How VRPs can improve the open banking experiences of consumers

Attributed to: Luke Ladyman, COO and Co-founder of Cheddar

 

Variable Recurring Payments (VRPs) are a new technology within Open Finance. Despite being relatively unknown outside of the financial marketplace, VRPs are at the centre of an exciting conversation around frictionless payments.

This technology enables consumers to set up specific payment instructions with regulated finance apps that are used to make a series of recurring payments. VRPs have been designed to make life easier for consumers and small to medium-sized enterprises (SMEs). However, there is still room for improvement.

 

Limits to VRP technology

VRPs have the potential to do far more than just simplify recurring payments but unfortunately, the efficacy of VRPs is severely limited. As they stand, VRPs are only mandated for ‘sweeping’, which is a word to describe moving money automatically between an individual’s current or saving accounts.

According to the OBIE, five million people now use Open Banking in the UK. We can expect consumers to demand greater scope in VRP services, but the infrastructure to support VRP technology is just simply lacking.

The next major step in expanding the scope of this technology will be when legacy financial institutions collectively adopt and build out VRP infrastructure. At present, only a small handful of legacy banks offer VRP services to their customers which has severely limited its reach.

 

Unlocking the potential of VRPs

VRPs promise to unlock countless opportunities for consumers to better manage their finances, whilst simultaneously supporting companies to build out mechanisms that allow for open banking adoption. This technology has the potential to completely transform how consumers interact with financial services and SMEs.

If mandated for more than just the sweeping use case, VRPs can give consumers complete control over their monthly subscription payments for things such as mobile top-ups or gym memberships. Consumers may even set up VRPs with taxi services to automatically charge them whenever they arrive at a destination up to a certain amount.

By expanding the scope of VRPs, consumers can enjoy hyper-personalised Open Banking experiences. And as Gen Z enters the workforce, this tailored approach will be more important than ever before. Setting payment parameters which are as easy to enforce as clicking a button will keep Gen Z happy and will give businesses access to an entirely new demographic.

 

Cost of living crisis

 With living expenses reaching record highs for young people and working families, paying for basic utilities has become a lot more painful. At their full potential, VRPs could enable the most vulnerable in society to authorise utility providers to automatically take payments, only up to a certain amount. This would help consumers budget better for emergencies and keep up with payments.

To further cushion the effects of the crisis, consumers could also specify payment parameters to avoid any shocks to their bank accounts. This will generally lead to less errors as data is processed digitally and won’t require manual entry.

Lastly, those struggling financially will be able to automatically withdraw their consent to payments service providers (PISPs) who make the payments on their behalf. This is in contrast to credit or debit cards where consumers do not have the flexibility to automatically opt-out of transactions and cannot set specific parameters for payments.

 

How does this affect banks?

On the surface, the value proposition of VRPs looks to threaten certain aspects of banks’ business models. However, once you look deeper, we can see this isn’t the case – it’s actually quite the opposite.

If adopted for all use cases, VRPs can help banks significantly combat fraud as no sensitive payment information is exchanged with businesses. VRPs can act as a frontline defence with its enhanced transparency and tight controls for the consumer. PISPs can create the same experiences you get by using your debit or credit card but with the additional benefits.

By effectively addressing security concerns, banks will greatly improve customer experiences and reduce customer drop-off rates.

 

The future of VRP technology

 We must take into consideration the current limitations of this technology as we press closer towards a completely frictionless way of banking. As things stand, the future of VRPs will rely heavily on further licensing approval from the Financial Conduct Authority (FCA) and increased approval from the Competition and Markets Authority (CMA).

 If utilised effectively, VRPs can be applied across a plethora of uses to give consumers greater control over their finances as initially promised. There’s no doubt that expanding the scope of VRPs will give consumers hyper-personalised Open Banking experiences that will decrease customer drop-off rates. So, definitely watch this space!

 

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