Commercial Variable Recurring Payments and the implications for banks
Driving the mainstream growth of Open Banking payments continues to be a key talking point for the UK government, regulators and wider banking industry. With more than 10% of the UK adult population now using the technology, attention is turning to the opportunities that stand to be realised in the case of commercial Variable Recurring Payments (cVRPs).
What are commercial VRPs?
In simple terms, cVRPs are variable recurring payments for everyday consumer-to-business payments. They extend the functionality of VRPs beyond ‘sweeping’, where money is moved between accounts held by the same person, (i.e. ‘me-to-me’ payments), to encompass a broader set of use cases. This includes household bills, subscription services, instalment payments, embedded / in-app payments and e-commerce or in-store purchases.
Catalysing growth
While cVRPs do exist today, they are small scale. Unlike sweeping VRPs which are already well established under the current Open Banking mandate, there is no Open Banking arrangement in place for commercial use cases. However, there has been much discussion by the Payment System Regulator (PSR), UK Joint Regulatory Oversight Committee (JROC), UK Finance and HM Treasury about how to catalyse cVRP growth.
Top of mind for many right now is the PSR. Having proposed core payment use cases (utilities, government and regulated financial services) for a cVRP Phase 1, the PSR has promised to publish an updated set of proposals that are expected to provide clarity on a number of contentious points surrounding the expansion of VRPs. These include the creation of an industry wide multi-lateral agreement (MLA) for processing VRPs, transaction pricing options for sending banks, and the possibility of a regulatory mandate for processing cVRP transactions.
Hurdles to adoption
Yet amid all the policy and regulatory talk, innovators are yearning for conclusions and decisions to be made to move cVRP forward. To drive the growth of VRPs in Phase 1, a critical mass (say over 80%) of all banks’ customer accounts will need to be available for processing commercial Variable Recurring Payments. For this, many across the industry are calling for the introduction of a commercial model or framework.
Banks have invested heavily to deliver the CMA’s Open Banking mandate, and while there is broad recognition of the rich potential and value that cVRPs stand to deliver, they also have the potential to cannibalise revenue from debit and credit card transactions.
Although it remains to be seen whether the industry can agree on a commercial model or if regulatory intervention will be needed, in any case, VRP-type activity is ramping up. Visa, for example, announced in September a new ‘open system’ for account-to-account (A2A) payments – its “Visa A2A” service – which will be launching next year. Visa will still need the Tier 1 banks to engage constructively.
Decide where to play
For established banks, determining whether or not to enter the VRP market is a critical decision.
To be able to offer compelling VRP services that can be monetised, banks will need significant capabilities, including:
- VRP channel components to integrate into the merchant’s front-end customer payment channels (online or in-store) for setting up a VRP mandate
- Consent management between the VRP provider and end customer (payer)
- A gateway and API to connect to sending banks for setting up and managing consents, for checking funds availability, issuing payment instructions, and checking payment status
- Operational processes for handling payment errors and declines, and customer / merchant disputes
- Fraud / financial crime monitoring and reporting
- Data storage and analytics to provide merchant clients with customer usage insights
Like any new product development, this will require significant investment. Yet the opportunity cost could be greater. There is a growing marketplace of fintechs ready to provide VRP services. If banks do not offer variable recurring payments to their commercial customers, the risk is that the value will be captured by competitors, while interchange revenue on card payments for consumer purchases steadily declines.
Accelerating VRP capabilities
For a sending bank that is processing variable recurring payments via a third-party provider, there is minimal additional development work beyond what is already in place. Commercial VRPs can use the same VRP standard and APIs.
But for banks that want to offer their own VRP product, moves must be made now to accelerate the design and build of the systems that will be needed to compete. In the coming months, the focus on cVRP is going to shift from building to offering. While there is already significant fintech activity focused on creating compelling VRP payment propositions, once the PSR’s Phase 1 is underway, the competition is only going to heat up.
Icon works closely with clients to design and implement leading-edge payments systems for real-time payment services, based on our Payments Reference Architecture model. It is our view that the key domains for establishing VRP capabilities lie in Order Management, Value Added Services, and Payments Channels. If you would like to learn how we can help, get in touch.
Andrew Ducker