The Competition and Markets Authority (CMA) has ruled in favour of the Open Banking Implementation Entity’s (OBIE) recommendation to mandate Variable Recurring Payments (VRPs) as the mechanism for implementing Sweeping, injecting a further element of competition into the Open Banking market and ending years of opposition from some of the UK's biggest banks.
Sweeping refers to the automatic transfer of money between a customer’s own accounts (such as moving excess funds into a separate savings account or using them to repay a loan or overdraft account) and has long been encouraged across the open banking landscape.
Speaking to Finextra on the announcement, Imran Gulamhuseinwala, OBIE Trustee states: “I’m personally very excited because this is something we’ve been trying to get mandated since the beginning of the open banking programme four years ago. The CMA’s aim was to bring competition to the large banks and Sweeping was always part of this vision.”
"Mandating VRPs will mean that the largest UK current account providers must implement within the next six months, allowing free access to third party providers (TPPs) who are using VRPs to enable their customers to move money from their current accounts to other accounts."
He furthers that the announcement is even more compelling given the significant pushback received from some large banks throughout the process, noting that banks have been resisting mandating the building of VRPs, which essentially give consumers greater control over their money.
Gulamhuseinwala states that while the specific uses for VRPs aren’t going to be mandated, he believes that the market is going to be built up around them and that they hold “the potential for gamechanging apps powered by open banking.”
Alan Ainsworth, head of policy at the OBIE explains that of the myriad use cases for variable recurring payments, two stand-out benefits include savings and borrowing advantages for consumers and SMEs.
“We’ve found that there are a number of providers which look to provide services to customers in order to encourage them to save more regularly. If you can see the accounts of each customer on an ongoing basis, you can receive instructions from those customers to let you move the money into savings vehicles more often than if you're relying on the customer to authenticate each and every time.”
Also, many of these providers will offer ‘round up’ facilities at the end of each week or month which, under instruction, ensure that any surplus income can be automatically moved into a savings account that offers a better interest rate.
“You can see use cases which enable customers simply to get better interest rates on their surplus money, and develop a better savings habit at the same time.”
This is consistent with data compiled and analysed by OBIE, which holds that Sweeping can unlock value for consumers and SMEs by reducing overdraft costs, with up to 20 million consumers and one million SMEs potentially saving up to £300 to £600 million each year.
Furthermore, the OBIE believes that up to 40 million consumers and six million SMEs could benefit from significant interest increases. The OBIE’s numbers also illustrate a potential increase in financial resilience: with up to 11 million consumers potentially establishing a saving habit.
Ainsworth adds that “a lot of people in the UK don’t have enough savings for a rainy day and finding ways to encourage them to save more regularly is something even the debt advice charities are focusing their messaging on.”
The other side of Sweeping, argues Ainsworth, pertains to customers getting better value from their borrower and is enabled by what the OBIE calls the ‘unbundled overdraft.’
“Instead of your overdraft being provided by your current account provider, that line of credit would be provided by somebody else - possibly with lower fees or lower rates of interest. This provides more choice or competition. We envisage Sweeping leading to many more innovations that will serve as a public good.”
“As the large UK banks will be required to enable VRPs for sweeping by early next year there is an additional incentive for these large institutions to work alongside TPPs and develop other new, innovative use cases.”
Ainsworth goes on to predict that “we think that VRPs could soon become (depending on the actions of banks and depending on what TPPs want) the replacement to the direct debit. It would be a much smarter form of direct debit, where a customer has got more control of both the amount and the parameters for transferring funds.”
Greater visibility for consumers means that there would no longer be a reliance on paper-based transactions. The permissions around amounts and frequency of transfer that consumers provide can be reviewed on a regular basis, and the ease of revoking permissions at both the TPP and bank level symbolises a far more flexible approach to the traditional and ageing direct debit model.
In a Linkedin post, Tink’s director of research and thought leadership, Jan van Vonno, responded to a comment from Gulamhuseinwala, stating that “the CMA’s decision may be late, but it’s a major win for the OBIE…We’re happy that the CMA has decided to support VRP for Sweeping as it will significantly improve the lives of many UK citizens and businesses. As you know very well, VRP for payments also creates opportunities for ASPSPs [Account Servicing Payment Service Providers] to generate an ROI and offset losses from a shrinking overdrafts business. I’m looking forward to seeing where this will take the payments industry.”
The OBIE has faced an eventful few months, with the CMA’s consultation into the future of open banking governance providing a contentious update in May that prompted loud reactions from across the industry.
This week Gulamhuseinwala was quoted in an OBIE press release stating: “Over the past five years, we have built a thriving open banking ecosystem that already benefits nearly 4 million people and is growing rapidly. We look forward to the outcome of the CMA’s consultation on the future governance of open banking, which we hope will allow us to continue delivering world-leading innovation to the benefit of consumers, SMEs and the industry.”