What are Variable Recurring Payments?

Variable recurring payments, or VRPs, use open banking technology to offer a better experience for both businesses and consumers. VRPs let customers set up repeat payments of varying amounts without any hassle by combining the benefits of card-on-file, direct debits, and standing orders. 

It allows merchants to get payments of differing amounts from consumers at routine intervals. As compared to traditional recurring transactions, VRPs give a smoother customer experience. 

To begin with, users set up a mandate that empowers businesses to take payments from the user’s account under particular conditions. These conditions may involve the maximum amount that can be deducted per payment and the maximum payment amount that businesses can take on a weekly, monthly, or yearly basis. From then on, these payments are initiated without the user having to take any action. 

However, it is important to note that customers have complete control over these payments. They can cancel the recurring payment at any time.

Direct debits and VRPs both enable recurring payments, but they are not created equal. VRPs depend on open banking APIs to start payments. They also enable a series of payments for consumers at variable intervals and amounts. 

On the contrary, traditional open banking only allows single immediate payments, where consumers have to authenticate each payment separately. 

As flexible payment models are gaining popularity, VRPs are becoming increasingly valuable for SaaS and subscription-based businesses seeking scalable, usage-driven billing options.

Types of VRPs

VRPs have two main types: sweeping and commercial. Let’s dive into what they are. 

Sweeping VRPs 

Sweeping VRPs allow automatic transfer or sweep of the money from one account to another, even when they’re with different providers. You can also think of them as “me-to-me” payments. 

The consumers can easily automate transfers between accounts, given that both accounts are in their name.

Sweeping needs regulatory approvals for three main reasons. 

• Transferring money between current accounts (this can include e-money accounts, such as the user’s Wise or Revolut account, and business accounts).
• Transferring money to cash-based savings accounts.
• Transferring funds into credit accounts, such as a user’s mortgage, student loan, or credit card. 

If your company provides current accounts or any other money management products, sweeping variable recurring payments allow you to offer your customers more value. 

Your product no longer remains a commodity. Rather, you can pose yourself as a trusted advisor, leveraging smart technology to assist customers in taking control of their financial matters. 

By making use of Open Banking analytics and parameters that the users have set ahead of time, sweeping variable recurring payments enable you to manage funds much more efficiently, without any intervention. Crucial use cases involve:

• Calculating how much a consumer can save based on their income, spending habits, and outgoings.
• Transferring surplus money into a cash ISA or savings account, or student loan payments, or making a mortgage. 
• Spotting the user’s most expensive debts so they can settle them first, before they get out of hand. 
• Identifying when an account is at risk of going overdrawn and transferring funds into it before this happens. 

Commercial VRPs

Commercial VRP (non-sweeping) services include recurring money transfers between two accounts under different names (me-to-business) under conditions and rules that customers control. 

Commercial VRPs are convenient, secure, and a cost-effective alternative to card-on-file and direct debit transactions for recurring payments like subscriptions or bills. They also offer significant advantages in one-click e-commerce buys. 

Besides, VRPs help in reducing churn and replacing card-on-file with “account-on-file” for e-commerce payments, making them a genius for modern commerce. 

The potential use cases of commercial VRPs include:

• Wallet top-ups.
• One-click e-commerce payments.
• Subscription service payments
• Utility bill payments
• Charitable donations

Benefits of VRPs

VRPs offer many advantages to both service providers and customers. 

More revenue stability, fewer failed payments

Companies lose billions to failed payments almost every year. Many things can happen: cards may expire, banks may block transactions, and consumers may forget to update their billing details. VRPs save you all the hassle by connecting payments directly to bank accounts, getting rid of card-related failures. If your Netflix subscription ever got canceled because your card expired, you have already seen the value here.  

Fewer chargebacks, better cash flow

For companies, cash flow is the first and foremost thing. Direct debits take longer to process, and chargebacks can reverse card payments. Whereas with VRPs, payments become instant without any middlemen eating into margins. There are no delays, no chargebacks, and no nonsense. 

Smarter payments

Imagine your gym only charges you if you show up, or your cloud storage provider tailors your bill based on usage. This is exactly what VRPs do. They turn payments into a dynamic, usage-based model that is way fairer than blindly charging customers the same amount every month.

More control and transparency

VRPs offer more flexibility than direct debits. Consumers can set spending limits, revoke access at will, and track payments in real time. You don’t have to worry about surprise deductions or businesses holding on to your money accidentally.

Challenges and considerations of VRPs

While there are many benefits of VRPs, it comes with its own challenges. 

Banks delay implementation

Banks make a lot of money from failed transactions, card fees, and overdrafts. Just notice how long it took for banks to duly implement open banking in the first place. Expect a lot of “we’re working on it,” delays, and resistance. 

Winning customer trust could be an issue

People don’t easily trust companies with their money, especially where there are chances for surprise deductions. Why would someone give a business ongoing access to their bank account, even with limits? Adoption relies on customers feeling in control. 

Not every business is compatible with VRPs

Some companies boom on fixed recurring revenue. SaaS subscriptions, gym memberships, and insurance businesses are more accustomed to the predictability of charging a fixed amount every month. So, some industries might struggle to adapt if payments become usage-based. 

Regulatory risks

VRPs only work well in markets that have strong open banking regulations in place (like the UK). But countries that have weak open banking regulations make VRPs a risk. When there are no clear frameworks, adoption could stall before it even starts. 

VRP use cases 

Commercial VRPs are much more reliable than direct debit or cards. They give customers more control, making the payment experience much smoother and easier. Once the customers set up the VRP, a single click makes any transaction within pre-approved parameters. Some situations might require further authentication steps, but this only happens when the transaction falls outside the set limits. 

Also, commercial VRPs mean lower cart abandonment, fewer payment declines, and enhanced cash flow. And while banks will still be deducting transaction fees, these fees will be lower and more transparent than those for direct debit or card payments. 

So, here are some promising use cases of commercial VRPs.

E-commerce

Nearly 70% of online shoppers leave their cart before completing a purchase. This is because of the complicated checkout process and customers’ concerns about whether the website will keep their financial info safe or not.

This is where commercial VRPs make these processes smoother, safer, and swifter. Your customers don’t need to share any sensitive information, making payments secure and safe for both consumers and merchants. Also, customers can set a maximum spending limit and buy anything under those limits with just a click, making the process friction-free while gaining control in their own hands.

Subscription businesses 

Commercial VRPs are an ideal match for subscription payments, as they’re more stable and reliable than card-on-file. 

Contrary to cards, bank details don’t expire. Moreover, you only need to do strong customer authentication once, when the user sets up the VRP. Hence, there will be fewer technical glitches and less failed payments. 

From the customer’s perspective, VRPs also offer a better user experience. They can easily keep track of their spending and also set parameters to stay alert if the monthly price jumps over a certain amount. 

Likewise, ending a subscription is straightforward. Rather than going through a complicated and non-transparent cancellation process, the user can simply log on to their banking app and cancel the VRP. 

Utility bills

Commercial VRPs have the ability to make utility bills more manageable. For example, if the user has an irregular income or gets paid other than once a month, commercial VRPs help manage bills that are more suitable for their financial circumstances. 

It lets them set money aside at regular intervals so customers can pay the bill at the end of the month. Or it lets them split the bill into several installments that coincide with the dates when they get their salary.

It becomes a win-win situation for both customers and service providers. Consumers don’t miss any payments or suffer any financial challenges. And the service providers don’t have to start costly and time-consuming debt collection processes that could damage their relationship with the customer, worsening their financial woes.

Besides, bills become more affordable. Instead of having an arbitrary direct debit amount and the need to revisit it at regular intervals, commercial VRPs ensure customers pay for actual consumption. 

Conclusion 

Variable recurring payments are redefining how customers and businesses manage transactions. VRPs have simplified payments by combining transparency, flexibility, and security through open banking, while also giving users greater control. 

As more businesses adopt VRPs, they are set to become a foundation for modern usage-based billing and digital financial transformation.