Variable Recurring Payments – the whats and the whens around the hottest topic in payments

Open bank payments are already changing the way consumers and businesses pay and get paid. And the numbers began to finally support the open banking hype with more than 3 million successful payments within the UK, in November 2021 alone (compared to 4 million in the whole of 2020).

While open banking has been driving the major disruptions in digital banking, its first major innovation may have just happened. I’m talking about Variable Recurring Payments (VRPs) – a new, low-cost way to make payments using banking APIs, happen in real time, and come as a more secure alternative to direct debit and card on file for recurring payments.

What are the current issues with direct debit?

Direct debits are one of the most popular ways to pay for subscriptions – from your bills to your gym subscription or video streaming provider. For the customer, this is an easy way to organize their finances, while from a merchant’s point of view, it provides clarity and stability in managing their cash flow.

However, using direct debit comes with some downsides for merchants and users as well:

  • Direct debit is not an instant payment method. It is processed during a three-day cycle of the baccalaureate;
  • First time direct debit setup ends with 30% discount for merchants due to errors, such as incorrect data provided by the consumer (account number/sort code or IBAN), insufficient funds in the account, or any other error that may occur within 3-4 days From direct debit processing. This makes payment processing more complex and long lasting;
  • Small businesses may find the use of direct debit as an expensive method of payment;
  • Sometimes canceling your direct debit as a consumer is a long-term process and you can end up paying additional fees;
  • When it comes to payment dates, direct debit is not that flexible. This is also a problem for consumers who may not have enough funds at a specific date/time and for merchants who may not receive payment for the same reason;
  • Direct debit has no expiration date. You are a lifetime subscription and you must explicitly cancel the Service when you no longer wish to use it.

Why is using a VRP more beneficial than direct debit or recurring payments with a card on file?

VRPs are a real game-changer, as they allow long-term consent for authorized third parties to initiate payments on behalf of the customer with a specific set of instructions. Moreover, funds are transferred from one account to another instantly without human intervention.

VRPs offer a more flexible way to sign up for a service directly from your bank account via instant payment. It is easier to set up both the merchant and the end customer. Once set up, VRPs can be used for any type of service, such as:

  • Transfer money from your checking account to a third-party savings or investment app (sweep – a specific VRP use case that allows transfers between your own accounts);
  • Sign up for a service using VRPs for several months to try, ensuring that you don’t end up in the subscription trap;
  • Mandate the parking vendor to withdraw an amount of no more than £20 at all times from the parking space automatically;
  • Payment of utility and delivery charges;
  • And many more cases that are easy to apply in everyday life, including B2B and B2G payments!

The road to VRP: what is required to make it happen?

VRPs are still a “dream come true” for third party providers. Currently, a blanket API (moving funds between two accounts owned by the same person) is a required regulatory requirement for CMA9 banks in the UK by July 2022.

The actual VRP model and operational model are still being discussed by the industry, as there are some concerns about the implementation and the liability/dispute management system that need to be identified. VRPs will 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 in progress to date. And again – at the moment, it is discussed only in the UK. It may take some time for it to be widely adopted in other areas.

Predictions: When will VRP get mass adoption?

Taking into account current progress, I believe that VRPs will be fully implemented by banks no later than the end of 2022, which means that the first serious use by the company will appear at the beginning of 2023. It may take another year or two for the VRPs to be in use. Widely by market players, which means we could see mass adoption of these payment types around 2024 in the UK and hopefully around 2025 across the EU and the rest of the jurisdictions adopting open banking as we speak. 😉

We still have a long way to go, but with so many industry players involved in the process and such obvious benefits of VRPs, I’m sure we will soon start using Variable Recurring Payments as our primary payment method in our daily lives. And with all its benefits in mind, let’s roll up our sleeves and get down to business!

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