account. This will not only save you time, but also relieve the stress of potentially going overdrawn.

As the sweep happens automatically, you’ll earn interest on idle cash in the account, for the maximum amount of time possible, saving both time and effort, and ultimately improving your savings habits in the long run.

The starting point

VRP is the turning point for Open Banking payments. It unlocks many subscription and pay-on-demand use cases that are currently only supported by direct debit and standing orders.

As a ‘push’ payment, VRP means consumers can get all the benefits of an Open Banking single payment without any friction when it comes to paying for subscriptions. In comparison, direct debits require the payee, usually a business, to ‘pull’ the payment from a consumer’s account. This requires a contract between the business and consumer before any funds can be taken, which is not only complicated but can also be costly.

Currently, sweeping is the first, and only, mandated use-case for VRP and the biggest retail banks now have until January 2022 to adopt sweeping and to build out the functionality ahead of time. We’re already working with account servicing payment service providers (ASPSPs) to make this a reality.

This is a major milestone for Open Banking as it’s invaluable for improving the financial health of consumers across the UK.

More to come

To maximise VRP’s potential and become a formalised part of the Open Banking roadmap, it needs to be extended to use cases where both accounts aren’t held by the same person.

Consumers need to be able to pay businesses directly and enable PISPs to complement direct debits and power the subscription economy.

It’s clear that VRP for sweeping is a huge moment for Open Banking in the UK, but we must do more as an ecosystem.

This is only the beginning of improving financial wellbeing for everyone and we’re excited to see where it will take us in the near future.

Written by Rebecca Danks, product manager at Yapily