What are Variable Recurring Payments?
Variable Recurring Payments (VRP) are a type of recurring payment instruction that can be set up and used to make a series of future payments. VRP is emerging as a possible gamechanger in real-time payments, especially as Open Banking picks up speed in Europe.
VRPs are similar to recurring payments made via direct debit or card-on-file and work on Open Banking rails. Recurring payments made using direct debit or card-on-file requires a customer to authenticate them using Strong Customer Authentication (SCA), as mandated by PSD2 regulations. But in the case of VRPs, the customer delegates SCA authentication to an authorized third-party payments provider, enabling a more seamless and embedded payment experience. However, customers have to give their prior and explicit consent to the third-party payments provider to carry out a VRP.
How do customers gain from VRPs?
Customers can use VRPs to make subscription and in-app payments. Currently, these payments use card-on-file to carry out the transaction. In the future, VRPs will replace card-on-file with account-on-file, making payments more seamless and secure. With VRPs, customers will never have to update their credit or debit card details or worry about filling in incorrect payment details. Unlike card-on-file payments, VRPs are directly made from a customer’s bank account, offering customers more convenience, control, and security.
How do merchants gain from VRPs?
For merchants, VRP means real-time settlements and lower costs, elimination of card fraud, lower costs, reduced customer churn, and no chargebacks.
What is happening with VRP in Europe?
So far, in Europe, VRP is currently being used for “Sweeping”, which are transactions between two accounts belonging to the same customer. But to use VRPs for Sweeping, banks have created the infrastructure needed to support more VRP use cases. Recently, European Open Banking platform TrueLayer and UK bank NatWest made the first VRP transaction in a “live” environment rather than a sandbox.
How Do Variable Recurring Payments Work?
In a variable recurring payment, a customer securely connects an authorised payments provider to their bank account. The provider can then initiate the transfer of funds on the customer’s behalf with their consent and authentication.
Because these payments are made on a set of agreed parameters between a customer and the payments provider, they give the customer more control and transparency. Customers can set a limit to the amount that can be taken, or set an end date for the payment mandate. Customer consent is necessary to set up VRPs, and these payments have to be online and through the customer’s bank.
In variable recurring payments, a long-life consent token is created based on three parameters: the maximum number of transactions in a time period (for example, a month), the maximum value of a single transaction, and the total value of all transactions in that period. And if transactions stay within these limits, there is no need to apply SCA.
Benefits of Variable Recurring Payments
VRPs have created a buzz in the payments industry because of their potential to offer a more secure and cost-effective alternative to direct debit and card payments, which are currently the primary methods to make recurring payments. VRPs are also expected to be faster and less prone to error and also help reduce customer churn.
VRPs make payments more secure. How? With VRPs, businesses do not have to collect or store confidential cardholder data on file. This reduces the potential impact of data breaches, as there is lesser sensitive data stored for fraudsters to steal. Also, as businesses do not store sensitive card data, they do not have to worry about PCI DSS compliance.
VRPs will also significantly lower transaction fees for businesses when compared to card payments because they bypass card networks and traditional payment intermediaries.
VRPs can lead to fewer payment errors and, in turn, higher conversion rates. VRPs eliminate the scope of error – like mistyping card numbers – that comes with manual entry. Recurring payments made using debit and credit cards can lead to customer churn, especially when a card expires or is lost or stolen. VRPs eliminate this aspect as they use account-on-file instead of card-on-file, and while cards expire, accounts do not.
And finally, VRPs are based on open banking, with SCA at its core. This ensures that VRPs use strong security protocols and explicit customer consent. All of this means reduced fraud, lesser payment risk, and safer transactions for consumers and businesses.
As VRPs become more mainstream, they could fundamentally change consumer payments and unlock new innovation in the future. Industry players can collaborate to build cutting-edge financial products and services based on open banking. There are plenty of opportunities to design digital payment experiences from scratch that use modern authentication technology and faster payment rails.
There is a clear appetite in the market to use VRPs. But, the key to adoption will be to overcome time and cost barriers so that businesses and consumers can reap the full benefits of this technology.
Speak to us to know more about variable recurring payments and how you can develop the best strategy that is relevant to your business.
Jose Augustine is the Chief Business Development Officer at Novalnet AG with extensive experience in European payment industry and a knowledge powerhouse.