December 04, 2020
OBIE consultations on VRPs and sweeping
Keval Chavda
Updated on December 04, 2020
On 9 November 2020, the UK’s Open Banking Implementation Entity (OBIE) released its consultations on Variable Recurring Payments (VRPs) and Sweeping. PSD2 and Open Banking have provided a necessary foundation to an open financial services sector, with over two million people using open banking-enabled products. VRPs and sweeping unlock many more opportunities for consumers by enabling newer and more innovative ways to manage individuals’ financial lives. For fintechs, it also provides an opportunity to build and develop mechanisms to enable the adoption and growth of open finance.
How will VRPs work?
A typical 21st century consumer has multiple expenses - utility bills, rent, mortgage and subscriptions (e.g. gym, video streaming), to name a few. While some of these are fixed (e.g. rent), others may vary (e.g. electricity or gas bills). VRPs help in situations where consumers frequently make payments of different amounts by using a long-held consent to initiate payments on their behalf. To set this up, consumers define specific restrictions (VRP consent parameters) which allow Payment Initiation Service Providers (PISPs) like Plaid to initiate payments on behalf of the consumer.
In the UK, all Account Servicing Payment Service Providers (ASPSPs), which includes banks, are now required to use strong customer authentication (SCA) to reduce the risk of fraudulent payments. As a result, whenever consumers make payments to new accounts or of different amounts, ASPSPs are required to confirm their identity - SCA is therefore required for every payment. With VRPs, the consumer only needs to pass SCA when VRP consent parameters are initially set. For all further payments, if the VRP consent parameters are met, banks have two choices:
Set up a trusted beneficiary (or other SCA exemption under PSD2). This is known as ‘customer not in session’.
Delegate authentication to an authorised third party (e.g. delegate SCA to an authorised PISP). This is known as ‘customer in session’.
VRPs will save time and effort for consumers because a significant proportion of payments can be automated. With more flexibility and freedom, VRPs are the next building block for a successful and effective open payments industry.
Sweeping to unlock personal financial freedom?
So far, we have seen the benefits that VRPs can bring to consumers who are managing payments which vary month-to-month. However, VRPs can also be used to manage personal finances through sweeping, where money automatically moves between two accounts held by the same person. Sweeping products are the start of the self-driving finance revolution, with consumers setting what they want to achieve (their destination), and Sweeping Service Providers (SSPs) figuring out how to do this. The most common sweeping use cases include money moving between a consumer’s accounts automatically to prevent overdraft fees and charges, or to obtain a higher savings interest rate.
With a consumer’s explicit consent, an SSP would typically collect data from all of the consumer’s connected accounts - this includes current accounts, savings accounts and investment accounts. The SSP would then sweep money between accounts as needed - for example, to prevent a current account from being overdrawn, money would be transferred from a savings account to the current account. An SSP would need to be authorised by the Financial Conduct Authority as an Account Information Service Provider (AISP) and PISP in its own right, or would need to become an agent of an authorised AISP and PISP such as Plaid.
Sweeping allows consumers to automate how accounts interact with each other, and therefore makes it easier to manage a complex financial life.
Still a long way to go...
The OBIE’s consultation closes on 4 December 2020, and the standard is expected to be implemented in Q2 2021. VRPs and sweeping have the potential to enable newer and more innovative use cases to unlock financial freedom for all.
Contact Plaid to learn how we can support your open banking initiatives. And check out the other posts in our Open Banking series: