Are VRPs the end of Open banking?
Variable Recurring Payments (VRPs) are often talked about (among the more payments obsessed of us anyway!) as the next big opportunity for opening up access to banking services in the UK. But unless we get a grip on some of the fundamental commercials of the model, I think they could actually be the death of Open Banking. In this blog we’ll discuss some of the reasons for this point of view and hopefully suggest a couple of ways that it can be avoided.
What is VRP?
So what is a VRP? Well, up to now Open Banking has only really allowed us to gather account information from multiple providers and present it as a consolidated view, for things like personal finance management tools and alternative credit checking models, or to make individual, one-off, payments. VRP is set to change that by allowing you, the account holder, to set up a repeating payment authority. In a lot of ways the functionality is similar to that of direct debit, you are giving a 3rd party, say a utility company, permission to move money from your account to pay for goods or services, or to sweep money into a savings account (more on that later).
There are however a number of key features of VRP that set it apart from Direct Debits. Like a direct debit, the destination of the payment is fixed (i.e. the account of your utility company), but unlike direct debits, the number and/or frequency of payments is limited and there are clear parameters around the amount that can be paid out, either as an individual payment or during a given period, say a month or a year.
What do the banks have to do and by when?
Well, that’s still a little unclear from my perspective. VRPs are the final part of the ‘Competition and Markets Authority order’ that compelled the 9 biggest retail banks, the CMA9, to implement Open Banking. But the CMA order only relates to VRPs for sweeping, and even then it’s only the CMA 9 that are compelled to be compliant.
Here’s the critical bit; other VRP use cases could be chargeable, but there is no ruling on who can be charged or by how much.
I think that the reality is that when you are looking at the various use cases for VRPs they all essentially use the same set of APIs and set out the structure of the VRP in the same way as the sweeping use case. It’s hard to see the justification for the banks blocking these types of use cases just because they haven’t been compelled to allow them. The difficult work has already been done, setting up the rules around duration and value for VRPs within the consent model that Open Banking already has built in.
Will this be chargeable?
As I mentioned earlier, sweeping won’t be charged for, as that’s mandated by the CMA, but other VRP use cases could well be charged for.
This type of chargeable model could represent a step change for the relationship between banks and third parties that provide innovative services off the back of Open Banking. At the moment, one of the unique aspects of the UK’s Open Banking model is that there is no requirement for a contractual relationship between these third party providers and the banks, only with the Open Banking Implementation Entity and the regulator.
It’s this effectively single point of integration that allows new entrants to come into the market and immediately be able to connect to the vast majority of personal and SME payment accounts.
So, assuming that the banks want a return on their investment for VRP, there is a question as to who will end up paying for the service; will it be the billers (who are after-all going to end up with the funds in the end), or will it be the payer, who is choosing to use VRPs as opposed to the various other payment mechanisms that they can use. Or will it be the TPP who is providing the service?
For consumer VRPs, I would expect this to be free at point of use, notwithstanding monthly fees, etc. that certain account types attract.
For businesses it’s a different proposition. Businesses are well used to being charged for both the debit and credit side of the transaction.
I think it will be interesting to see what the various banks do in respect of defining the charging models. Those that see VRPs as a threat to existing card revenues will, I expect, look to billing TPPs, with the contractual entanglement that goes with that. Those that see VRPs as an opportunity to leverage their data and to provide customers with novel solutions will, I think, look at charging the billers.