Understanding VRPs and what they could mean for payments

In July 2021, the UK’s Competition and Markets Authority (CMA) ruled in favour of the OBIE’s recommendation to mandate Variable Recurring Payments (VRPs) for sweeping services between bank accounts. This is one of the most significant announcements since Open Banking launched in the UK in 2019, so let’s take a moment to look at how VRPs and sweeping will work, why they’re beneficial for businesses, and what to expect next.

What are Variable Recurring Payments (VRPs)?

VRPs are a type of Open Banking API, meaning that they work by using Open Banking rails to connect banks to Third Party Providers (TPP), like GoCardless, in a secure and standardised way. Functionally, they are similar to Direct Debit in that they enable recurring payments and, like with Direct Debit, you will be able to vary the payment amount being collected via VRPs without requiring re-authentication by the account holder. A great example of how this can be used is by consumers paying recurring utility bills, such as an electricity bill, which will have a fixed payment date but may have a different amount due each time.

At the moment, VRPs aren’t ready for businesses to start using. The CMA requires the UK’s big nine banks to build their own VRP API before July 2022 - however, they are only mandated to do this for sweeping payments. Sweeping payments are the automatic transfer of money between two accounts belonging to the same person - often referred to as ‘me-to-me’ payments. Whilst VRP sweeping payments will bring their own benefits, such as the possibility of intelligent savings, it’s hoped that they will be the start of VRPs being rolled out further.

Why VRPs could change payments forever

Payments don’t have a history of moving at a rapid pace. Offline payment methods like cheque and paper mandates have only started to phase out recently, with the move away from cash also only happening in the past five years. However, after open banking adoption surged to over 4 million users in 2021, the CMA hopes for VRPs to spur competition and change in the payment space. If banks commit to going beyond sweeping use cases, then there’s a very real opportunity to drive the payments landscape forward. 

The outlook is overwhelmingly positive. Back in 2019, GoCardless collected the first-ever live VRP with Starling Bank. Now GoCardless, along with other TPPs, have been asked to tap into this experience to support NatWest as they conduct a new open-banking initiated VRP pilot. Being months ahead of the CMA’s deadline indicates that there’s genuine interest from the banks to unlock the potential that VRPs and open banking offer.

Card-on-file e-commerce transactions

If we look ahead, beyond sweeping, then the use case that is most likely to be impacted by VRPs is card-on-file e-commerce payments. Strong Customer Authentication (SCA) is already in place in the UK and will be legally required by March 2022. Many of us are already having to authorise card payments by inputting codes that are sent by email or text. This will soon be required for all card transactions, putting an end to the ‘frictionless’ payment experience that card-on-file users have become used to. There are also several other significant downsides to card-on-file transactions for businesses too - most notably high card transaction fees and card failure which lead to cart abandonment.

Open Banking and paying via bank account helps ease the friction problem as authentication is built into the payment flow. Crucially, this is where VRPs will come into their own because they will be able to pull the payment directly from your bank account each time you shop without needing to worry about updating your card details or authenticating each transaction (think back to our utility bills example). That means paying via your bank account will be on a par with cards and potentially even better from a payer perspective. 

Barriers to VRP adoption

Whilst VRPs mark an exciting time in payments, there is a reason why the CMA’s mandate only covers sweeping use cases. Currently, there is no formal consumer protection in place for broader VRP use cases, which is guaranteed to make consumers hesitant to embrace VRPs. The second barrier is that the fees are currently un-set. After the recent public battle between Amazon and Visa over high card fees, it’s not surprising that businesses may be cautious to change their payment strategies until they know exactly what they’re signing up for.

It’s early days, and if banks match NatWest’s speed at launching VRPs then it seems reasonable to assume wider use cases and consumer protection will quickly follow.

Learn more about VRPs 

Our Chief Product Officer, Duncan Barrigan, recently joined Open Banking Excellence (OBE) as part of a Campfire panel to discuss VRPs. He spoke about what it means for payment innovation and if open banking has gone far enough, or if it's only just getting started. You can watch the full conversation on-demand over at the OBE website.

You can also find out about GoCardless' VRP offering: Instant Bank Pay for recurring payments here.