Variable Recurring Payments (VRPs) have a lot of potential for banks, individuals, and fintech providers due to the innovative technology they are based on.
However, there are still significant obstacles to overcome before they become more widely adopted and they are not as revolutionary as some organisations may lead consumers to believe.
At Acquired.com, our payments experts are passionate about the industry we work in and have decades of collective experience in the payments sphere. We want to demystify the payments process when it comes to variable recurring payments.
In this guide, we’ll take a look at what VRPs are, how they can be used, their limitations and what the future of recurring payments might look like in an Open Banking world.
To learn more, keep reading or get in touch with our expert team!
What are Variable Recurring Payments?
Variable Recurring Payments (VRPs) are payments that an individual authorises a Payment Initiation Service Provider (PISPs) to take directly from their account on a regular basis. A set of parameters regarding frequency and payment amount is agreed and a flexible payment can be made within those agreed boundaries.
VRPs utilise Open Banking technology to provide a smart, convenient payment method without compromising on security. To do this, banks need to build a VRP API in order to offer VRP services to consumers, which then allows third-party providers like Acquired.com to initiate the payment process.
Previously, open banking only allowed third-party providers (TPPs) to initiate single payments, with customers approving and authenticating each payment individually. With VRPs, users only have to agree the payment conditions once with their payment initiation service provider and bank, and the process will then continue automatically on an ongoing basis!
How to Manage Variable Recurring Payments
Users still maintain a high amount of control over their payments, however. Some of the ways in which individuals can maintain control over their payments includes agreeing on a series of payment parameters with banks and TPPs before setting up the VRP, such as:
- A minimum or maximum payment amount to be taken every time which cannot be exceeded.
- The frequency of payments to be taken
- How long the payment schedule lasts (meaning user consent can be revoked or needed again after a certain period of time and the payment cannot be taken)
Users can also cancel the VRP via their bank, or the third-party provider.
VRPs vs Direct Debits
VRPs are quite similar to Direct Debits from a customer perspective. They are both processes by which regular payments are taken, as agreed by the end user, and through which variable payment amounts are possible.
While VRPs use open banking rails to transfer funds directly between customer and business bank accounts, Direct Debits use the traditional payment process to facilitate their transactions. Money travels from the user account, using BACS, into the business account where the transaction is completed.
While Direct Debits are still by far the most popular option for businesses and banks at the moment compared to VRPs, there are many benefits of VRPs for users, and it’s likely we’ll see an uptick in VRP usage over the next few years.
- Conversion rates – VRPs are likely to have higher conversion rates as the funds are taken directly from the customer’s bank account, meaning there isn’t any need for pre-authorisation and declines are less likely.
- Real-time payments vs. Bacs – Direct Debit payments use Bacs to move money, which means that payments take several days to move from the user’s account to the business account. With VRPs, bank-to-bank transfer of money is carried out immediately, with no delays.
- Fraud rates – Strong customer authentication (SCA) is used for customer authorisation when making payments using VRPs, improving security for individual users.
- Costs for businesses – Credit and debit card payments can vary considerably when it comes to their costs. Direct Debits are cost less per transaction for businesses, particularly for recurring transactions. However, as VRPs don’t require a “middleman” (like a card network), businesses can expect even lower costs when using them for recurring payments. You’ll also avoid costly chargebacks, bounced payments, and reversals with VRPs.
- The cost of failed Direct Debits – When direct debits fail, there is a cost incurred, both in terms of processing for businesses, and in terms of revenue lost. Bacs Payment Schemes estimates that every direct debit failure costs up to £50 to repair, and that’s without even touching on the damage that direct debit failures does to your relationship with your users. In fact, nearly 15% of customers have admitted to cancelling their service with an organisation due to problems with their direct debit.
For now, Direct Debits maintain their market dominance, as they are a consistent, reliable option that most users will be familiar with.
What is sweeping?
A couple of terms you’ll hear time and time again when it comes to VRPs are “sweeping” and “non-sweeping”. These refer to the two main types of Variable Recurring Payments.
Sweeping payments (also known as me-to-me payments) are payments that can be made between a single customer’s accounts. This has a range of uses and has been mandated by the Competition and Markets Authority (CMA), so banks are required to develop the APIs needed to allow sweeping payments to be carried out. Third-party providers can then offer a range of services to their customers using sweeping VRP technology.
How sweeping simplifies personal finance
Savings optimisation
Sweeping allows TPPs to quickly and efficiently move money between a user’s accounts in order to optimise how their money is working for them and improve personal finance management.
For example, if a user were to have considerable funds in one account that the TPP has identified as a lower-interest account, using sweeping VRPs can automatically move those funds into a higher-interest account, where they will perform better in the long run.
Smart overdrafts
Sweeping payments can be used to prevent an individual from becoming overdrawn. If the TPP can identify an area where a user might become overdrawn, VRPs give them the access needed to initiate the movement of funds to that account. This can prevent any outstanding overdraft fees from being applied, or Direct Debits and other payments from bouncing or failing.
New account funding
For many traditional organisations in the financial industry, the process of onboarding new customers can be a difficult and long-winded one.
Sweeping funds can help speed up the process of funding new current accounts, allowing new banking customers to fund their accounts straight away, rather than waiting days or even weeks for funds to arrive (particularly when moving large sums or moving sums between international bank accounts).
Removing these barriers at the point of signup helps banks and companies in the fintech industry improve their customer experiences while reducing fraud, among other benefits.
What is non-sweeping?
We’ve already touched on how sweeping payments can be used to help individuals and organisations make the most of their finances internally, but what about other use cases for VRPs?
As we’ve established, sweeping is the most common use for VRPs today, as these are the only types of variable recurring payments that have been mandated by the UK government. Non-sweeping payments are payments between a customer and a business and are not currently mandated by the UK government.
The technology for non-sweeping payments is currently well behind that for sweeping payments, meaning it is not accessible for users in the current state of the market. It is a massive undertaking by banks to develop these technologies, and until these developments have been made and tested, non-sweeping VRPs cannot be used. There is also currently very little financial incentive for banks to invest the considerable time and money required into developing new open banking APIs for end-users.
How can non-sweeping VRPs be used?
However, while the technology isn’t available in practice yet, the potential that VRPs have is massive, and could be used in a range of different ways:
- Increased control over subscriptions – by defining time limit parameters and maximum transaction amounts, users can avoid being charged for subscriptions they don’t use, or seeing large payments leave their account without realising it!
- One Click/Card-on-file payments – using VRPs can improve the speed and reliability of card-on-file payments such as in the Amazon or Uber app. No need to enter your card details for pre-checking, it can all be done automatically and payments are taken instantly!
- Regular bill payments – one of the most likely functions for VRPs is to replace traditional Direct Debits. Regular household bills like utility payments and subscriptions such as streaming services are some of the most obvious uses for VRPs, improving both user experience and collection rates for businesses.
It is important to note though, that these applications are not currently supported and aren’t available to individual users or organisations.
The current landscape of VRPs
VRPs are a technology with a huge amount of potential for banks, businesses and consumers, and a hot topic for many third-party services and the largest banks in the UK. However, it’s important to be realistic about the capabilities of Open Banking technologies, especially right now when adoption rates are low.
Initially, VRPs for sweeping were mandated for banks by regulators to be ready by January 2022. However, this deadline was then pushed back 6 months, and even at the time of writing, most banks are yet to roll this technology out.
The future of VRPs
Natwest completed its first successful non-sweeping VRP trial in May 2022, and both Natwest Group (which includes Natwest, Royal Bank of Scotland, RBS International, and Ulster Bank, among others) and HSBC have rolled out sweeping capabilities. It’s clear that banks are picking up momentum to implement this kind of tech, but we clearly still have a long way to go.
JROC and the Open Finance Association, among others, are providing the UK government with recommendations on how to mandate open banking and VRPs more effectively. However, currently there is no commercial framework to ensure profitability for banks, and there is no liability framework in place to protect end consumers. Without these crucial components to protect traditional institutions, third-party fintech businesses and consumers, VRPs aren’t yet ready to become a widespread reality.
For now, commercial VRPs (non-sweeping payments) are optional for banks in the UK, and there is still considerable research to be done by financial institutions as to if and how they could offer this service profitably and at scale. Banks also need to continue to invest in their authentication capabilities and customer journeys when it comes to authentication in order to ensure the safety of VRPs in the future.
Ultimately, VRPs have an enormous amount of potential, but the technologies needed to ensure their successful deployment simply aren’t there yet. For now, it’s a question of whether regulations will force the market into developing VRP technology, or if banks are willing to make that investment in order to reap the rewards of open banking.
At Acquired.com, we’re committed to staying ahead of the curve when it comes to banking innovation, and our products have open banking capabilities built in to help our clients get ahead of the competition when it comes to their payment strategies. To learn more about open banking, variable recurring payments and how our platform can help your business, please don’t hesitate to get in touch.
