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Will Variable Recurring Payments kill direct debits?

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Saeed Patel, Group Director at Eastnets

The world of consumer banking received an innovation boost when the EU regulation PSD2 enforced the rails for Open Banking. This disruptive force offers new ways to streamline payments and is predicted by Juniper Research to handle more than $116 billion in global payment transactions by 2026.

Innovations such as Open Banking often have a domino effect, opening many opportunities: Open Banking, as a system, provides the underlying capability to create innovations. One disruptive force driven by Open Banking is Variable Recurring Payment (VRP). This new payment model looks to shake up the traditional recurring payments scene. But what is VRP, and can it make waves in the incumbent payments systems?

What is a Variable Recurring Payment?

Open Banking was originally part of the EU’s PSD2 regulations, which set out the frameworks required to access customer data via APIs. The original specification for the Open Banking API standard was released in 2017. Since then, Open Banking and similar initiatives have become popular worldwide.

Saeed Patel

Opening access to banking data to third parties has encouraged new players into the financial space, namely FinTech. Companies like Plaid and Truelayer act as a middle-layer TPP (third party provider), connecting the Open Banking rails. This offers eCommerce vendors a link to thousands of banks; this gives customers a way to pay for goods and even provide identity assurance using their KYC verified bank account.

Open Banking is behind the emergence of the Variable Recurring Payment or VRP. Under Open Banking, a Payment Initiation Service Provider (PISP) provides a service to facilitate access to a customer’s bank account that is then used to transfer funds on the customer’s behalf. A VRP uses a PISP to set up recurring payments under rules and constraints. This system differs from the traditional bank debit system that handles recurring payments:

Under a direct debit system, the bank uses a ‘pull method’ where a business can request regular payments based on a pre-completed mandate set up by the bank customer.

A VRP uses a push-based model and differs in the mechanism used, i.e., Open Banking, with a centralized consent to pay mechanism. Importantly, this mechanism places the customer at the core of the transaction.

‘Sweeping’ is the first use case for VRPs.

What is ‘sweeping?’

NatWest is the first UK bank to offer VRP support for ‘sweeping’. Many banks are expected to follow their lead. Sweeping facilitates automated account transfers, specifically between two accounts of the same name, e.g., from a savings account to a current account. This particular use case has been identified as a great application of VRP because the transfers are fast, cheap, and secure, compared to the expense of credit cards or direct debits.

However, currently, there is no consumer protection in place for Sweeping and fees are yet to be set. A report from the Competition and Markets Authority (CMA) looking into VRPs concluded:

“Respondents also raised points around the need for minimising and managing disputes over sweeping access going forward as well as points around consumer protection.

VRPs offer a great choice payment model as they provide the level of transparency and customer control expected by customers today.

Are VRPs the death knell for fixed recurring payments?

VRPs look set to change how funds are transferred, certainly in consumer models. Customers want seamless, cost-effective, and fast payment systems: this will drive competition in the financial sector, as evidenced in a recent Thales ​​survey that found that 38% of consumers would move to another bank for better services or rates.

Financial analyst and renowned guru David Birch, quoting Mike Kelly on the potential of VRPs, says, “Mike Kelly, who was the product lead for VRP, says that they have “huge potential to revolutionise finance” and he is absolutely correct.”

VRP uses the Faster Payments service, so fund transfers are near-real time. This is great for retailers. In addition, VRPs are fully digital, so no paperwork is needed, unlike a direct debit mandate. This saves the customer time and potentially reduces fraud and manual error risks at this juncture in the user journey.

VRPs are customer-centric, placing the control of finances in the hand of the consumer. The VRP system allows granular control with customers setting maximum payment amounts, consenting to regular payments, and being able to cancel payments instantly.

In comparison, credit cards and debit systems are slow and costly. But they are incumbent, with 175 million American consumers owning a credit card with cumulative debts of $825 billion. Having a credit card is expensive for all involved, with the credit card companies pulling in vast sums of money. Customers and retailers actively want reduced costs and faster transfer speeds. VRPs offer a viable alternative to credit cards and debit payments that fulfil both needs.

Is the VRP system secure?

Open Banking uses a superset of OIDC that implements FAPI (Financial-grade API), which provides many extra security features compared to the standard OIDC flows. In addition, the Open Banking protocol includes several security features that help to secure transactions:

  • Access control using digital signatures on any request made and on all tokens used in the system.
  • mTLS (Mutual Transport Layer Security) is used to prove to the server where the request comes from.
  • To ensure trust, the Open Banking directory issues certificates to any organization wishing to participate in an Open Banking-based service.

Are VRP payments open to fraud?

The CMA survey pulled out fraud as a possible issue in the VRP model of fund transfer: “One respondent said that sweeping to accounts which do not have the capability to sweep back in the event of fraud or error is problematic as there is a lack of suitable dispute resolution process should that occur.

Another point in the paper was that “Others queried the benefit of FSCS protection on the basis it does not cover erroneous or fraudulent payments.

Cybercriminals are already targeting the faster payments system that VRPs utilize. An FATF report, “Opportunities and Challenges of New Technologies for AML/CFT” points out that faster payments provide opportunities for faster cybercrime, with the short transfer windows allowing criminals to fly under the radar. The report recommends the use of intelligent technologies to catch fraud events in real-time.

A 2021 consultation from the Open Banking Implementation Entity (OBIE) exploring VRPs and Sweeping points out several notes on fraud in a VRP ecosystem:

  • A TPP (third party provider) should use a mechanism, such as to assure the identity of the owner of the destination account. This will help reduce the risk of APP (authorized push payment) fraud and misdirection fraud.
  • TPPs may not have mechanisms to check the link between a card and a specific account during a card-based Sweeping transaction.
  • Confirmation of Payee (CoP) checks are lacking in current Sweeping systems making VRP susceptible to fraud.

Variable Recurring Payments have been called a gamechanger in banking and retail. The need for seamless, cost-effective, consented, and controllable payments is a no-brainer. But this cannot be at the cost of increased opportunities for fraudsters. The VRP ecosystem has several moving parts, each of which could add a vulnerability to the ecosystem.

Using faster payments also adds to the burden of anti-fraud checks by requiring that a VRP-based transaction is checked quickly and in real-time. Variable Recurring Payments offer innovation in banking that can help banks and FinTechs build new business models and better customer experiences. But it must have the same levels of anti-fraud checks and balances to ensure that this disruptive force is one for good and not bad actors.

Finance

Crypto’s tipping point

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Chris George, Senior VP of Product at Somo argues that Crypto needs to improve its scalability to be taken seriously

Cryptocurrencies are no longer the exclusive domain of high risk financiers or tech Bitcoin jockeys, willing to ride a niche and volatile asset for good or ill. Today, neobank and mainstream banking apps alike offer crypto banking, helping them trade in Bitcoin or Ethereum from as little as one dollar(https://www.revolut.com/crypto/).

Indeed, in September 2022, Finbold reported that British citizens had invested nearly £32bn in cryptocurrencies, and additional research from HMRC would have it that one in 10 UK adults has bought crypto, double the number from the previous year. 

But even given the legitimacy lent to crypto by the fact that now 50% of UK banks allow customers to interact with these currencies as well as other digital assets, how can the asset management industry turn it into a significant – and mainstream – asset, particularly in today’s turbulent economic climate? With the collapse of FTX, this must be taken into serious consideration. FTX was sold as being a safe and stable way to trade digital currency, alas this has not been the case. It turns out Sam Bankman-Fried seriously over-promised and dramatically under-delivered, gambling away customer assets and ultimately prioritising fraud and malpractice.

First, we need to acknowledge that not all crypto is created equal. Some, such as Bitcoin or Ethereum, do function as a currency, are limited in volume and therefore can increase and (as 2022 amply showed) decrease in value. But other blockchain-based crypto doesn’t behave like what most people commonly accept as currency at all. 

For there to be significant uptake in crypto as an asset, there is going to have to be a far broader and deeper understanding of what it is and what it can do. As Christophe Diserens, chief compliance officer at SwissBorg has suggested: “Value and useability are going to be key. Metcalfe’s Law has been used to value tech and internet stocks so why not crypto?”. That value took a bit of a beating during the recent sell-off and crypto’s perceived volatility will need to be addressed if it is to achieve scale. Because that’s what it’s going to need if it’s ever going to be considered as a legitimate global payment alternative in the future.

 

The role of The Merge

Not the latest B-movie, sci-fi flick, The Merge in September 2022 saw the world’s second-biggest cryptocurrency, Ethereum, move from a ‘proof of work’ to a ‘proof of stake’ protocol. This was nothing short of seismic. 

Proof of work is how the vast majority of crypto has been mined to date. People solving complex equations to validate transactions (the ‘work’) uses masses of computer processing energy, accounting for a significant slice of the world’s electricity consumption. In today’s climate (in both senses of the word), that’s just not on. 

Proof of stake, on the other hand, relies on far fewer ‘miners’, fewer computers and less energy as a result. This so-called ‘Merge’ is not only expected to reduce worldwide energy consumption by 0.2%, but also boost the crypto economy as a whole, creating more opportunities for investors and allow developers to build more products and applications on Ethereum. Ultimately, it could be what drives the decentralised internet of blockchain, crypto and NFT – Web3 – mainstream. 

What does this mean in the ‘real’ world? This could present a real opportunity for the financial services sector as a whole. It will change the way it operates, speeding up transactions, creating new business models and generally just making the whole thing a more efficient way of working. Fully cashless payments for business would be a real boon, given the costs and potential losses involved in transacting in cash. Digitisation also makes transacting an altogether more intuitive experience. 

One thing crypto and its associated technologies and solutions needs to be wary of is becoming a solution in search of a problem. For a truly mainstream breakthrough, the industry needs to make sure it’s bringing the consumer along on the journey. For end users to be truly confident in crypto, it has to benefit from the same levels of governance and regulation that cover the rest of the financial services industry, building and maintaining consumer confidence will be extremely important as trust levels have been shaken by the recent lack of solid administration and “irresponsible lending practices” leading to the FTX implosion . It has to be simple to transact, but with all the protections that investors have come to expect. It can’t afford to take them on another rollercoaster ride like 2022’s. 

While 50% of the UK’s banks may be getting on board with crypto to some degree, there is still a wide open ocean of opportunity for asset management players to realise value for themselves and their clients. It will involve some reshaping and more investment in digitisation to manage the assets of the future, whatever they may be. 

Somo, part of the CI&T family, will be publishing a report titled ‘Assessing the Crypto Conundrum: Will cryptocurrency ever be a significant trading asset and how can digitalisation shape its future?’ in 2023. 

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Skedadle to change the game for advertising with Currencycloud partnership

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Currencycloud, the experts simplifying business in a multi-currency world, has partnered with Scottish start-up app Skedadle to provide its users an easy, secure and seamless way to transfer money earned in-app while playing games on public transport.

Skedadle rewards travellers for the time they spend playing on-the-go. They can earn £2 per day simply for playing games on the move. That’s an extra £60 in their pocket each month. This can be done thanks to a disruption in the advertising market, by using algorithms to verify and track the users’ engagement with ads, proven to be higher while playing than in traditional online advertising, which increases product and brand recall for advertisers. Thanks to the partnership with Currencycloud, Skedadle users can use the app on public transport and be reassured that all financial transactions and financial data comply with the highest standards of security and validations.

By connecting to Currencycloud’s API technology, Skedadle has been able to integrate in their app a state-of-the-art payments ecosystem that seamlessly bulk settles the money earned from advertisers into a secure account and then processes withdrawals from users fast. At the same time, Currencycloud also sets the infrastructure that will enable them to grow both geographically in the UK and globally, by providing access to 38 currencies and low cost, fast FX rates.

Says Nick Macandrew, CEO and Founder at Skedadle: “Trust and security are crucial, especially when it comes to people’s money. As we rapidly grow our platform, we need a solution that can keep up with our pace and Currencycloud do just that. Our cutting-edge technology requires a secure, stable, and simple way of managing payments, whilst guaranteeing the best user experience possible.”

Nick Cheetham, Chief Revenue Officer at Currencycloud commented: “Backing bold start-ups from day one has always been part of our DNA. Skedadle’s creation of new revenue streams for travellers and advertisers alike is an exciting business endeavour. We are eager to see how the  platform can grow and disrupt the market by integrating our seamless payment capabilities.”

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