How the world pays has changed dramatically since technology became part of the process. A pivotal advancement in these recent changes has been Open Banking Variable Recurring Payments (VRPs). Open Banking VRPs are beginning to drive the change regarding how customers pay for goods and services. As a result of more interconnected accounts, payments are more convenient, and transactions have seen a marked improvement in security.
VRPs play a crucial role in the Open Banking revolution, facilitated by the Payment Services Directive 2 (PSD2), which allows Payment Initiation Service Providers (PISPs) to use APIs to initiate payments straight from a bank account.
With customer consent, your business can receive payments directly from their account without them ever leaving your website. The transaction is an inexpensive, push-only transfer straight from the customer’s bank account. It bypasses the traditional card networks and interchange fees, completing in just seconds.
The connection between VPRs and Open Banking payments is critical to the future of how consumers remit payments, delivering security, speed and lower costs. To meet the needs of today’s consumer, companies will need to connect to the Open Banking ecosystem to build these new payment experiences.
Let's review how VRPs work, the types, and why they're beneficial for customers and businesses.
How VRPs work
VRPs represent a portal into the future of financial transactions. VRPs securely connect an authorised Payment Initiation Service Provider like Moneyhub to bank accounts. This step permits transfers automatically—or ‘sweep’—money between their accounts with defined parameters.
The connection between PISPs and bank accounts allows providers to initiate payments on behalf of the consumer as long as they stay within the agreed guardrails. The timing and amount of each payment can vary, delivering unprecedented control and transparency versus other regular payment options.
The types of VRPs
There are two kinds of VRPs: sweeping and non-sweeping. Here are the differences.
VRPs for sweeping
The primary use case for VRPs falls under sweeping which has recently been made available by the main banks through APIs, VRPs entail moving funds between different accounts. The source account could be personal or business. Transactions between the two accounts must belong to the same person or legal entity.
There are several scenarios for sweeping, and they all relate to moving money seamlessly, including:
Moving money seamlessly from current accounts to alternative ones for ‘unbundling’ overdrafts
Transferring money to accounts used only for loan repayments
Sending to a credit card account
Shifting money to a saving account to earn interest
An example of sweeping would be a consumer permitting any surplus money from their main account to move automatically to a savings account. They can also do the reverse if the current account funds fall below a certain threshold.
Sweeping has the potential to be very attractive to consumers and a major contributor to improved financial wellbeing, but these VRPs are only the beginning of a system that’s propelling Open Banking. Non-sweeping VRPs expand the possibilities.
Non-sweeping VRPs
The other type of VRP is non-sweeping, which involves money movements for payments between different accounts and owners. Such transactions could include:
E-commerce purchases
Subscription services
Transfer of funds between fintech applications
Foreign exchanges or international money transfers
Funding investment and pension products.
Moving money to accounts to purchase cryptocurrencies or similar assets
There’s a bigger world for VRPs with this type of flexibility and agility. It goes beyond the banking capabilities of sweeping, creating better customer experiences through equitable control. With more third parties involved, consumers could manage payments and money more seamlessly, and the money exchange is also easier for companies.
Why smart payments using VRPs are attractive to consumers
The drive to evolve your payment choices has much to do with consumer preferences. Most are tired of having little control over the process. VRPs open this up to them and give them a new level of control over their finances.
Sweeping can be a great money management tool and ensure greater financial wellbeing and a savings mindset. With sweeping, people can build their savings with little and often sweeps. Since consumers can create rules and parameters around money movement, they can benefit from not having money sitting in the account idly. Instead, the funds could rest in a savings account to earn interest.
Other savings advantages consumers could realise from VRPs are:
Improved cash flow by setting thresholds for account balances with automatic transfers when the source account gets low
Rounding up transactions to the nearest £ and sweeping the surplus to savings
Sweeping surpluses from one-offs like bonus payments to savings
Facilitating new savings account openings and making saving a regular behaviour through embedding regular VRP transfers
One-offs—identify a bonus payment and sweep a surplus above a certain amount to savings
There are also benefits for borrowers. Many people are increasingly concerned about large payments leaving their accounts without more control and overdrafts. Sweeping can help people avoid large payments being taken out of their account if they don’t have sufficient funds.
Such an ecosystem lowers fees by avoiding overdrafts or missing payment dates for loans or credit card bills. VRPs can also help consumers develop bespoke and more affordable payment plans.
Lastly, account-to-account payments are typically 85% less expensive than card-based ones, according to our data. VRPs are charged on a flat-fee basis rather than incurring percentage based fees.
VRPs, coined as ‘the smart Direct Debit’ are a vital pillar for Open Banking. They are gradually becoming more accessible, less costly, and more convenient than existing channels. Customers have more control and card-related failures, chargebacks, and fees will no longer be an issue.
Learn more about Moneyhub’s Open Banking VRP solutions
Moneyhub is an FCA-authorised PISP. Our technology connects you to the Open Banking ecosystem to develop payment experiences and provide low-cost VRPs via the UK Banks’ Faster Payments network. Learn more about our Open Banking payment solutions.