What are VRPs and how can they grow from here

Following a mandate from the Competition and Markets Authority (CMA), the UK’s nine largest banks have started rolling out Variable Recurring Payments (VRP) APIs. TrueLayer‘c Matt Parish explains why VRP makes recurring payments less cumbersome and how they can grow from here.

What are the problems with traditional recurring payment methods – eg card on file and direct debits?

Direct debit and card payments were not designed with digital in mind. When customers make an online payment, they want the process to be fast, easy and secure. Traditional recurring payment methods are neither of these things.

Direct debit and card payments can take days to be confirmed, preventing businesses from offering a smooth, instant experience. Both methods require customers to manually enter their payment details, which is both difficult and error-prone. And each has its share of security concerns: customers need to provide sensitive information to set up card payments, while direct debit lacks the strong customer authentication (SCA) standard for other payment methods.

These are just the problems from the users side as well. Both options can be costly for businesses. Card payments require interchange and processing fees, while direct debit carries its share of operational costs.

What is VRP and how does it deal with other recurring payment issues?

VRP is Open Banking’s answer to recurring payments. Using an API, it allows customers to set up recurring payments of varying amounts directly from their bank accounts.

The result is similar to direct debit and registered card, but with greater security and ease of use. Strong Customer Authentication (SCA) is built into the process so customers can initiate recurring payments using a single facial recognition or fingerprint scan. And there’s no manual data entry, eliminating the risk of a failed payment due to user error.

VRP has several other advantages over traditional recurring payment methods. For example, they settle instantly when used with real-time payment rails, creating a faster experience. With the customer’s consent, the VRP also confirms that the necessary funds are available before making a payment, reducing the risk of failed payments.

Which banks currently offer VRP and in what form?

Last year, the CMA ruled that the UK’s nine largest banks must introduce APIs that enable VRP. These rules went into effect earlier this year when CMA9 began rolling out its VRP offerings.

Initially, however, there was uncertainty about the scope of the VRP. The CMA’s mandate was to allow “cleaning”, the movement of funds between two accounts owned by the same customer. This raised questions about what account types were eligible – could you transfer funds to an online gaming account, for example? How about a utility bill?

In March, the CMA clarified that the cleanup was limited to three types of accounts:

• Payment accounts, including “substitute payment accounts” for electronic money used by consumers and SMEs

• Credit accounts

• Cash savings accounts that can pay interest

Everything else falls outside the scope of the CMA, so banks are not authorized to include them in their current VRP offerings.

So why is VRP useful outside of sweeping?

Sweeping is really only the tip of the iceberg for VRP. Using these APIs, banks could extend the VRP beyond the CMA’s mandate to enable recurring payments to businesses.

Currently, card on file and direct debit are the default payment options for everything from subscriptions to utility bills to ride-hailing apps. Not only is VRP ideal for each of these applications, it is also faster, safer and more cost-effective in many cases.

Take subscriptions for example. Card payments can be inconvenient here because cards expire or get lost or stolen. In turn, this leads to failed payments and churn. VRP does not expire, which helps businesses retain customers and saves customers the inconvenience of updating their information.

How are companies already using VRP to facilitate recurring payments?

Already VRP is proving popular for both sweeping and non-sweeping.

For the first companies like Chip use VRP to help increase their savings. Customers create a savings plan and based on their financial situation in a given month, VRP will automatically transfer a variable amount into their savings accounts.

On the other hand, proptech companies are already using VRP to automate slow and difficult manual processes. For example, rental platform Pink Chilli uses TrueLayer’s API to collect rent, secure late payments, and more.

How do you expect VRP to grow from here?

As with all new payment methods, things will evolve slowly and then suddenly. Financial services are likely to be the tip of the adoption spear. VRP will allow lenders to provide flexible and intuitive repayment plans, while personal finance apps can use it to power their smart savings features.

From there, VRP is likely to become an important part of e-commerce payments, especially in the food delivery and digital content spaces. In time, I would expect this to become the dominant recurring payment method in these sectors.

Want to know how industry leaders are using VRP to power their recurring payments? Register for the TrueLayer Live Event ‘Getting to know VRP’which will be held at TrueLayer’s head office in London on October 13 at 4:00 p.m.

About Matt Parish

Matt is TrueLayer’s product leader for recurring payments. He joined TrueLayer in 2019, playing a key role in scaling their open banking network, which now processes millions of transactions every day.

About TrueLayer

TrueLayer is a global open banking platform that makes it easier for everyone to build better financial experiences. Businesses of all sizes use TrueLayer to power their payments, access financial data and customers across the UK, Europe and Australia. Founded in 2016, TrueLayer is trusted by millions of users and businesses around the world. Our vision is to create a financial system that works for everyone.