Article

Variable Recurring Payments. What are they and how can they help SMEs?

vrp

 

Variable Recurring Payments (or VRPs for short) are a hot topic. They are a form of payment instruction that can be set up and used to make a series of future payments.

At the moment it’s not uncommon to hear VRPs referred to in the same breath as a process known as ‘sweeping’, but VRPs will be used well beyond sweeping as well.

Granted, if you operate outside of the financial services marketplace, the chances are you probably haven’t heard of VRPs or sweeping. However, they are at the heart of a new form of open banking-enabled technology that is set to make life a whole lot easier for small to medium-sized enterprises (SMEs).

SME Think Tank views

In a recent OBIE Think Tank we brought together representatives from across the business landscape to explain how VRPs work, both in the context of sweeping and other propositions that can provide big benefits, and potentially impact, the SME community.

What is a VRP?

A VRP will allow customers to safely connect authorised payments service providers (PISPs) to their bank account. Providers can then make a series of payments on a customer’s behalf within agreed parameters, offering more control and transparency than existing alternatives.

For many consumers and small businesses, the most well-known method of collection for a recurring payment is via Direct Debit or continuous payment authority (CPA) – a type of recurring payment that a merchant makes using their debit or credit card details.

Unlike these two well-known methods of payments, a VRP works by letting customers safely connect authorised PISPs to their bank account so they can make payments on their behalf.

VRPs offer a range of benefits over Direct Direct and card CPA to both the small business making payments and the small business receiving payments, as the table below sets out.

At a glance: Recurring payments

 Direct DebitCPAVRP
TransparencyYou have visibility of the mandate and the last amount taken.You can’t see details, only the transactions that appear on your statement.  Mandate and payment parameters are visible in your banking app.  The payment parameters limit the amount that can be taken and also allow an end date for the mandate to be set.
SecurityInvolves sharing a sort code and account number in an uncontrolled environment.Involves sharing all card details on a debit or credit card.Must set up via a secure consent journey. It has to be online and through your bank.
FlexibilityTakes place on the same day (or nearest working day) every month and if the timing or amount changes, the payee has to be notified in writing (unless waived in terms and conditions).A company is given permission to take funds from your debit or credit card on a flexible basis. A set of parameters is agreed and a flexible payment can be made within those agreed boundaries.  

Why should you care about sweeping?

Sweeping is a particular proposition which can be developed using a VRP to automatically move (or sweep) money from one of their accounts to another of their accounts.

There are many examples of where this could be used, such as sweeping funds from a current account to a savings account, or a current account to a loan account.

And of particular interest to our Think Tank was an industry consultation where the Competition and Markets Authority (CMA) mandated the leading nine retail banks to make VRP functionality available, for free, to any PISP as long as the payment is specifically for the purposes of sweeping.

This means that PISPs can develop solutions for customers to help them run their finances run more effectively, and ultimately make their money work harder.

For example, money can be automatically transferred between accounts, such as moving excess funds into an account where it can generate interest. Alternatively, it could be used to transfer money to repay an overdraft or loan account.

However, we know that the industry is busy developing VRPs for other propositions as well.

At a glance: VRPs for sweeping versus VRPs for other use cases

VRPs for sweepingVRPs for other use cases
All CMA9 banks must offerOptional for all banks
Free to usePotentially charged
Free to accessRequires a contract
Launch due summer 2022At the discretion of individual banks

The real-world business benefits of VRPs for sweeping
By coupling VRPs with sweeping, the OBIE has identified potential benefits relevant for both consumers and SMEs. These include:

Building up savings

Currently there is £100 billion pounds tied up in the UK’s business current accounts earning little interest. However, though many businesses are cash-rich, many don’t have the time or inclination to do anything with their savings.

An instruction could be set up with a savings company to monitor a business current account. Every time the balance goes over a certain amount, that money could be swept into a business savings account. Every time a balance drops below a certain amount, money could be swept back (though there is acknowledgment that current low interest rates make this of limited value).

Preventing overdrafts

There is potential for sweeping to create a form of unbundled overdrafts to bring more competition to the business current account market.

The real-world business benefits of VRPs

While there are pockets of opportunity for VRPs and sweeping for SMEs, our panel saw the real prize in non-sweeping use cases. This could be as a replacement mechanic for existing payment methods that carry particularly high cost, or as a route for better, more timely payments. These include:

Cost savings on international payments

According to a report in 2016, approximately £4bn of excess profit was generated by banks where small businesses default to make international payments. That number is only set to increase. VRPs for sweeping could be used to take the friction out of using an alternative payment company or FX business.

Tax efficiencies

As HMRC embraces open banking-enabled technology, we know the revenue is looking for more real-time options to support prompt and secure payments. Not all SMEs manage tax well – but what if tax could be siphoned off for payment at the point of invoice collection?

Tackling late payments.

With late payments the thorn in the side of many SMEs, our panel were more animated when discussing the wider use of VRPs to help them get paid, whether in a real-time retail environment, or in supporting instant payments.

New options in the subscription economy

The subscription economy continues to expand, with many SMEs participating. VRPs offer a method of payment which could combine the low cost of Direct Debit, with the speed and flexibility of cards, which could be a powerful alternative for this growing market.

So what’s the verdict?

Our discussion clearly demonstrated the appetite from the market to use VRP technology and take advantage of this capability.

Helping mitigate late payments were deemed the real prize, but our panel also welcomed removing some age-old headaches, such as the indemnity claims associated with Direct Debit.

The final thought was that the innovations discussed would be helpful if they provide a benefit that is easily articulated and saves time. The key to adoption will be in ensuring time and cost barriers are overcome to ensure SMEs get to the start line.


Notes

Report based on discussions at the OBIE SME Think Tank which took place on 23rd September 2021.