March 22, 2022
How UK banks will benefit from VRPs
With the CMA’s decision to mandate variable recurring payments (VRPs) as the mechanism for sweeping, there’s no question the UK payment landscape is on the verge of change.
Sweeping is the technology that enables consumers to automatically move money between bank accounts in their name, such as moving excess funds to a savings account or topping up a current account when the balance is low. While the final definition of sweeping excludes some surprising “me-to-me” use-cases, there are still clear benefits to consumers such as the general ease of moving money and encouraging behavioural changes for healthy financial habits.
The CMA9 banks are mandated to support sweeping functionality by July 2022.
Looking beyond the “me-to-me” piece of VRP, commercial VRPs will allow users to move money to third-party accounts or pay for goods and services via open banking rails on a recurring basis. Banks are not mandated to support commercial VRP; however, these use cases are largely welcomed by the industry and will unlock a new wave of innovation and digital payment experiences while also being a longer-term contender to replace direct debits and credit cards.
Promising as it may sound, VRPs come at a cost to all parties involved but especially to banks as they will be required to implement API programs to comply with regulations, and partner with third-party providers to support commercial VRP use cases.
While merchants and consumers stand to benefit from VRPs, the question remains if banks will also benefit?
Based on logic and evidence, the answer is yes.
After all, anything that increases the consumer’s agency in the open banking ecosystem sounds like good news to us.
How banks benefit from VRPs
Deepen relationships with customers.
For high-street banks, it’s not as easy to modernise legacy technology than to start from scratch. In the payments space, most banks still rely on direct debits for recurring payments, a technology that was created in the 1960s. By mandating banks to adopt VRPs, the CMA is effectively nudging banks to embrace innovation, which is likely to build momentum and capability for undertaking other voluntary transformation projects in the future.
With VRPs, banks have a new opportunity to deepen their relationship with customers on multiple levels: improving value propositions and customers’ lifetime value, enhancing relevancy and retention, and putting their brand back at the heart of their customers’ payment experiences.
In the context of downward pressure on revenue and margin of retail payment propositions, this provides banks with a unique opportunity to play the innovation game and extract more value from their payment infrastructure.
2. Fights fraud.
Banks and consumers alike are concerned about fraud, and rightfully so. In 2021, fraud became such a prominent issue that UK Finance declared it to be a “national security threat.” Losses from bank transfers were the main source, with fraudsters stealing approximately £2m a day throughout 2021.
Fraud is extremely costly for banks, since under the Payment Services Regulations (PSRs), which governs Faster Payments, the banks are left out of pocket in many circumstances where fraud has taken place.
Now enter VRPs. VRPs can act as a “smart” direct debit and provide a staunch frontline defence against bank fraud with its enhanced transparency and controls for the consumer.
Let us consider how two typical user experiences under direct debit and VRP would look.
To start, when setting up a direct debit, consumers would typically share their sort code and account number in, at times, an uncontrolled environment, which has many open opportunities to become compromised. With VRP, however, the consent journey is set up through secure bank infrastructure using Strong Customer Authentication, reducing the likelihood of fraud. Setting up VRPs doesn’t require sensitive information so there is absolutely no credential sharing (other than with the bank).
Secondly, management of consent parameters is lacking in functionality under direct debit. Consumers can view their direct debit consent on their banking portal but to amend these parameters will require direct bank interaction or emailing the merchant, which is more of a lengthy process than a self-serve function. VRPs will allow for consumers to view as well as instantly cancel or update with a new mandate and payment parameters in their banking app, on the merchant site and also at Plaid portal without speaking with any of these parties.
We want to partner with banks in the fight against fraud. With enhanced transparency and security controls, VRPs will help banks reduce fraud, build consumer trust, and ultimately lead to a healthier payment ecosystem and sustained growth for open banking payments.
3. Remain central to a user’s financial life.
VRPs help banks to rapidly keep pace with the massive shifts in payment technology. This alignment allows banks to retain customers longer. Increased LTV leads to improved revenue, not to mention greater customer satisfaction.
Over the past few years, neobanks and big tech’s move into the e-wallet space has been threatening the current account as we know it. For the first time in history, an overwhelming majority of consumers are also using fintech to manage their finances. This shift in increasing digital connectivity is impacting how consumers interact with their primary financial institution. By supporting connectivity and functionality such as VRPs, banks can help maintain account primacy.
In fact, connectivity is a driving factor in how consumers even select their bank, according to Plaid’s recent consumer survey:
76% of consumers prioritise connectivity when choosing a bank.
69% would consider switching banks if their primary bank couldn’t connect to their financial accounts.
80% said connectivity between their bank account and digital financial apps is important.
Enabling this popular functionality will help banks meet consumers where they are today and remain at the centre of their financial lives.
How Plaid can help
As a world-leading open banking platform, Plaid has built a foundation of connections with top financial institutions that enable us to deliver real value to consumers, banks and payment customers.
Because of these connections and our deep experience crafting partnerships with financial institutions, we’re in the best position to support both the mandated and commercial VRP use cases to align with the managed rollout timeline set by the OBIE.
Contact our Financial Access team to learn how Plaid is enabling the new frontier of open banking.
We do not provide any financial, regulatory, legal, tax or investment advice. Our content is for informational purposes only and should not be construed or relied upon as financial, regulatory, legal, tax or investment advice.