Open Banking and the Rise of Variable Recurring Payments

https://thefintechtimes.com/open-banking-and-the-rise-of-variable-recurring-payments/
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Variable Recurring Payments (VRP) are further realised by the financial industry as a wave of implementation sweeps across fintech. The open banking initiative is now seeing wider adoption between payment initiation service providers (PISP), merchants and customers, with the process and parameters of recurring payments being fully reimagined. 

VRP allows a customer to connect their bank account to a PISP, authorising them to make a series of continuous but controlled payments. Customers are able to decide the amount, scope and expiry date of the VRP, through a process that advocates wider transparency and control when compared to traditional alternatives.

The relationship of processing payments between businesses and customers will be familiar with direct debit or continuous payment authority (CPA). These are both well-established means of taking payment and have typically relied on the details of the credit or debit card.

To understand why this relationship is now shifting at increasing speed over to VRP, we must first analyse the pros and cons of each process to businesses for making and receiving payments.

Direct debit

Of the three, direct debit suffers the most from a lack of transparency, with the view being limited to the last amount processed and the mandate itself. In order for direct debits to be initiated between both parties, the account number and the associated sort code must be shared in what is usually an unsecured environment.

As might be expected, it is the slowest of the trio in terms of processing time. Although payments are regularly facilitated in a same-day transaction, delays in the banking system can result in payments being made on the next working day; so not ideal if you’re in a rush to make or receive a payment.

In addition to this, if the date or amount of the direct debit is changed by the merchant, it’s required that the payee be notified in writing, although this can be waivered in the terms and conditions of the service.

CPA

In just as many ways as direct debit, CPA is hindered by an equally limited view of the transaction. Businesses can only see the transaction on the statement itself, but no additional details of the payee. This does shower the process in an air of anonymity, but can be restricting should anything go wrong with the order.

In terms of security, again very similar to direct debit, CPA requires all the information of the account and the card to be shared in order for the process to work. However, the process is also much more flexible, with a business being granted to retrieve funds on a more accessible basis.

VRP

VRP are the most transparent form of a standing order, with the details, date and parameters of the recurring payments being fully accessible and identifiable within the allocated banking app. Both the amount and the time frame of the process can be limited and controlled, which would lend itself to the added flexibility of the service.

Establishing a VRP requires a secure journey to authorisation, and is usually settled through the terms of the bank.

VRP isn’t suitable for every business, and there has historically been slight hesitation around its implementation due to concerns about how it would be adopted or welcomed by customers.

However, as open banking works its way further into everyday financial consciousness, the industry seems now more eager than ever to exploit the benefits of the service.

Implemented by the Competition and Markets Authority (CMA) upon the recommendation of the Open Banking Implementation Entity (OBIE) back in August, VRP could considerably disrupt the current system of billing and its relationship with paytech, as the OBIE’s implementation trustee Imran Gulamhuseinwala OBE, explains:

Imran Gulamhuseinwala OBE, Implementation Trustee, OBIEImran Gulamhuseinwala OBE, Implementation Trustee, OBIE
Imran Gulamhuseinwala

“The OBIE will now mandate variable recurring payments for the purpose of sweeping, which is the automatic movement of money between an account holder’s different accounts. We like to think of it as the smarter version of direct debit payments.

“This is a major step forward in payments, giving consumers more control over their money whilst also protecting them from incurring unwanted fees.

“It will, for example, allow surplus money to be automatically transferred from a current account to a savings account to help build a savings pot or to an overdraft or loan account to help the customer keep their borrowing costs to a minimum.”

What do the headlines say?

The personal finance app Nude announced its intention to leverage VRP earlier this month,  partnering with the online payment processing solution of GoCardless to power the payments for its users to save and invest for their first home deposit.

GoCardless has been active in the VRP space since 2019 when it took the first live transaction through a sandbox developed by the OBIE.

Duncan Barrigan, chief product officer and chief growth officer at GoCardlessDuncan Barrigan, chief product officer and chief growth officer at GoCardless
Duncan Barrigan

“With open banking payments now in the mix, users will be on the fast track to their first home,” said Duncan Barrigan, chief product officer and chief growth officer at GoCardless.

“We’ve long said that VRPs have the potential to improve the financial well-being of people up and down the country. Working with companies like Nude makes it all the more tangible.”

Earlier this month, NatWest announced it had signed an agreement with the company to provide VRPs as a new payment option for businesses and consumers. GoCardless is also reportedly developing a ‘non-sweeping’ VRP pilot, which is expected to launch sometime later this year.

Away from GoCardless however, and NatWest has been equally as busy in the VRP space of late. The group has signed agreements with two other PISPs, namely TrueLayer and Crezco, to offer VRP as a payment option for businesses and consumers.

NatWest has become the first UK bank to go beyond the requirement for banks to provide VRP in support of ‘sweeping’.

Daniel Globerson, head of bank of APIs at NatWest Group, commented: “VRP has huge potential for both consumers and businesses. As a relationship bank in a digital world, we’re proud to lead the industry by delivering a new payment option through VRP, which will make it easier for businesses and their customers to manage payments for a wide range of services.”

NatWest had already been leading the industry, having built its VRP API for sweeping last year – well ahead of other banks – and having made the first VRP transaction for sweeping in a live environment in December.

Offering VRP as a new payment method also marks a significant development in NatWest’s API commercialisation strategy, which is bringing an increasingly wide variety of the bank’s services to customers and partners in innovative and convenient ways.

Being one of the bank’s main partners in the space, TrueLayer announced further VRP developments this week, stating that its customer The Credit Thing had successfully implemented its recurring payments API to make the first consumer VRP transactions in the UK.

Colin Hollingsbee, CIO for The Credit Thing, commented: “Could this be the beginning of the end for direct debits? VRP is a real game-changer. We pride ourselves on providing great experiences and being at the cutting edge. That’s why we’re excited to be the first in the industry to do this with TrueLayer, reinforcing our philosophy to deliver on innovation.

“This isn’t innovation for the sake of it. It delivers meaningful benefits – consumers are firmly in control, the service is secure and user friendly, the cost of service is ultra-competitive, and regular payment approval rates are likely to be phenomenal.”

Michael Lane, VP of sales at TokenMichael Lane, VP of sales at Token
Michael Lane

Michael Lane, VP of sales at Token, offers his thoughts on the advancement of VRP and suggests what he believes could be the next steps for open banking: “In terms of delivering the best user experience, we need to move further beyond single, immediate payments. For A2A payments to capture a portion of cards’ share of checkout, they need to be moved behind ‘buy now’ buttons.

“As a consumer, once you’ve used that single-click checkout button, irrelevant of the payment mechanism behind it, you won’t want to go back to a checkout experience with the merest hint of friction.

“VRP capabilities can power this switch. From July 2022, the CMA will mandate sweeping services by the largest UK current account providers. But I’d like to see faster progress. We have to open up what’s allowed under VRPs from its current, somewhat limited, scope.

“We need all the banks to offer it. And we need all third party providers (TPPs) to offer it to their payment service users. We need to work out competitive pricing and agreements on who’s liable if something goes wrong. These are all things that card schemes worked out over decades, but we need to do this within the next 12 to 18 months.

“And then last, but by no means least: conversion. It’s important to all merchants, but especially to the largest e-tailers. A single fraction of a percentage of movement costs or benefits them to the tune of tens or hundreds of thousands of pounds or euros. Once open banking payments have permeated checkouts and recurring payments are in place, conversion rates will naturally rise.

“The final pins are being knocked down, and the big e-tailers are starting to come to the party. Time to forget about use cases and let’s just talk payments!”

  • Tyler is a Fintech Junior Journalist with specific interests in Online Banking and emerging AI technologies. He began his career writing with a plethora of national and international publications.

https://thefintechtimes.com/open-banking-and-the-rise-of-variable-recurring-payments/