Variable Recurring Payments (VRPs) and Sweeping: The Opportunities

A Variable Recurring Payment (VRP) is a method of payment that offers a more secure, transparent, and lower-cost alternative to Direct Debits. VRPs allow customers to safely connect a third-party provider (such as a fintech app) to their bank account so that the third party can make regular payments on the customer’s behalf.

Many of us use Direct Debits for regular payments such as rent, bills, and subscriptions or memberships. Although Direct Debits are used by many consumers and offer benefits, they also have some drawbacks that VRPs could eliminate.

For instance, because the technology works in cycles, it can take up to three working days for a Direct Debit payment to clear. Variable Recurring Payments, on the other hand, are instant. At this point in time, it doesn’t appear that VRPs will replace Direct Debits but they could certainly be complementary and assist with sweeping transactions.

Another hot topic in the financial sphere at the moment is sweeping.

Sweeping is the automated movement of funds between two accounts in a customer’s name. Some people refer to sweeping as ‘me-to-me’ payments and many use these to avoid overdraft charges or benefit from better interest rates. Sweeping also allows consumers to move money quickly between different types of accounts – for instance, from a current account to a savings account, improving money management.

One specific use case for VRPs is to speed up the sweeping process and reduce the need for manual transactions. VRPs could enable authorized third parties to move funds on your behalf.

Sweeping is popular in the world of investment as it allows high-value payments to be made and reinvested quickly, making the most of the market.

While sweeping has the potential to help consumers manage their finances more efficiently and stay out of overdrafts, there is a risk to be aware of. After the initial sweeping transaction has been set up, the money will automatically be moved every month until the customer tells it to stop. If they forget about a recurring payment, there’s the risk of becoming overdrawn.

Although there are still areas to iron out and regulations to put in place, Variable Recurring Payments offer real benefits for both businesses and bank customers. They provide a safe, secure, and convenient way to pay that can speed up transactions and give both parties peace of mind.

The ability to offer sweeping services could also be a valuable proposition for banks.

• Time-saving: You can set up an arrangement with your customer so they can pay you directly into your bank account. This means you can focus on running your business rather than chasing payments and being taxed on them each month.
• Reduced fees: Receiving payments from cards or direct debits often incurs a high fee. With VRPs, you won’t be charged such a high cost.
• Transaction transparency: Merchants can have full visibility over all incoming revenue, including transactions from customers on payment plans.
• Trend-spotting: Because of this visibility, businesses may be able to identify trends based on user behavior and improve future campaigns.
• Lower risk of failed payments: With VRPs, authentication is built into the payment flow so there’s less chance of card failures and abandoned carts for eCommerce businesses.

For customers, VRPs offer the benefit of convenience and speed. You can make a payment on-demand from anywhere in the world as long as you have an internet connection. Other benefits include:

• Ease of use: just enter the amount you’d like to pay and select your preferred payment method from a range of options including bank transfer, credit card or PayPal.
• Financial management: the option to sweep can ensure users avoid overdraft fees and can make the most of available interest rates.
• Post-payment options: VRPs also provide an option for customers who want to pay after receiving a product or service instead of at the time they place their order.
• Security and fraud prevention: VRPs use tokenization technology to reduce the risk of fraudulent transactions. Every transaction is assigned a unique number, making it extremely difficult for criminals to create counterfeit versions of account credentials because there’s only one valid combination per cardholder account number.

VRPs are more secure than Direct Debits because there’s no need to enter card details to make a payment. VRPs also remove the need for businesses to keep confidential cardholder data on file. As such, fraudsters cannot intercept that data.

Open banking APIs are increasingly popular in a range of industries around the world. Regulations vary from country to country, and the same goes for introducing VRPs and enabling sweeping.

The UK is leading the way in terms of VRPs – the nine largest banks are in the process of rolling out VRPs with approved third-party providers. Any sweeping service providers (SSPs) must follow FCA guidelines. In the EU, a lack of regulatory mandates for banks offering sweeping beyond their customer interface means there is less of an uptake.

It’s likely to be a while before VRPs and sweeping services are implemented globally, however, the benefits they provide make them a worthy pursuit.