The VRP Revolution: How Automated Payments Will Transform Banking Over the Next Decade

In 2023, Visa and Mastercard, two of the largest players in the payment industry, generated over $57 billion in combined revenue, primarily through the fees they charge businesses for processing card transactions. A major component of their services is the card-based recurring payment model, which has played a significant role in the expansion of the subscription economy worldwide.

However, change is on the horizon. Variable Recurring Payments (VRPs) are emerging as a revolutionary force in banking, offering a more flexible and cost-effective approach to payment processing. By enabling businesses to lower transaction fees and retain a greater portion of their revenue, VRPs are gaining traction. As their adoption grows, VRPs have the potential to disrupt the current payment landscape and transform the way payments are handled in the future.

Recurring payments – the foundation of the modern economy

Recurring payments have become a cornerstone of today’s economy, supporting a diverse array of transactions across industries—from subscription services like Netflix and Spotify to essential utilities such as electricity, gas, and internet bills.

For SaaS companies, recurring payments are essential for maintaining a steady revenue stream and nurturing long-term customer relationships. Take Adobe Creative Cloud, for example: it provides users with continuous access to premium tools while ensuring a consistent cash flow for the company, creating a win-win situation for both parties.

Other sectors, including gyms, insurance companies, software vendors, subscription box services, and loyalty programs, have also adopted recurring payments as a reliable method for customer retention and business sustainability.

While traditional recurring payments typically involve fixed amounts at regular intervals, variable recurring payments (VRPs) offer enhanced flexibility, allowing businesses to adjust payment amounts based on customer needs or usage. This flexibility strengthens customer relationships and helps companies avoid the hefty fees often associated with traditional payment methods like Visa and Mastercard.

So, what are variable recurring payments in a nutshell?

In simple terms, a variable recurring payment (VRP) is an automated transfer of funds between accounts that occurs at regular intervals, but with flexibility in both the amount and timing.

Customers can permit registered payment service providers to handle these payments on their behalf, with the freedom to adjust the payment amount and schedule within pre-agreed limits.

Key features that make VRPs a game-changer

From enhanced payment flexibility to seamless integration with open banking, VRPs are redefining convenience in the payment world. They don't just optimize billing—they’re transforming the entire digital payments landscape.

These key features position VRPs as the ideal solution for managing recurring payments, providing a more streamlined and intelligent alternative to traditional methods.

Why VRPs are a win for businesses and customers

Unlike traditional methods such as credit cards or direct debits, VRPs enable automated and flexible payments directly between bank accounts, offering significant advantages for both businesses and customers.

Key benefits for businesses:

Reduced fees, higher profits
By bypassing high transaction fees, VRPs provide a cost-effective alternative to traditional card payments. This allows businesses to retain more of their revenue, making it an especially attractive option for companies with high transaction volumes, like subscription services or utility providers.

Enhanced security and smarter payments

With VRPs, merchants don't need to store sensitive card information, reducing the risk of data breaches. Additionally, VRP transactions are secured with Strong Customer Authentication (SCA), ensuring robust protection for both businesses and consumers.

Faster payments, better cash flow

VRPs operate on a faster payment system, enabling near-instant settlement. This contrasts with traditional card payments, which can take 3-5 days to clear. 

E-commerce businesses, for instance, can benefit from quicker access to funds, improving cash flow and helping them manage stock, supplier payments, and operational costs more efficiently.

Reliable payment flow

VRPs provide a more reliable payment method, reducing the likelihood of failed payments and helping businesses maintain consistent revenue. 

For subscription services, this means fewer disruptions due to issues like expired or outdated card details, ensuring smoother, uninterrupted cash flow.

Flexible pricing models

VRPs give businesses the flexibility to design more dynamic subscription models, such as usage-based pricing or customizable billing cycles. 

For example, energy providers could implement pay-as-you-go systems that adjust charges based on actual consumption, providing customers with more personalized and transparent billing options.

In summary, VRPs offer businesses a smarter, safer, and more efficient way to manage recurring payments, while giving customers more flexibility and security.

Key advantages for consumers:

Greater control over finances
Automating recurring payments gives consumers more control over their financial management. With VRPs, payments are transferred seamlessly between accounts or for bill payments, eliminating the need for manual intervention and reducing the chances of missed payments or late fees.

For instance, VRPs can ensure that pension benefits are paid on time and streamline salary payments, ensuring employees receive their wages promptly.

Less paperwork and hassle
One of the key advantages of VRPs is the reduced paperwork and simpler process compared to traditional payment methods.

For example, if users need to adjust their payment amount or frequency, they can do so easily without the hassle of completing lengthy forms or submitting additional paperwork.

Smoother, simpler payments
VRPs provide a seamless payment experience by automating transactions, so there's no need for manual intervention. Once a VRP is set up, payments are processed automatically, saving you time and reducing the effort required to stay on top of your bills.

This means you'll never miss a payment for services like streaming subscriptions, gym memberships, or software licenses again. VRPs ensure that these recurring payments happen effortlessly.

No more card update hassles
VRPs also offer the added convenience of eliminating the need to constantly update payment information. Unlike card-based methods, VRPs use bank account details, ensuring that payments continue without disruption—even if you lose or replace your card.

Imagine no longer having to update card details across multiple services when switching to a new debit card—VRPs take care of keeping your payments on track.

The survey by Token.io confirms that the key benefits of adopting VRPs for end-users are frictionless user experience and the ability to control spending.  

Use cases for variable recurring payments in real-life

VRPs offer a modern, efficient solution for managing recurring payments, providing significant benefits for both consumers and businesses. Here are some real-life applications:

Subscription payments
VRPs are particularly well-suited for subscription services, offering a more reliable alternative to traditional card-on-file payments. Since bank account details don’t expire and authentication is required only once, the likelihood of payment failures is significantly reduced.

E-commerce one-click payments
In the world of e-commerce, VRPs simplify online shopping by eliminating the need to repeatedly enter payment details. This streamlines the user experience and helps reduce cart abandonment.

For example, when a customer purchases clothes online, they can authorize payments with a single click via VRP, speeding up the checkout process and providing enhanced security, all without sharing credit card information.

Utility bill payments
VRPs are ideal for paying household utility bills, offering flexibility to match irregular income patterns or to pay based on actual consumption.

For example, energy providers can use VRPs to allow customers to pay for electricity or gas based on their real usage, making budgeting and payments more predictable.

Delivery payments
VRPs simplify grocery or delivery payments by allowing customers to pre-authorize payments up to a set limit, enabling merchants to adjust charges based on changes to the order.

For instance, if a customer orders groceries for delivery and the store needs to substitute an item, the VRP allows for payment adjustments without requiring additional approval at checkout.

Tax payments
VRPs can also automate tax-related payments, such as VAT or income tax, helping businesses avoid cash flow problems and ensure timely submissions.

Small businesses, for example, can use VRPs to automatically set aside funds for tax payments each month, ensuring they never miss a due date and improving cash flow management.

Taxi and delivery services
VRPs enhance the payment experience for taxi and food delivery services, streamlining the process and offering both riders and customers a more seamless experience.

For instance, platforms like Uber or Uber Eats can use VRPs to automatically adjust fares based on ride distance or duration, as well as implement recurring meal deliveries. This helps reduce transaction costs compared to traditional card-based payments.

The technology behind VRPs

Here are the key technologies that enable Variable Recurring Payments (VRPs):

Open banking APIs
At the core of VRPs are open banking APIs, which allow third-party providers to access customer bank accounts for initiating payments.

For example, SDK.finance uses an integration with Salt Edge to leverage these APIs, securely retrieving account information and triggering payments. To ensure security and compliance with regulations, Salt Edge implements Strong Customer Authentication (SCA), requiring multi-factor authentication before accessing sensitive data or initiating payments.

OAuth 2.0 authentication
OAuth 2.0 is used for secure authorization when accessing customer data and initiating payments. Once consent is provided, access tokens are issued, allowing for seamless recurring payments without requiring users to authenticate each time. This ensures a smooth, ongoing payment process.

For instance, with SDK.finance’s SaltEdge integration, users are redirected to a secure widget to provide consent for recurring payments.

REST APIs
VRPs utilize REST APIs to facilitate real-time data exchange between financial institutions, payment processors, and third-party providers. These APIs manage VRP sessions, ensuring that payments are automatically triggered according to predetermined schedules or conditions.

Encryption and secure data transmission
To safeguard sensitive payment and account data, encryption protocols like Transport Layer Security (TLS) are employed for secure data transmission between platforms and users. This ensures that information is securely transmitted throughout the payment process.

Furthermore, businesses must comply with PSD2 regulations, utilizing eIDAS certificates for Strong Customer Authentication (SCA) to verify the identity of users and protect the security of transactions.

Regulations environment for variable recurring payments 

The regulatory environment for VRPs is evolving, with different regions advancing at different speeds. Here’s a snapshot of the current state of VRP regulation in key markets:

United Kingdom
The UK is at the forefront of VRP adoption, largely due to the efforts of the Competition and Markets Authority (CMA). Since July 2022, the CMA has mandated the nine largest UK banks (the CMA9) to offer VRP services for "sweeping"—automatically transferring funds between a customer’s accounts to optimize interest or avoid overdraft fees. 

However, this initial focus on sweeping has delayed the introduction of commercial VRPs, which would allow direct payments from customer accounts to merchants. As a result, commercial VRPs are still not widely available.

The Payment Systems Regulator (PSR) is working to expand VRP use beyond sweeping. Ongoing consultations are exploring the potential for low-risk applications, such as payments to regulated firms, utilities, and government bodies. E-commerce is also seen as a promising area, though its complexity and scale present challenges.

For consumers, particularly those with variable incomes like gig economy workers, VRPs offer enhanced control over recurring payments. By reducing penalties for failed Direct Debits, VRPs could provide greater financial flexibility.

European Union
In the EU, open banking is gaining traction, but regulatory support for VRPs has not yet reached the same level as in the UK. Many EU member states are still in the early stages of developing frameworks for VRP adoption. This fragmented approach has slowed the widespread implementation of both open banking and VRP solutions across the region.

United States
The regulatory landscape in the US is highly fragmented, which has hindered the adoption of both open banking and VRPs. With a patchwork of state-level regulations and no clear federal guidance, progress toward a unified framework for VRPs has been slow.

Global developments
In other parts of the world, the regulatory landscape for VRPs is still under development. Efforts are underway to establish global standards and guidelines, and updates will be provided as more regulatory frameworks are introduced.

The future of the banking industry and VRPs 

The Banking in 2035 report by SAS Institute predicts a significant decline in traditional card payments over the next decade, with innovations like VRPs (Variable Recurring Payments) likely to become a staple in banking. As open banking continues to reshape the industry, VRPs will play a pivotal role in transforming how payments are processed.

Banks that successfully adapt to this shift will evolve their infrastructure into dynamic, real-time platforms capable of supporting a wide range of financial services. This transition will position them to leverage the growing demand for more flexible and efficient payment methods.

Source: Payment Cards and Mobile

Open banking payments are a major factor driving the adoption of VRPs. As open banking adoption expands, the volume of direct, account-to-account payments is expected to increase dramatically, reducing the reliance on traditional card networks.

Charles Damen, Chief Product Officer at the open banking payments platform Token, compares the shift in banking to the transformation seen in the music industry. He explains:

“If you look at the music business, 20 years ago it derived 100% of its revenue from physical performance and physical music formats,” he says. “Last year, 67% of its revenues come from digital streaming – and revenues across the music business are at record levels.”

This analogy underscores that change, rather than being a threat, represents a significant opportunity. Just as the music industry embraced digital streaming, the banking industry can harness the potential of VRPs and open banking payments to drive new growth and profitability.

How to integrate VRPs into the established banking system

Integrating Variable Recurring Payments (VRPs) into existing banking systems requires strategic planning and innovation. Below are three forward-thinking approaches for banks to seamlessly adapt their infrastructure to support VRP technologies:

Agile payment solutions
Banks must adopt flexible, agile payment solutions capable of supporting VRPs. This involves investing in API-driven architectures and cloud-based platforms that enable seamless, real-time payment processing. By embracing these technologies, banks can offer their customers an efficient and modern payment experience.

Collaboration with FinTechs
Partnering with fintech companies allows banks to rapidly enhance their VRP capabilities and launch innovative payment solutions. These collaborations offer access to specialized technologies, such as advanced fraud prevention tools and customer verification systems, helping banks stay competitive and compliant with regulations.

User-centric innovations
To stand out in a competitive market, banks should focus on delivering personalized, value-added services. This can include offering budgeting tools, tailored spending insights, and flexible payment scheduling options. By prioritizing customer needs, banks can enhance their VRP offerings and foster stronger customer relationships.

The opportunity for VRP implementation into FinTech

FinTech companies have a unique opportunity to leverage Variable Recurring Payments (VRPs) to improve their service offerings and meet the growing demand for more flexible, automated financial solutions. By adopting VRPs, these businesses can streamline payment processes, offer greater flexibility in financial products, and tap into the expanding market for account-to-account (A2A) transactions.

Conclusion

Variable recurring payments are ushering in a new era of innovation in banking. With real-time settlements, enhanced control, and greater flexibility, VRPs are set to revolutionize everything from subscription billing to utility payments.

Platforms like SDK.finance offer FinTech companies a ready-made solution to capitalize on this transformation. By incorporating VRP capabilities and utilizing its modular architecture, SDK.finance allows businesses to quickly build and launch scalable payment products, positioning them to lead in the next phase of financial innovation.