Variable Recurring Payments - the whats and the whens around the hottest topic in payments
Open banking payments are already shifting the way consumers and businesses pay and get paid. And the numbers are starting to finally back up the open banking hype with over 3 million successful payments within the UK, in November 2021 alone (compared to 4 million in the entire 2020).
While open banking has been leading major disruptions in digital banking, its first big-time innovation may have just occurred. I’m talking about Variable Recurring Payments (VRPs) – a new lower-cost way of making payments using bank APIs, happening in real-time, and it comes as a more secure alternative to Direct Debits and card-on-file for recurring payments.
What are the current issues around Direct Debits?
Direct Debits are one of the most common ways to pay for subscriptions – from your bills to gym subscription or your video streaming provider. For a customer, this is an easy way to organise their own finances, while from a merchant’s point of view, it brings clarity and stability in their own cash flow management.
However, using Direct Debit comes with some downsides for merchants and users as well:
- Direct debit is not an instant payment method. They are processed within the Bacs three day cycle;
- Setting up a Direct Debit for the first time ends up in a 30% churn for the merchants due to errors, like incorrect data provided by the consumer (account number/sort code or IBAN), insufficient funds on the account, or any other error that might occur during the 3-4 days of Direct Debit processing. This makes the payment processing much more complicated and long-lasting;
- Smaller businesses may find using Direct Debit as a quite expensive payment method;
- Sometimes cancelling your Direct Debit as a consumer is a long-lasting process and can end up in extra fees to be paid;
- When it comes to payment dates, Direct Debit isn’t that flexible. This is also an issue both for consumers that might not have enough funds on a specific date/time and for the merchants that may not receive the payment due to the same reason;
- Direct Debit has no end date. You subscribe for life and have to explicitly cancel the service when you don’t want to use it anymore.
Why is it more beneficial to use VRP over Direct Debits or card-on-file recurring payments?
VRPs is a real game-changer, as it allows long-lived consent to licensed third parties to initiate payments on the customer’s behalf with a specific instruction set. Moreover, moving funds from one account to another happens instantly, with no human intervention.
VRPs are offering a much more flexible way of subscribing to a service directly from your bank account via an instant payment. It is easier to set up both by the merchant and by the end-customer. Once set-up, VRPs can be used for any kind of services, like:
- Moving funds from your current account to a savings or investment third-party application (sweeping – a specific VRP use case enabling transfers between your own accounts);
- Subscribing for a service using VRPs for several months to try it out, ensuring you do not end up in a subscription trap;
- Instructing the car parking vendor to automatically withdraw for the parking slot an amount of no more than 20 GBP at all times;
- Paying for utility expenses, delivery services;
- And so many more cases that are easy to apply in daily lives, including B2B and B2G payments!
The road to VRP: what does it take to make it happen?
VRPs is still “a dream to come true” for Third-Party Providers. At the moment only sweeping API (moving funds between two accounts owned by the same person) is regulatory required to be built by the CMA9 banks in the UK by July 2022.
The actual VRP and the operational model are still being discussed by the industry, as there are some concerns around the implementation and liability/dispute management system that have to be figured out. VRPs are going to be commercial APIs, based on bilateral or multilateral agreements between banks and third parties willing to use such a service. The entire framework is still a work in progress to this date. And again – at the moment, it is discussed only in the UK. It might take some time to get it massively adopted in other regions.
Predictions: when will VRP get mass adoption?
Taking into account the current progress, I believe that VRPs will be fully implemented by banks no earlier than the end of 2022, which means that the first serious use by the business will emerge at the beginning of 2023. It might take another year or two for VRPs to be widely used by the market players, which means we might see mass adoption of such payment types around 2024 in the UK and hopefully in 2025 across the EU and the rest of the jurisdictions that are adopting open banking as we speak. 😉
There is a long way ahead of us, but with so many industry players involved in the process and such clear benefits of VRPs, I’m sure we’ll soon start using variable recurring payments as our primary payment method in our daily lives. And taking into account all its benefits, let’s roll our sleeves and get to work!
Written by Lisa Gutu, Chief Operating Officer at Salt Edge
About Salt Edge
Salt Edge – a financial API platform with PSD2 and open banking solutions. The company has two main vectors of activity: enabling third parties to get access to bank channels via a unified gateway, and developing the technology necessary for banks to become compliant with the directive’s requirements. ISO 27001 certified and AISP licensed under PSD2, the company employs the highest international security measures to ensure stable and reliable connections between financial institutions and their customers. The company is integrated with up to 5,000 financial institutions in 50+ countries.