Variable Recurring Payments (VRP) have great potential for banks, individuals and fintechs due to the innovative technology they are based on.
However, there are still significant hurdles to overcome before they gain wider acceptance and they are not as revolutionary as some organizations would like consumers to believe.
NoOur payments experts at Acquired.com are passionate about the industry we serve and have decades of experience in group payments.. We want to demystify the payment process when it comes to variable recurring payments.
In this guide, we 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.
For more information, read on or contact our team of experts!
What are variable recurring payments?
Variable Recurring Payments (VRP) are payments that an individual authorizes a Payment Initiation Service Provider (PISP) to collect directly from their account on a regular basis. Various parameters are agreed regarding payment frequency and amount, and flexible payment can be made within agreed limits.
VRPs use open banking technology to provide a smart and convenient payment method without compromising security.. To do this, banks need to create a VRP API to offer VRP services to consumers, which then allows third parties like Acquired.com to initiate the payment process.
Previously, Open Banking only allowed third-party providers (TPPs) to initiate one-time payments, requiring customers to approve and authenticate each payment individually. With VRPs, the user only needs to agree the payment terms once with their bank and payment initiation service provider, and the process continues automatically!
How to manage variable recurring payments
However, users still maintain a high level of control over their payments. Some of the ways people can stay in control of their payments include agreeing various payment parameters with banks and TPPs before setting up the VRP, such as:
- A minimum or maximum amount to withdraw, which cannot be exceeded.
- The frequency of payments to be made
- How long the payment plan lasts (i.e. the user's consent can be revoked or requested again after a certain period of time and the payment cannot be made)
Users can also cancel the VRP through their bank or third-party provider.
VRP x Direct Debits
VRPs are quite similar to direct debits from a customer's point of view.. Both are processes where periodic payments are charged as agreed by the end user and where variable payment amounts are possible.
While VRPs use open banking rails to transfer funds directly between customer and merchant bank accounts, direct debits use the traditional payment process to facilitate your transactions.Funds move from the user's account using BACS to the trading account where the transaction is completed.
While direct debits are still by far the most popular option for businesses and banks compared to VRPs, there are many benefits of VRPs for users and it is likely that we will see an increase in VRP usage in the coming years.
- Conversion Rates – VRPs are likely to have higher conversion rates as the funds are taken directly from the customer's bank account, meaning no pre-authorization is required and there is less chance of rejections.
- Real-Time Payments vs Bacs: Direct debit payments use bacs to move funds, which means it takes several days for payments to transfer from the user account to the merchant account. With VRPs, transferring funds from bank to bank is instantaneous and without delays.
- Fraud Rates: Strong Customer Authentication (SCA) is used for customer authorization when making VRP payments, improving the security of individual users.
- Business costs: The cost of credit and debit card payments can vary significantly.Direct debits cost businesses less per transaction, especially for recurring transactions. However, since VRPs do not require a "middle man" (such as a card network), businesses can expect even lower costs when using them for recurring payments. Plus, with VRP, you can avoid costly chargebacks, missed payments, and cancellations.
- The cost of unsuccessful direct debits: When direct debits fail, there are costs, both in terms of processing for businesses and in terms of lost revenue.Bacs Payment Schemes estimate that each direct debit error costs up to £50 to repairNot to mention the damage that direct debit errors do to your relationship with your users. In fact, around 15% of customers have already admitted to having ended their service with an organization due to problems with their domicile.
For now, direct debits maintain their dominance in the market as they are a consistent and reliable option that most users are familiar with.
What is sweeping?
Some terms you'll hear over and over again when it comes to VRP are "sweep" and "unsweep". These refer to the two main types of variable recurring payments.
Sweep payments (also called me-to-me payments) are payments that can be made between accounts for a single customer. This has a variety of uses and was commissioned byCompetition and Markets Authority(CMA), requiring banks to develop the necessary APIs to enable bulk payments. Third-party providers can offer a variety of services to their customers using Sweep VRP technology.
The extent to which personal finance is being simplified
economy optimization
Sweeping allows TPPs to quickly and efficiently move funds between a user's accounts to optimize the functioning of their funds and improve personal finance management.
For example, if a user has significant funds in an account that the TPP has identified as having a lower interest rate, using the Sweep VRP can automatically move those funds to an account with a higher interest rate where they will have better long-term performance. .
smart spinners
Sweep payments can be used to prevent a person from going empty handed. If the TPP can identify an area where a user may be in a negative balance, VRPs give them the access they need to start moving funds into that account. This can help prevent outstanding overdraft fees from being charged or direct debits and other payments from being rejected or failed.
new finance account
For many traditional finance industry organizations, the process of onboarding new customers can be difficult and time-consuming.
Fund transfer can help speed up the process of funding new checking accounts by allowing new bank customers to deposit funds into their accounts immediately rather than waiting days or even weeks for the funds to arrive (especially when transferring large amounts or between international bank accounts).
Removing these barriers at registration helps banks and companies in the fintech sector, among other things, improve the customer experience and reduce fraud.
What is not sweeping?
We've already mentioned how payments can be widely used to help individuals and organizations make the most of their finances internally, but what about other use cases for VRPs?
As we found out, sweeping is the most common use for VRPs today, as these are the only types of variable recurring payments required by the UK government. Non-broad payments are payments between a customer and a business and are currently not mandated by the UK government.
Currently, scanless payment technology lags far behind scanned payments., which means that it is not accessible to users in the current market situation. The development of these technologies is a huge undertaking for banks, and until these developments are done and tested, Sweepless VRPs cannot be used. Furthermore, there is currently little financial incentive for banks to invest time and money to develop new Open Banking APIs for end users.
How can VRPs be used without a scan?
Although the technology is not yet available in practice, the potential of VRPs is enormous and can be used in many ways:
- Greater control over subscriptions: By setting time limit parameters and maximum transaction amounts, users can avoid being charged for subscriptions they don't use or large payments accidentally leaving their account!
- One-Click Payments/Card on File: Using VRP can improve the speed and reliability of card payments on file, e.g. B. on the Amazon or Uber app. No need to enter your card details for pre-check, everything can be done automatically and payments are made instantly!
- Regular bill payments: One of the most likely roles of VRPs is to replace traditional direct debits. Regular household bills like utility payments and subscriptions like streaming services are some of the most obvious uses of VRPs which improve user experience and business fee rates.
However, it is important to note that these applications are not currently supported and are not available to individual users or organizations.
The current landscape of VRPs
VRPs are a technology with great potential for banks, businesses and consumers, and a hot topic for many third-party providers and the UK's largest banks. However,It is important to realistically assess the possibilities of open banking technologies, especially now that adoption rates are low.
Originally, regulators required VRPs to be ready for scanning by January 2022. However, that deadline has been pushed back by 6 months and, as of this writing, most banks have yet to implement this technology.
The future of VRPs
Natwest completed its first successful non-scanning VRP test in May 2022, and both the Natwest Group (which includes Natwest, Royal Bank of Scotland, RBS International and Ulster Bank, among others) and HSBC have implemented scanning capabilities. It is clear that banks are gaining momentum to implement this type of technology, but clearly we still have a long way to go.
JROCit's atOpen Finance Association, make recommendations to the British government on, among other things, how open banking and VRPs can be more effectively applied. However, there is currently no commercial framework to ensure the bank's viability and no accountability framework to protect end users. Without these critical components to protect traditional institutions, external fintechs and consumers, VRPs are not yet ready to become a mainstream reality.
Commercial VRPs (scan-free payments) are currently optional for banks in the UK, and financial institutions still need to do a lot of research to see if they can feasibly offer this service at scale.Banks must continue to invest in their authentication capabilities.and authentication-related customer journeys to ensure the future security of VRPs.
Finally,VRPs have tremendous potential, but the technologies needed to successfully implement them are simply not available yet.For now, the question is whether regulation will force the market to develop VRP technology or whether banks are willing to make that investment to reap the benefits of open banking.
At Acquired.com, we strive to stay ahead of the curve when it comes to banking innovation, and our products have built-in Open Banking capabilities to help our customers stay ahead of the competition with their payment strategies. FORLearn more about open banking, variable recurring payments and how our platform can help your business. Do not hesitate to contact us..