Open Banking Variable Recurring Payments explained

Introduction

The way we make payments is changing. Open banking has introduced a host of innovations, but few are as promising as Variable Recurring Payments (VRPs). As a modern alternative to traditional methods like direct debits and standing orders, VRPs offer a more flexible, secure, and dynamic way to manage recurring payments.

So, what makes VRPs special? They allow consumers to automate payments within pre-defined parameters, giving them greater control and transparency. Whether it’s dynamically transferring savings or automating subscription payments, VRPs cater to real-world needs in a way traditional payment systems can’t.

In January 2024, open banking payments hit 14.5 million transactions, with VRPs accounting for 8% of this total. While this technology is still in its early stages, its potential is undeniable. This blog will explore how VRPs work, their key use cases, and why they matter for businesses and consumers alike.

We will guide you through:

What Are Variable Recurring Payments (VRPs)?

Variable Recurring Payments (VRPs) are a new way of automating payments that provides more control and flexibility than traditional methods like direct debits or standing orders. With VRPs, customers can set up payments that vary in amount and timing within limits they define, making them better suited for real-life situations where payment needs often change.

For example, instead of agreeing to a fixed monthly payment for a utility bill, a customer can set a rule allowing payments that match the actual usage, as long as it stays below a certain limit. This approach means customers don’t have to manually approve each transaction but still have control over how their money is used.

There are two main types of Variable Recurring Payments:

1. Sweeping VRPs: These are transfers between a customer’s own accounts, like moving leftover money from a checking account to savings or paying off a credit card balance. This type of VRP is already available and supported under open banking regulations in the UK.
2. Commercial VRPs: These handle payments from a customer to a business, such as subscriptions or e-commerce transactions. These are not yet widely available but are expected to grow in use as the market develops.

Key Features of Variable Recurring Payments:

• Real-Time Payments: Unlike traditional methods, payments are processed instantly.
• No Sharing of Account Details: Customers approve payments securely through their bank, without sharing sensitive information with third parties.
• Customisable Payment Rules: Customers can decide how much to pay, how often, and set upper limits for peace of mind.

Variable Recurring Payments provide a simple and secure way to manage payments for both personal and business use, giving people the flexibility they need without the hassle of repeatedly setting up or changing payment instructions.

How Do Variable Recurring Payments Work in Open Banking?

To understand how Variable Recurring Payments work, it’s important to look at the role of open banking. Open banking allows customers to securely share their financial data with third-party providers and authorise them to initiate payments on their behalf. VRPs are a natural extension of this system, giving customers a way to automate payments under conditions they control.

Here’s a step-by-step breakdown of how Variable Recurring Payments work:

1.Authorisation by the Customer:

The customer sets up a VRP through their bank or a third-party provider. They define specific parameters for the payment, such as maximum amounts, frequency, and purpose. For example, a customer might authorise up to £200 per month to be transferred to a savings account.

2.Payment Initiation by the Provider:

Once the VRP is set up, the third-party provider (like a budgeting app or utility company) can initiate payments on the customer’s behalf. These payments are only processed if they meet the pre-approved rules.

3.Secure Communication via APIs:

The payment request is sent through APIs (Application Programming Interfaces), which act as secure communication channels between the bank and the third-party provider. No sensitive account details are shared during this process.

4.Real-Time Settlement:

The payment is processed instantly, ensuring that funds move immediately between accounts. This is a significant improvement over traditional recurring payments, which often take days to settle.

5.Transparency and Control:

Customers can monitor their VRPs through their bank’s app, where they can view upcoming payments, change limits, or cancel the authorisation altogether. This ensures that they remain in control at all times.

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Sweeping Variable Recurring Payments

The most common type of Variable Recurring Payments available today is sweeping, where customers automate “me-to-me” payments. For instance:

• Savings Automation: Extra funds at the end of the month are transferred to a high-interest savings account.
• Debt Repayment: Small payments are automatically directed toward paying off loans or credit cards, reducing interest charges over time.
• Overdraft Protection: Funds are moved from a savings account to a current account to prevent overdraft fees.

How Variable Recurring Payments Are Different from Traditional Recurring Payments

Unlike standing orders or direct debits, VRPs allow customers to:

• Adjust to Real Needs: Payments can change based on actual expenses (e.g., utility bills based on usage).
• Retain Control: Customers don’t have to share their account details with merchants or third parties.
• Access Immediate Payments: Transactions happen in real time, providing faster service compared to traditional methods.

Variable Recurring Payments simplify the process for both customers and businesses, ensuring payments are secure, fast, and aligned with the customer’s preferences. This flexibility makes VRPs particularly valuable for managing modern financial needs.

Why Variable Recurring Payments Matter for Businesses and Consumers

Variable Recurring Payments offer practical advantages for both businesses and consumers, addressing many pain points associated with traditional payment methods like direct debits, standing orders, and card payments.

For Consumers: Better Control and Transparency

1. Flexible Payment Options:

Consumers can set limits on how much and how often payments occur. For instance, instead of a fixed monthly amount for a utility bill, payments can align with actual usage, reducing overpayments or surprises.

2. Enhanced Security:

VRPs don’t require customers to share sensitive account details with merchants or apps. Payments are authorised directly through the customer’s bank, significantly lowering the risk of fraud or misuse of data.

3. Real-Time Payments:

Transactions occur instantly, so funds move immediately between accounts. For example, if a consumer is at risk of overdrawing their account, money can be transferred in real time to avoid penalties.

4. Simpler Management of Subscriptions and Bills:

Ending or adjusting a subscription is straightforward. Instead of navigating complex cancellation processes, consumers can simply revoke a VRP through their banking app.

For Businesses: Improved Payment Processes

1. Lower Payment Failures:

Unlike card payments, where transactions can fail due to expired or invalid card details, VRPs are tied to bank accounts, which don’t expire. This stability ensures more consistent payments.

2. Reduced Costs:

VRPs eliminate the need for card processing fees, which can significantly reduce costs for businesses. Moreover, they are more affordable than traditional direct debit systems.

3. Faster Settlements:

Payments are processed in real time, which improves cash flow for businesses. This is particularly helpful for small and medium-sized businesses (SMBs) that rely on timely payments to manage their operations.

4. Increased Customer Satisfaction:

Offering VRPs as a payment option gives customers more flexibility and control, improving their overall experience. Businesses can build trust by showing that they prioritise customer security and convenience.

Real-World Use Cases of Variable Recurring Payments

Variable Recurring Payments (VRPs) aren’t just a theoretical advancement in open banking; they’re already solving real-world problems for both consumers and businesses.

Here are three impactful use cases of Variable Recurring Payments:

1. Automating Savings and Debt Management

For many people, managing their savings and paying off debts requires regular effort. Sweeping VRPs take the stress out of this by automating “me-to-me” payments. They allow individuals to transfer funds between their accounts based on predefined rules.

How It Works:

• At the end of each month, a budgeting app linked to your bank account analyses your income and expenses. If there’s leftover money, it automatically transfers the surplus to your savings account.
• If you have a credit card or loan, VRPs can help you pay it down gradually by setting small, recurring payments toward the outstanding balance.

Why It’s Useful:

• Customers can save without thinking about it, ensuring their money works for them.
• It helps avoid late payments and reduces interest costs on debts.

Example:

A young professional sets a VRP to transfer any remaining balance above £200 in their checking account to a savings account every month. Over time, this approach builds a healthy emergency fund without manual effort.

2. Simplifying Subscriptions and Memberships

Subscriptions are a part of everyday life—whether it’s for streaming services, gyms, or software. But traditional payment methods like cards-on-file often lead to issues, such as failed payments due to expired cards or difficulty canceling a subscription.

How It Works:

• Customers authorise a Variable Recurring Payment for a subscription service, setting a maximum monthly limit. Payments are then processed automatically, and the subscription continues seamlessly.
• If a customer wishes to cancel, they simply log into their banking app and revoke the VRP—no need to deal with the service provider.

Why It’s Useful:

• Businesses benefit from fewer payment failures, ensuring predictable cash flow.
• Customers gain more control and transparency, avoiding frustration with complicated cancellation processes.

Example:

A gym offers VRPs for monthly memberships. Customers pay only for the month they attend, and if they need to pause their membership, they can simply cancel the VRP from their banking app.

3. Managing Utility Bills with Flexibility

Utility bills, like electricity and water, often vary month to month. With Variable Recurring Payments, customers can authorise payments that adjust to their actual usage while staying within a budget they set.

How It Works:

• A customer sets up a VRP with their energy provider, allowing payments to fluctuate with their monthly consumption but capping the amount at, say, £150.
• The payment is processed automatically each month, based on actual usage, ensuring customers only pay for what they consume.

Why It’s Useful:

• Customers no longer have to manually adjust payments or worry about underpaying or overpaying.
• Utility providers reduce the administrative burden of managing late or incorrect payments.

Example:

A family sets a VRP for their electricity provider, with a cap of £100 per month. In colder months, their payment adjusts up to the limit, while in warmer months, it decreases automatically. This ensures their bills align with their actual usage.

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Regulatory and Market Context in the UK

The UK has been a global leader in open banking, creating a robust regulatory framework that fosters innovation while safeguarding consumer interests. Variable Recurring Payments are a direct result of these efforts, with the government and regulators laying the groundwork for their adoption and growth.

Sweeping VRPs: A Mandate for Financial Empowerment

Sweeping Variable Recurring Payments, which automate “me-to-me” payments, were mandated by the UK’s Competition and Markets Authority (CMA) in 2021. Under this regulation:

• Nine major UK banks (referred to as the CMA9) were required to make their VRP APIs available for free by mid-2022.
• This mandate was aimed at enabling consumers to automate tasks like transferring surplus funds to savings accounts or repaying credit card balances.

This regulatory push has led to sweeping Variable Recurring Payments becoming widely available and adopted, offering customers a more seamless way to manage their finances.

The Path Forward: Commercial Variable Recurring Payments

While sweeping Variable Recurring Payments are already in use, the next big milestone is the rollout of commercial VRPs—automated payments between consumers and businesses. Commercial VRPs promise to modernise payments for use cases like subscriptions, e-commerce transactions, and household bills.

Current Status:

• The UK’s Joint Regulatory Oversight Committee (JROC) is actively working on a blueprint for non-sweeping (commercial) VRPs.
• Banks and third-party providers are conducting pilot programs to test the feasibility and scalability of commercial VRPs. For instance, NatWest has already piloted its PayIt solution, a VRP product for business-to-consumer payments.

Challenges to Overcome:

• Pricing Models: Unlike sweeping VRPs, banks may charge businesses for commercial VRPs. Agreeing on transparent and fair pricing structures is critical for widespread adoption.
• Liability Issues: Questions remain about who is responsible for failed payments—banks, third-party providers, or merchants.
• Consumer Awareness: Many customers are still unfamiliar with VRPs and their benefits, making education a priority for banks and fintechs.

Open Banking’s Broader Role

The UK’s open banking initiative has been instrumental in making Variable Recurring Payments a reality. By requiring banks to provide secure and standardised APIs, regulators have ensured a level playing field for innovation while maintaining consumer protection.

How Finexer Makes Variable Recurring Payments Accessible

As a trusted open banking API provider, Finexer is committed to helping businesses, fintechs, and small to medium-sized enterprises (SMBs) tap into the potential of VRPs. By leveraging our expertise in Account Information Service Provider (AISP) and Payment Initiation Service Provider (PISP) solutions, we enable businesses to integrate VRPs seamlessly into their systems.

Key Ways Finexer Supports Businesses with VRPs:

1.End-to-End API Integration:

Finexer provides robust APIs that are easy to integrate into existing platforms. Whether you’re a fintech developing a new budgeting app or an SMB looking to automate payments, our solutions are designed to simplify implementation while ensuring full compliance with UK regulations.

2.Scalable VRP Solutions:

Our infrastructure supports both sweeping and commercial VRPs. From automating internal fund transfers to enabling secure customer-to-business payments, Finexer’s scalable solutions are tailored to meet diverse business needs.

3.Enhanced Security and Compliance:

Finexer ensures all VRP transactions are conducted through secure, encrypted channels. By adhering to the highest regulatory standards, we protect both businesses and their customers, fostering trust and confidence in every transaction.

4.Customisation and Flexibility:

Every business is different, and so are its payment needs. Finexer’s APIs allow for customisation, enabling businesses to define specific payment parameters, such as limits and schedules, that align with their operational goals.

5.Reliable Support and Expertise:

Transitioning to VRPs can feel daunting, especially for businesses unfamiliar with open banking. Finexer offers dedicated support throughout the integration process, ensuring a smooth transition to this modern payment system.

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Why Partner with Finexer for VRPs?

• For Fintech Startups: Gain a competitive edge by offering VRP-powered features in your apps, such as automated savings, real-time bill payments, and subscription management.
• For SMBs: Improve cash flow, reduce payment failures, and give your customers a more secure and convenient way to pay.
• For Accounting and ERP Services: Integrate VRPs to help your clients manage their finances effortlessly, from automating tax payments to optimising cash management.

With the growing demand for flexible and secure payment solutions, partnering with Finexer positions your business at the forefront of financial innovation.