A deep dive on the benefits of Variable Recurring Payments

Variable Recurring Payments (VRPs), or Dynamic Recurring Payments (DRPs) as they’re commonly known in continental Europe, represent a promising payments innovation and are poised to deliver significant benefits to both merchants and consumers, potentially unlocking several killer use cases for open banking-enabled payments.

This article explores the various benefits Variable Recurring Payments (VRP) and Dynamic Recurring Payments (DRP) will unlock across a range of verticals and end users.

While the path to maturity is clearer for VRPs in the UK, we expect to see progress on DRPs in continental Europe, which will eventually offer similar functionality to VRPs.

Automation and efficiency

At their core, commercial VRPs and DRPs are about removing friction, making them poised to offer an efficient alternative to card-on-file and direct debit.

Users can set up a payment mandate with flexible parameters, allowing for variations in payment timing and amount. This can significantly streamline the payment process, saving time and reducing manual errors for businesses and consumers alike.

There are huge potential upsides, across a range of payment scenarios encompassing consumer-initiated payments (like one-click purchases) and merchant-initiated payments (like recurring billing and basket value change). Beyond the obvious potential for faster settlement of funds (settlement is often instant with VRP), below are a few examples of how VRP can improve payment processes in other ways.

Boosting e-commerce

VRP will play a critical role in the growth of e-commerce in Europe. One key benefit for merchants operating in verticals involving consumer-initiated payments will be improving the one-click purchase experience. Enabling one-click purchases refers to the process of reducing friction in the payment journey by allowing the consumer to complete their purchase in one action without further authentication needed; this is possible today using card-on-file, but there are a few significant barriers.

First, initial setup of card-on-file involves manually entering a card number, which is time-consuming, cumbersome and error-prone. In contrast, VRPs simply require the user to choose the payment parameters they’re comfortable with, resulting in a much simpler customer experience.

Second, while every card-based transaction is subject to PSD2 Strong Customer Authentication (SCA) (which can be slow and unreliable, leading to consumer dropout) VRPs involve one SCA to set up parameters. After that, every transaction within said parameters can be initiated with one action.

E-commerce merchants are likely to see significantly improved conversion and success rates with VRPs because the time to complete a payment is significantly reduced. As opposed to waiting for the card issuer to verify the transaction against a ruleset, then entering a one-time passcode, VRPs allow the consumer to initiate payments in a matter of seconds, improving payment completion for merchants.

Finally, if a customer’s card expires, the merchant may not have card updater functionality available. Conversely, bank accounts do not expire, so VRP can always be available after setup.

Replacing card-on-file with account-on-file is expected to be a significant step forward in enabling frictionless e-commerce payments. By facilitating recurring payments, VRPs and DRPs will support the growth of these businesses, contributing to the overall dynamism of the e-commerce sector.

Enhancing cashflow management

Merchants operating in verticals involving merchant-initiated payments also stand to benefit enormously from VRPs and DRPs, which will improve reliability and support a more predictable revenue stream. This makes it easier for merchants to manage cashflow and plan for growth. By reducing the need for manual follow-ups on payments, VRP can also free up resources for other business functions.

By way of example, charities collecting monthly donations, local councils collecting council tax, and utilities companies collecting monthly bills are all cases where direct debit may traditionally be used to source funds. While direct debit is cost-effective and familiar, it has similar friction points as card-on-file.

First, direct debit setup can be tricky as it involves manual entry of bank details. Bank details are not always something a user easily has at hand, and manual entry is cumbersome and error-prone. Should a customer pass this first 'test', it can take up to a week for a direct debit setup to be confirmed to a customer by their bank. This delay can cause confusion and cancellation because the direct debit is no longer top-of-mind for the customer. In contrast, VRPs offer a simpler setup process with less manual data entry, and instant setup confirmation to ensure minimal up-front cancellation.

Direct debit collection success is also notoriously hit-and-miss. Failure can occur if a user has insufficient funds, and the merchants often can’t reattempt collection and must absorb further operational cost to chase missed payments. On the other hand, VRPs, allow merchants to check if a consumer has sufficient funds in advance, so they can notify consumers to take action if a payment will not be successful. Further, should the user fail to take action the first time, merchants can automatically reattempt collection as many times as needed, reducing the operational cost of chasing missed payments.

In addition, while direct debit transactions can be the subject of fraudulent activity due to their lack of SCA, VRPs inherently invoke SCA during their initial setup process, minimising fraud.

Another key VRP use case for merchant-initiated transactions is reducing friction in the case of basket value change. When a customer orders groceries online, for example, the initial payment amount at checkout may not match the final payment amount at delivery if a merchant has to make product substitutions or change to a more expensive delivery slot. While many merchants solve this problem by taking an initial deposit then collecting the outstanding amount later on, this approach involves taking more than one payment and potentially repeating SCA if the value has changed significantly. VRPs allow the merchant to simply take one payment on delivery with no SCA, safe in the knowledge that the consumer has the necessary funds and that the payment will be successful due to the parameters the customer has set up.

Consumer empowerment

VRPs give consumers more control over their finances. Consumers can easily manage their recurring payments, subscriptions and bills more efficiently and enjoy the convenience of automated payments. While direct debit offers similar control, card-on-file payments do not offer the user any control within their own banking environment. With card-on-file, consumers must place a significant degree of trust that the merchant will bill them appropriately.

Killer use cases for open banking-enabled payments

We expect to see VRPs and DRPs mature as they come to the market. There is a need for strong merchant security measures to prevent unauthorised transactions, and customers will need to receive clear communication to ensure they understand the terms of their payments. Nonetheless, as businesses and consumers adopt VRPs and DRPs, they will play an increasingly important role in the payments landscape and economies of the UK and continental Europe.