A Primer on Variable Recurring Payments: The Next Big Thing in Open Banking?

Variable Recurring Payments (VRP) is generating considerable discussion in the industry. Why? Because VRP has the potential to become a viable alternative to card-on-file, digital wallets, and even Direct Debit payments. While the building blocks are not yet all in place, the opportunity for banks is real and merits serious consideration.

This is not a UK-only topic either. The discussions around Dynamic Recurring Payments in the rest of Europe, and growing interest in overlay services for real-time payments infrastructure around the world, make this a topic to which banks, infrastructure providers, PSPs and regulators everywhere should pay close attention.

What is VRP? In short, it is a new form of open banking payment (OBP). VRP offers the same core functionality as OBP, in that a licenced third party can (with the consent of the customer) initiate a payment from the customer’s account. The funds move across the existing account-to-account (A2A) infrastructure, which is typically a domestic real-time rail. Where VRP differs is that the customer can give an ongoing consent for further payments of variable amounts to be initiated over time. VRP therefore brings the OBP concept into a new range of use cases as a potential alternative for Direct Debit and card-on-file payments as a form of ‘bank account on file’.

The UK's CMA 9 banks are required to offer VRP for sweeping use cases (between accounts held by the same customer), but have the option to extend this to non-sweeping use cases (those involving other payees) on a commercial basis. VRP for non-sweeping cases is therefore a clear revenue opportunity for banks. Unlike other areas of open banking, in which most of the benefits are indirect, account holding institutions can charge a fee for third parties to initiate non-sweeping transactions. As such, there can be an income flow back to the bank for every such payment.

Despite the interest in VRP for non-sweeping use cases, the infrastructure is not yet ready. We are some distance from this being a proposition that can begin to grow, and there are four areas that the industry must address for commercial VRP to become a viable payment option:

• Pricing and dispute resolution need to be clarified.
• A critical mass of players across the ecosystem is required.
• Multilateral frameworks will ultimately be needed.
• Banks will need to raise their game over API availability.

There are near-term opportunities for the industry in use cases around account funding (including top-ups), and subscription payments. Digital commerce and bill payments are potentially far more lucrative but will take time to develop.

Progress on these points seems likely in 2023. Celent understands that several UK banks are in active discussions over commercial frameworks for non-sweeping VRP. Issues around potential revenue cannibalization are proving challenging for others though. Ultimately, this is a question that will be decided by customer demand. If VRP does begin to gain traction, then any bank would be better served by disrupting itself rather than face being disrupted by competitors.