2022: The Year of Variable Recurring Payments

It happens like clockwork: sometime between the day we first crack open our advent calendars and the appearance of the fattest edition of the Radio Times, everyone -- in every industry -- turns into a psychic. It’s ‘prediction season’, the time of year when we all try our hand at divination.

Frankly, I’m not a huge fan of predictions. More often than not the most disruptive trends aren’t predictable at all -- just take the last two years as an example. But, as a self-professed payments geek, this year I can’t help but share my excitement for 2022 and how the next 365 days will represent a tipping point for open banking, and Variable Recurring Payments (VRP) in particular.

VRPs will drive forward open banking

Payments isn’t exactly known for being a hotbed of rapid innovation. Just look back over the past 70 years or so to see that cash, cheques, cards and bank transfers have been the mainstay of payments for many decades. Of course the internet took payments online - but the reality is that we’ve largely digitised existing payment methods, rather than inventing new ones. Open banking is set to change that. 2021 has seen the launch of a number of new open banking payment solutions (including Instant Bank Pay from GoCardless) and we’re excited to see VRPs being added to the mix.

This is an area we’ve been close to for quite some time. At the end of 2019, GoCardless and Starling took the first live VRP transaction through the OBIE’s regulatory sandbox. Recently, NatWest announced it had conducted an open banking-initiated VRP transaction of its own as part of a wider pilot with GoCardless and other third-party-providers -- months before the new CMA deadline for ‘sweeping’, or the automated movement of funds for a customer between two accounts in their name, usually to help them avoid charges or benefit from better interest rates. Not only is this a reason to celebrate; it’s another proof point for our thesis that VRP will generate further momentum for open banking in 2022.

We expect to see uptake accelerate quickly for sweeping use cases in the first instance, particularly for high value payments across savings and investments products - where speed and security can make a big difference. We work with lots of Savings and Investment clients and sweeping is a big value-add to them - the faster they can transfer money into their clients’ accounts, the faster their clients can reinvest it, resulting in a quicker return.

Card-on-file e-commerce transactions

Although the original intent of the VRP mandate was to enable sweeping, I have to admit it’s the potential for new cases beyond sweeping that excites me the most. In this category, card-on-file e-commerce use cases are the most likely space for VRPs to start gaining a foothold. Strong Customer Authentication (SCA) is already in place in the UK, and will be legally required by March 2022. Many of us are already having to authorise card payments by inputting codes that are sent by email or text and this will soon be required for all card transactions, putting an end to the ‘frictionless’ state of card-on-file that we’ve enjoyed to date.

Paying via your bank account will definitely help ease the friction problem as authentication is built into the payment flow. VRPs will come into their own in those cases where you have an ongoing relationship with a supplier - think the supermarket that you use for your weekly online grocery shop, or the ride sharing app you use regularly - because they will be able to pull the payment directly from your bank account each time you shop without needing to worry about updating your card details or authenticating each transaction. That means paying via your bank account will be on a par with cards and potentially even better from a payer perspective. 

There are a few significant downsides to card-on-file transactions for merchants too - most notably card failures which lead to cart abandonment and / or churn. There is of course the high cost of cards, which was underscored by Amazon’s announcement it will no longer accept UK-issued Visa credit cards from January due to excessive fees. Then there’s the risk of future interchange fee hikes from Visa and Mastercard because of Brexit; and higher fraud risks, which is what SCA is looking to combat. VRPs will not only solve the upcoming friction problem for payers, but many of these other challenges that merchants face too.

Ultimately it will be payer preference and conversion that will drive usage. Merchants are unlikely to sacrifice conversion at the checkout, so getting some big, well-known brands to support VRPs will go a long way towards creating the awareness needed to drive payer adoption.

Will VRPs replace bank debit?

We don’t think VRPs are a full replacement for bank debit (known as Direct Debit in the UK), at least not any time soon. On the contrary, we see them as being very complementary. While bank debit is a great way to collect recurring payments across a wide range of use cases, VRPs present an exciting opportunity in many cases where bank debit is not a suitable fit - typically sweeping and card-on-file e-commerce transactions where there is a need for real-time authorisation of recurring or regular payments. 

However, bank debit will remain preferred in many instances where real-time transactions aren't required; so merchants can benefit from the high preference, high conversion, lower churn rate and lower costs associated with bank debit. In addition, in the UK VRPs are being rolled out bank-by-bank and will need to be activated by each individual payer. At launch next summer, it’s likely that only a small subset of payers, from one or two banks, will actually be ready and willing to use VRPs. Therefore the ability to intelligently combine both the speed and security of VRPs with the reliability and efficiency of bank debit will be crucial to most businesses. 

Barriers to adoption

Whilst we’re very positive about the impact of VRPs on the payments landscape, there are some caveats worth thinking about that risk slowing down short-term adoption.

First is the question of consumer protection. We have very solid, long-standing protections in place for bank debit and card transactions, but nothing currently exists for bank transfers - essentially a VRP is an automated bank transfer. This won’t be an issue for sweeping as transfers are being made between the accounts of a single customer; but when VRPs expand beyond this consumers are unlikely to use them to any great extent if there is no recourse. This is one of the areas GoCardless will prioritise as we continue to build our VRP proposition, leveraging our decade-long expertise in bank payments to find the best solution.

Second is cost. It’s the biggest unknown at the moment and is a potential barrier to widespread adoption, on the merchant side. Setting fees too high could have disastrous effects on uptake and will render VRPs unusable for low value transactions.

The bottom line

There’s certainly a lot to be done in the world of VRPs. However, the ball is now rolling. Over the next 365 days we’ll do our part to keep the momentum going through launching our first VRP feature and collaborating with industry players on exciting pilots and live propositions alike. The impact of VRPs on the payment landscape will probably take a few years to be fully realised -- but by the time we reach prediction season in 2022, this new payment method will have likely sprouted strong green shoots.