What is open banking and what does VRP, the latest acronym in the immediate payment ecosystem, mean?
Here’s the idiot’s run down to these payment systems that mean instant payment using the UK’s faster payments rails. If there’s anything still unanswered, get in touch with us and we’ll happily answer and include the info in our next blog.
In this post, we’ll cover:
- What is open banking and how does it incorporate immediate payment?
- How does collecting instant payment via open banking incorporate confirmation of payee, and how does making immediate payment via open banking mitigate push payment fraud?
- What is the latest open banking service, VRP, or Variable Recurring Payments, and how does VRP use the faster payments rails?
1. What is open banking and how does incorporate immediate payment?
Open banking payments refer to a system where financial institutions and fintech companies can exchange financial data and initiate transactions on behalf of their customers, with the customer consent, for ease and convenience. This is made possible by using open APIs (application programming interfaces), which allow these different players to communicate and access data in a secure and standardised way, and to work across payment systems in the UK, including faster payments.
One of the key features of open banking payments is the ability to make immediate payments. Immediate payments refer to transactions that are processed and settled in real-time or near-real-time, as opposed to traditional payment methods that can take several business days to clear; these traditional payment methods use a variety of payment systems, some are more secure than others in terms of push payment fraud, and some have patchy coverage of the clunky system known as confirmation of payee (more on that below).
The incorporation of immediate payments in open banking payments is made possible through the use of the payment system known as Faster Payments. The payment system known as Faster Payments, together with the open banking standards, uses advanced messaging protocols and clearing and settlement processes to enable fast and secure payments between different financial institutions.
Immediate payments have several benefits, including faster processing times, increased convenience, lower cost, greater security and improved cash flow management. They are particularly useful in situations where funds need to be transferred quickly, such as for emergency payments or time-sensitive transactions.
Open banking instant payments move money from a payer’s bank account directly to the bank account of the person or entity requesting money. Open banking, using the faster payments payment system, moves money in real time from the person sending money to the person requesting it, there’s no middle man or woman or card scheme, and so it means instant payment every time. And because there’s no middle man, woman or card scheme for example, it means open banking immediate payments are lower cost, and can display the account name of the person or business requesting immediate payment exactly, so it’s not only more informative, but more secure, less prone to push payment fraud and doesn’t need the fuzzy security check known as confirmation of payee.
2. How does collecting instant payment via open banking incorporate confirmation of payee, and how does making immediate payment via open banking mitigate push payment fraud
If open banking instant payments use the faster payments payment system, how do these instant open banking payments accommodate the security check that is confirmation of payee?
Confirmation of payee was set up by the banks to try to fight push payment fraud. When a person makes a manual business transfer using their bank’s online or mobile banking, they’ll be using the UK’s payments system known as Faster Payments.
In an attempt to stop push payment fraud and people being tricked into sending instant payments across the faster payments payment system to fraudsters, the sending bank displays a fuzzy result of whether or not the account number of the recipient they have entered matches the name of the person they believe they’re paying.
The trouble with a non-open banking instant payments using faster payments and the confirmation of payee check is that it’s a fuzzy match – you may get a green light match, but the payer may also get a confusing ‘maybe’ message which says the recipient name isn’t quite the same, or the name they inserted may be nearly right but not right enough for the confirmation of payee check so advises the payer there is not a match. What’s driving all of this is that the banks often refer to their same customer by multiple names, which may or may not be included in the confirmation of payee check, for instance, the recipient of the instant payment someone is trying to send using faster payments to make a manual bank transfer may be known by their bank as Ms Smith, Jane Smith, J Smith, Jane Elizabeth Smith, J E Smith or many more varieties, and the person trying to send the instant payment needs to know which title out of all these potentials the bank decided to allocate as the bank account title to get a match in the confirmation of payee check that’s meant to be helping stop push payment fraud.
With immediate payments using open banking, there’s no fuzzy match or guessing. The open banking instant payment request, through secure API connections between open banking provider and the bank, displays the exact account title of the person or business requesting instant payment to the payer who’s being asked to make the open banking immediate payment. If the payer doesn’t recognise the name of the person who’s asking them to pay, they simply don’t pay. There’s no fuzzy match confirmation of payee check, instead, there’s a clear and absolute display of account holder name, which will either be correct or not, much better for combatting push payment fraud than confirmation of payee.
3. What is the latest open banking service, VRP, or Variable Recurring Payments, and how does VRP use the faster payments rails?
Variable Recurring Payments (VRP) are a use case for open banking that allows businesses and consumers to make regular payments for goods or services, with the flexibility to vary the amount and frequency of payments. This type of arrangement is particularly useful for subscription-based services and recurring bills, where the payment amount may vary depending on usage or other factors.
Payment amounts and frequency are agreed in a one-time set up of the overall agreement between instant payment requester (usually a business, charity or public body like a local council) and payer, where they agree maximum amounts and frequency, and usual amounts and frequency.
Within these initial parameters, amounts of instant payment to be collected and frequency may be varied, for example, if a payer has surplus funds they could pay more of their loan, credit card bill or overdraft off to reduce the overall amount being repaid; or extra money could be paid into a savings account meaning a larger sum begins attracting interest sooner.
VRP uses the faster payments rails, which is made possible by open banking using standard messaging and secure protocols resulting in, once authorised, a instant payment via faster payments in a seamless digital journey. This allows payments to be processed and settled in real-time or near-real-time, providing the benefits of immediate payment.
The result of all this is that repeated instant payments using VRP offer a convenient and flexible payment option for both businesses and consumers, while leveraging the benefits of open banking and the faster payments payment system. With the exact match of open banking bank account title display, replacing the confusing fuzzy match confirmation of payee check, making instant payments have never been easier, or more secure from push payment fraud, and all at lower cost.
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