Variable Recurring Payments (VRPs) are an exciting and emerging new method of payment. They have the potential to revolutionise the way people make regular transactions. Several in the sector see the process as the next step forward for open banking.
Pismo is ready to help all banks, fintechs, and payment providers deploy this game-changing solution. But what is it exactly, and how can it benefit both users and providers?
VRPs – what are they?
The development of VRPs stems from the European Union’s second payment services directive (PSD2), which came into effect in 2018.
The legislation allows customers to safely connect authorised payment providers to their bank accounts. With this connection, the provider can use VRPs to make ongoing payments on the customer’s behalf.
Under the Strong Customer Authentication (SCA) guidelines set out by PSD2, many payment providers installed safeguards, requiring a customer to authenticate themselves for every transaction they wish to make.
Consumers are now familiar with the process, whisked to separate pages or pop-up windows to verify their identity when making a payment. However, this creates needless friction if a user has to authenticate regularly.
Traditional recurring payment methods, including direct debit and continuous payment authority (CPA), are a solution to this problem. Yet these have their own problems. To change a direct debit or CPA is a multi-step process which introduces pain points.
A VRP enables customers to modify their transactions from their mobile banking apps without going back and forth between payee and payment provider. It provides several advantages in transparency, security, and flexibility:
| Direct Debit | CPA | VRP | |
| Transparency | Visibility of the payment details and the amount taken | No details seen, only transactions in the statement | Details visible in-app, parameters like the end date and the amount taken are fully customisable |
| Segurança | Sharing a sort code and account number | Sharing all card details | Created via a secure consent process, online and via a bank |
| Flexibility | Payment taken the same working day, monthly. Changes must be given to the payee in writing | Company has permission to take funds from your card on a flexible basis | Parameters agreed by the user, with payment date and amount fully customisable |
Source: Openbanking.org.uk
What is sweeping?
Sweeping is a process enabled by VRPs. It enables a customer to transfer funds automatically from one account to another. This could be used to send money from a current account to savings or a loan account.
The process can go further than this, however. Third-party payment providers can set up parameters to enable effective money management. A customer could, for example, set a maximum limit in their current account for daily spending. Any funds that spill over this maximum figure can be instantly moved to a savings account with higher interest rates or into an investment portfolio.
Sweeping can also be used to prevent a user from falling into an overdraft. Triggers can be created to “parachute” funds from other accounts into a current account to ensure the balance remains positive.
These types of payments are exempt from SCA requirements, meaning a user can set up a series of customisable money movements between their disparate accounts without having to consent to the transaction each time. Sweeping could prove revolutionary for personal finance.
How a VRP solution can empower financial institutions
Examples like the above may seem disadvantageous to a bank. After all, overdraft revenues add to the bottom line. Cutting out the interchange and handling process could mean lost funds too.
Financial institutions should look at VRPs as a fantastic opportunity to empower their customers. Banks can position themselves as a major player in a user’s financial life, not just as a repository for cash.
Looking to the future, VRPs may signal a refocusing of the payments ecosystem back to the customers’ (digital) wallet, and firms must think about what strategies and innovations they could use to ensure they are top of mind for users.
Do you want to discuss VRPs in greater detail or learn how your institution could effectively deploy them? Talk to Pismo today, and our specialists can provide you with those important first steps.
