Variable Recurring Payments (VRP) are a major step forward for payments and the wider Open Banking movement. In July 2022, the CMA9 banks were mandated to introduce VRP for sweeping. Yet, this use case is only one of many game-changing possibilities – including VRPs for so-called non-sweeping services.
Against this backdrop, we wanted to help the industry better understand how payment service providers (PSPs), merchants and banks will view this new development. For the second consecutive year, in partnership with Open Banking Expo, Token has conducted a comprehensive industry survey to gauge the industry’s attitudes on Variable Recurring Payments and the future of payments.
Understanding the VRP Opportunity
VRPs for non-sweeping services can address two key areas of opportunity.
The first is VRPs as a potential replacement for direct debit. The second is replacing card-on-file with VRPs, and using Variable Recurring Payments to put Open Banking payments behind e-commerce “Buy Now” buttons.
Our survey reveals that the latter — VRPs for frictionless e-commerce, e-commerce payments — is where the industry’s focus really is today. Actively converting direct debit to VRP was not seen as a very strong driver by survey respondents this year, which is a change from last year and even more of a change from when VRPs were originally introduced and most were seriously looking at the direct debit opportunity.
Perhaps this is because, although it certainly has its challenges, Direct Debit is a low-cost form of payment. However, you cannot see if a Direct Debit mandate has been withdrawn, which is a significant downside. When a transaction fails, a merchant or service provider may only realise after they have already sent an item or delivered the service. There remains great potential for VRPs to address this challenge by offering immediacy of payment and showing when a consumer has withdrawn a mandate.
Growing appetite for standardisation
Another key finding of the survey was that two-thirds of survey respondents believe that there should be standardised fee structures for VRPs, and 80% of survey respondents indicated there should be standardised contract frameworks. We also found that respondents also had a strong view that regulators should also set a maximum fee that banks can charge for VRPs.
While these issues are currently being debated and negotiated across the industry, including during last week’s Open Banking Expo event in the UK, there is now general acceptance that, for the first time during our Open Banking journey, VRPs will bring banks into a position where they are incentivised and able to monetise this new form of payment, as well as future forms of premium APIs.
Defining the future
We are currently defining the next phase of Open Banking in the UK and Europe, and VRP serves as the starting point for the new premium models that will emerge from related industry-wide efforts. Premium APIs give banks many revenue driving opportunities, such as introducing a new API for passport verifications to facilitate onboarding and making this a chargeable event. There are also many types of assets that banks can monetise through APIs.
Interest in VRP has grown significantly over the past twelve months. However, there is still only one bank really advocating and promoting VRP for non-sweeping services. NatWest has made APIs for VRP available, developed a contract role, and started charging for VRPs, which is all very encouraging. Now, other banks need to follow suit.
The interest in VRP revealed through this survey should encourage more banks to jump on the bandwagon and define the models that will help them to monetise VRP and premium APIs.
Regulators have been very outspoken about the need for an alternative form of payment, which means now is the time for banks to act. Wait too long, and regulators may step in to force action.
Banks that move now can benefit from the learnings of other institutions and grow the models they can implement for a new API economy.
Where are we headed?
At last week’s Open Banking Expo UK in London, I was thrilled to announce that Token can now enable VRP for sweeping services across all major UK banks. We are also entering into an agreement with NatWest to enable VRP for non-sweeping services, with other banks to follow.
At the same time, Token remains heavily involved in defining the future of Open Banking in the UK within the Strategic Working Group and its Steering Committee.
We are also involved with the definition and the completion of the SEPA Payment Account Access (SPAA) scheme rulebook, which sets the framework for open finance and the future of open banking payments in Europe, where Dynamic Recurring Payments (DRP) are particularly exciting. We see a lot of interest from our PSPs in the provision of DRP functionality, which provides very similar functionality to VRP, and we hope that DRP will be the key MVP of the SPAA rulebook.
Contributed by Charles Damen, Chief Product Officer, Token