Last editedMay 20222 min read
In July 2021, the UK Competition and Markets Authority (CMA) ruled in favour of the Open Banking Implementation Entity (OBIE) to authorise Variable Recurring Payments (VRPs). This means that the UK’s nine biggest banks can now use VRPs as their mechanism for sweeping payments. But what exactly does this all mean to the average account holder? Here’s a breakdown of the sweeping payments meaning, and what a bank account sweep facility can be used for.
Sweeping payments: what are they?
Sweeping is the movement of money when it is automatically transferred between two of a customer’s own accounts. Also called me-to-me, these types of payments are similar to Direct Debit payments, which allow businesses to automatically collect payments on a recurring basis. With the sweeping payments, customers facilitate this automatic recurring transfer between their own accounts.
The CMA’s ruling in favour of open banking means that VRPs can now be used to allow automatic transfer of funds between accounts without the customer needing to authorise every single transaction. Instead, the customer agrees on a set payment parameter and the transfers are automatically initiated.
What can sweeping be used for?
There are several ways to take advantage of sweeping, starting with investing. If a customer opens a sweep account with a brokerage firm, any excess funds are transferred into the account that earns higher interest at the end of each day. It provides an automatic way to ensure that your money is earning as much interest as possible, without manual monitoring.
For example, imagine that you set up a sweep account with a minimum amount of £3,000. When your balance exceeds this amount, the excess will be automatically transferred to a different, higher-interest account. Apps like Chip and Plum use open banking data to apply this same concept to savings accounts to maximise earnings.
A bank account sweep facility could be used to prevent overdrafts. When consumers are in danger of falling into overdrawn funds, a sweep payment can automatically transfer money from another account to keep the balance above zero.
A third potential use of sweep payments is in repaying debt, allowing end users to pay back loans with excess funds. Instead of channelling money into an investment or savings account, the sweep payment can be sent to pay down debt.
What are the pros and cons of a sweep account?
Understanding the sweep account definition and how it works can lead to numerous benefits for account holders. You can pay down debt, prevent an overdraft, and earn more interest automatically. With a payment request function, debtors automatically receive a notification regarding payments owed, reducing the chance of delayed or failed payments for businesses.
There are few downsides to setting up sweep payments. However, one aspect to consider is that after setting up your initial variable payment amounts, the system will automatically sweep payments from one account to another until you tell it to stop.
How will open banking impact sweep payments?
Sweeping payments are just one aspect of open banking. With the latest ruling in favour of VRPs and sweeping payments, it will be easier than ever for consumers to access this technology. The result will be a reduction in overdraft costs and an increase in earned interest payments – essentially, more money in their accounts. Merchants will benefit from this advance in open banking as well, with a better online payment experience enhancing customer satisfaction. With open banking APIs, UK banks will be able to build better products for their customers and bring sweeping payments into the mainstream.
We can help
GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.
