As businesses seek more efficient and cost-effective ways to manage recurring transactions, Variable Recurring Payments (VRPs) powered by Open Banking present an attractive alternative to traditional payment methods like Direct Debit and card payments. By allowing businesses to collect payments directly from customers’ bank accounts, VRPs bypass the need for intermediaries, reducing costs and offering greater flexibility. However, the success of VRPs is not solely dependent on their technological benefits, it also hinges on the commercial model that underpins them, particularly when it comes to pricing.
At Acquired.com, we are actively monitoring developments in the payments landscape, with particular attention on the evolving commercial framework for Commercial Variable Recurring Payments (cVRPs). The recent report commissioned by Open Banking Limited (OBL) sheds light on the potential commercial model for Wave 1 of commercial variable recurring payments (cVRP) and lays out a framework for pricing and agreements. For businesses considering the adoption of cVRPs, understanding how this model could impact both costs and benefits is crucial.
Why this report is needed
The introduction of cVRPs represents a fundamental shift in how recurring payments are processed. While sweeping VRPs, enabling consumers to move funds between their own accounts, have already been implemented in the UK, the adoption of cVRPs, which enable businesses to collect variable payments from consumers, remains limited. The reason? cVRPs were not mandated under Open Banking, unlike sweeping VRPs, which were required by the Competition and Markets Authority (CMA) to enhance competition in retail banking.
Without a regulatory mandate, banks—also known as Account Servicing Payment Service Providers (ASPSPs)—have faced limited incentives to prioritise cVRPs. The investment required to build and maintain the necessary infrastructure for cVRPs is significant, and for many banks, this investment risks eroding revenues from established payment methods like card payments. As a result, the slow adoption of cVRPs underscores the need for a well-structured commercial model that can incentivise all players in the payment ecosystem to support and adopt these payments.
The Need for a Commercial Model
The Frontier Economics report has proposed a pricing model for cVRPs that aims to facilitate broader adoption. Under this model, Payment Initiation Service Providers (PISPs) would pay ASPSPs a fixed, per-transaction fee, ranging from 3p to 11p. This fee would be paid to the bank for processing cVRP payments via the Faster Payments system.
The variation in the fee reflects different timelines for cost recovery. At the higher end of the scale (11p per transaction), banks would expect to recover their infrastructure costs quickly—likely within the first five years. This would occur if cVRP adoption and transaction volumes increase rapidly, allowing banks to recoup their investment sooner. This scenario assumes a faster rollout of cVRPs, with banks charging higher fees upfront to support the early stages of adoption.
Conversely, at the lower end of the fee range (3p per transaction), the cost recovery process would take longer, extending beyond five years. This approach aims to stimulate adoption by lowering upfront costs, making cVRPs more accessible for businesses in the early stages of implementation. The idea is to encourage businesses to experiment with cVRPs without bearing a heavy financial burden in the initial phases.
What Costs Are Covered?
The proposed fee structure is designed to balance the need for banks to recover their costs while also fostering market adoption. The lower fees in the early stages of cVRP rollout are intended to stimulate competition and encourage businesses to experiment with the new payment method. However, it’s important to note that the basic per-transaction fee does not cover all associated costs.
Additional fees are not included, such as:
Scheme Operator Fees: A separate fee may be levied by the scheme operator, which is responsible for overseeing the cVRP ecosystem and ensuring its smooth operation. This fee is still to be determined but will likely be passed on to PISPs, who may then pass the cost onto merchants.
Closed-Loop System Costs: Businesses using a closed-loop system gain added benefits such as confirmation of settled funds, instant refunds, and streamlined payout capabilities. These features help reduce transaction risks and improve reconciliation. However, managing the closed-loop system for receiving cVRP payments into its own system may incur additional costs, which are not covered by the basic per-transaction fee. As with the scheme operator fees, these costs will likely be passed on to merchants, further influencing the total cost of adopting cVRPs.
Understanding these supplementary costs is essential for businesses evaluating cVRPs, as they will impact the overall cost structure beyond the basic transaction fee.
cVRPs in the Payments Ecosystem
Direct Debit
Variable Recurring Payments (cVRPs), powered by Open Banking, offer an innovative alternative to traditional payment methods like Direct Debit and card payments. While cVRPs provide notable flexibility, the cost comparison with Direct Debit is an important consideration—especially for businesses processing high-volume, fixed payments.
Direct Debit remains cheaper than cVRPs, particularly for businesses with high-volume payments, due to its batch-processing model, where transactions are settled in bulk, reducing unit costs. Furthermore, Direct Debit leverages existing infrastructure that requires minimal maintenance. In contrast, cVRPs settle each transaction individually through the Faster Payments system, which necessitates more infrastructure and generates additional administrative overhead—making cVRPs inherently more expensive than Direct Debit for high-volume transactions. The suggested pricing for cVRPS seems particularly high for businesses with a low average transaction value (ATV) eCommerce. Particularly in light of the fact that there is often a reconciliation settlement fee involved on top of the basic per-transaction fee.
However, when compared to Direct Debit, the value of cVRPs lies not in their cost but in the real-time flexibility they offer. For financial services businesses – particularly in lending, insurance, and utilities – where customer circumstances can shift quickly, the ability to adjust payment terms instantly is a powerful advantage. Unlike Direct Debit, which is constrained by a rigid structure and a three-day Bacs cycle, cVRPs enable immediate changes to payment schedules, amounts, or frequency without administrative delays. This enhanced control not only improves customer experience and responsiveness but also reduces operational risk and strengthens a business’s ability to manage dynamic repayment scenarios effectively.
Cards
Card payments offer real-time processing and flexibility, allowing for dynamic capabilities like adjusting payment schedules and supporting one-off transactions. However, they come at a significant cost, with merchant fees typically ranging from 1% to 3% of the transaction value – making them expensive for businesses with high-value or high-volume payments. Additional costs related to fraud prevention and chargeback management can further increase the burden.
In comparison, commercial Variable Recurring Payments (cVRPs) may offer a more predictable, fixed-fee pricing model. While this can be more cost-effective for larger or variable payments, it may be less suitable for lower-value transactions. As highlighted in the report, cVRPs are generally only cheaper than cards for payments over £50. For industries like debt collection – part of Wave 1 of the cVRP pilot – where recurring transactions are often smaller, cVRPs may not offer the same cost-efficiency. Ultimately, cVRPs deliver strong flexibility and long-term savings for higher-value use cases, while cards may remain the more practical option for frequent, low-value payments.
Conclusion
Beyond pricing, the successful adoption of cVRPs hinges on overcoming a range of key challenges. While the proposed commercial model addresses cost recovery for ASPSPs, broader adoption requires a holistic approach. ASPSPs must be incentivised to invest in and prioritise cVRP offerings, requiring a clear understanding of the potential return on investment and a model that fairly compensates their efforts. Simultaneously, the value proposition for merchants must be compelling. They need to perceive a strong value proposition in adopting cVRPs over existing payment methods.
Factors such as seamless integration, potential cost efficiencies beyond transaction fees, improved cash flow management, and the ability to offer enhanced customer experiences will be pivotal in driving widespread adoption and unlocking the full benefits of a competitive payments ecosystem. Addressing these interconnected challenges is crucial to realising the full potential of cVRPs and fostering a dynamic payments ecosystem.
Acquired.com views the proposed commercial model for cVRPs as a positive development and extends its thanks to Open Banking and Frontier Economics for advancing this crucial discussion on pricing for cVRPs. While the model offers valuable insights, particularly concerning ASPSP cost recovery, we also recognise potential hurdles for certain Wave 1 pilot industries, particularly those where transactions are frequent and of low value.
At Acquired.com, we are committed to collaborating with industry partners to facilitate the adoption of cVRPs. We believe that ongoing dialogue and a flexible approach will be key to optimising the commercial model and unlocking the full potential of Open Banking for recurring payments.
