What are Variable Recurring Payments?

Variable Recurring Payments are one of the hottest topics in the Open Banking community.

Just this week, the Joint Regulatory Oversight Committee published an update on the significant progress made since it outlined its Open Banking vision in April and set out plans to deliver a new generation of payment products and services.  

Back in 2021, the nine largest banks in the UK were mandated by the Competition and Markets Authority to offer VRPs, in the form of “sweeping”, automatic transfers of funds between a customer's accounts. While mandatory for these institutions, many other banks began voluntarily embracing VRPs.

They combine the advantages of direct debits, card-on-file, and standing orders into a versatile and user-friendly package. The strategic support of the Joint Regulatory Oversight Committee, and its push for the next phase of Open Banking, gives a clear mandate for its continued adoption in the UK.

Here we’ll take a look at VRPs, their differences from traditional payment methods like direct debit, real-life applications, and the benefits they offer to both merchants and consumers.

What are VRPs?

In the simplest possible terms, VRPs are like the direct debit payments, favoured by the utility providers such as phone and electricity companies and facilitated by the card networks, that we’ve all come to love/hate. They allow customers to authorize businesses to withdraw varying amounts from their accounts, at different times, under agreed terms.

In the same way Open Banking facilitates the pay-by-bank process called Payment Initiation Services (PIS), a direct, secure bridge from your bank account to that of a trusted business. VRPs allow that bridge to be opened by trusted businesses under rules and limits defined by the consumer. There are two main types of VRP:

Sweeping:

Automate the movement of “me-to-me” payments between two accounts held by the same person. So, if you’re salary is paid into your Revolut account, you can easily set up a monthly transfer into your HSBC savings account.

Non-sweeping:

Also known as “commercial VRPs”, they facilitate recurring payments to third parties, such as for subscriptions or bills, with varying amounts. They’re the perfect replacement for the direct debits we have with utility companies as they provide the flexibility to adjust payment amounts according to the service usage or billing cycles.

What’s the difference between VRPs and direct debit?

VRPs and direct debit are similar in functionality but differ in their advantages for business. They present a substantial upgrade over direct debits, primarily through their real-time processing that enhances cash flow efficiency. Unlike the rigid structure of direct debits, VRPs offer enhanced flexibility in payment amounts and timing, coupled with improved security measures. They simplify administrative tasks, reducing the potential for human error as well as the administrative burden.

How will non-sweeping VRPs be used in real life?

Non-sweeping VRPs are being piloted for a range of applications including payments to financial services, utilities, government agencies, and ecommerce. While integrating VRPs for ecommerce may require more adjustments, sectors like financial services, utilities, and government are poised to benefit more immediately from VRPs. These payments provide consumers greater control and visibility, helping manage money, saving on costs, and offering flexible repayment solutions. In practice, we’ll see use cases like:

Subscriptions

They enable users to pay for their media subscriptions or memberships based on usage or tiered service levels.

Household bills

VRPs can be used to pay utility bills based on actual consumption, ensuring fair and accurate billing.

Taxes

They simplify tax payments by allowing variable amounts to be transferred as and when due.

Benefits for businesses

As opposed to the banks and card companies who benefit most from direct debits and card-on-file payments, businesses themselves gain from offering VRPs via:

Cheaper payment processing: Lower transaction costs compared to card networks reduce operational expenses.

Better cashflow management: Immediate fund transfers improve financial planning and budgeting.

Enhanced security: Secure Open Banking protocols minimize fraud risks.

Reduced customer churn: A smoother payment process enhances customer satisfaction and loyalty.

Benefits for consumers

It’s not just businesses who will benefit from VRPs, consumers also stand to gain through:

Better financial management: Automated transfers help in budgeting and managing expenses more effectively.

Increased security and control: Users have the power to set and adjust payment terms, providing a sense of security and autonomy.

Less chance of human error: Automation reduces the chances of missed or incorrect payments.

Reduced data management burden: Once set up, VRPs eliminate the need for repeated manual payment setups.

The future promise of VRPs

As the Open Banking landscape continues to evolve, VRPs stand at the forefront of this transformation. They aim to build customer trust beyond sweeping by ensuring consumer protection during account-to-account payments.They not only offer enhanced control and transparency for both consumers and businesses but also signify a shift towards more seamless, secure, and efficient transaction methods. With the potential for further innovation, VRPs are poised to redefine the standards of payment processing and encourage even greater adoption of Open Banking.

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