The open banking system has been widely adopted across different states in the US and UK. One such innovation in the open banking industry is the variable recurring payments. It’s one of the safest, fastest, and easiest forms of payment for merchants and customers. VRPs have transformed the way businesses accept payments or process monetary transactions.
It’s not just convenient for customers to pay their bills and for other regular services, but Variable Recurring Payments are secure and convenient for merchants. They involve the automatic debit transfer on an ongoing basis. They are different from traditional payment systems in that they do not require authentication from the customer’s end for every payment. Instead, the amount is automatically deducted from their bank accounts. Learn more about VRP, its benefits, the reasons it’s used in the payment industry, and how it works. Keep reading.
What are Variable Recurring Payments?
Variable recurring payments refer to the transactions in which the bank account holder authorizes a third party or the Payment Initiation Service Provider (PISP) to deduct payment from their bank accounts on their behalf. They conduct these transactions on an ongoing basis until the account holder revokes the agreement.
These transactions are conducted on pre-determined parameters, which include, the frequency of the transactions and the amount. Simply put, an account holder provides third-party access to their bank accounts, allowing them to pay for the services they are using on their behalf. They sign an agreement, which outlines the terms and conditions of this contract. Although the PISP gets control over the user’s account, the user can end the agreement whenever they want. Once they have disabled the variable recurring payments, the PISP will discontinue the service.
PISPs are certified and licensed parties that follow the EU’s regulations to protect users’ interests and ensure that each party involved in the transaction gets control over their bank account. Many organizations, brick-and-mortar stores, and online companies have implemented Variable Recurring Payments (VRP) to facilitate secure, speedy, and safe transactions. The best example is the gym membership or the streaming services that often charge a fixed amount on a monthly/annual basis to all their subscribers. If you wish to end the subscription, you can do that via your mobile banking app.
As mentioned previously, the amount that’s deducted and on which date it will be debited are mentioned in the agreement.
Benefits of Variable Recurring Payments
VRP offers the benefits of both open banking and direct deposit. Open banking offers security, flexibility, and speed benefits. The transactions are processed instantly. Direct Deposits facilitate automated payments processed by the authorized PISP. The customer can set the end date for the agreement, after which, the PISP will stop deducting the payments from the customer’s account.
This payment approach is beneficial for merchants and customers. Let’s explore its benefits for both parties.
- Cost-Effective: Since VRPs are outside your credit/debit card processing system, they incur a fairly lesser fee. In fact, merchants do not pay anything in fees when debiting a customer’s bank accounts. A credit card transaction, on the other hand, incurs a fixed fee, which is a small percentage of the transaction amount.
- Flexible Approach: Merchants enjoy the flexibility of receiving payments on an ongoing basis without having to seek customer validation for each transaction. Once they have made an agreement, they can deduct the payment from customers’ bank accounts following the pre-defined parameters. There’s not much administrative work needed on the merchant’s end. They do not have to provide any written notice to make adjustments to the payment frequency or the amount.
- Instant Transfer: Merchants do not need to wait for days for the amount to be processed. It processes instantly and is reflected in their bank accounts either immediately or within a few hours.
- Less Risk of Chargebacks: Chargebacks are common in credit card transactions. People can misuse a stolen credit card, which then results in chargebacks issued by the customer. VRPs do not involve credit cards. As the payment is deducted from customers’ bank accounts at predetermined intervals, there’s no risk of chargebacks. This reduces their exposure to unnecessary chargebacks, which results in significant losses.
- Satisfied Customers: Variable Recurring Payments reduce the administrative work for the customer. Since the payment is debited from their accounts automatically, they enjoy the flexibility to pay bills and make payments for streaming services and other ongoing services automatically. Satisfied customers translate into more conversions, better engagement, and increased customer retention for businesses.
- Save on the Overdraft Fee: The overdraft fee is ridiculously high. VRP was launched to enable customers to implement financial safeguards, which facilitates automatic top-up of the account balance when the upcoming payment date arrives. This prevents your funds from going into the overdraft and incurring an unnecessary fee.
- Safer: VRP is integrated with an open banking system, which is known for its secure payment measures. As mentioned above, the parties that are given access to withdraw funds from the customer’s bank accounts are under strict regulations. They use secure APIs and communication channels to protect users’ confidential data. Besides, the method is safer than the traditional banking approach, which requires a signature and a customer’s bank account details to withdraw funds. With VRP, you can subscribe to the service and set the amount, frequency of transfers, and other parameters for the payment. It’s relatively safer than the traditional banking system.
- Greater Control: It gives customers greater control over the payment frequency, amount, end date, and other parameters. Although the amount is automatically deducted from their bank accounts, they can cancel the contract at any time and stop paying for the services they no longer need. That means the variable recurring payments work as long as the customer doesn’t end the subscription. Besides, it gives the flexibility to make payments in a timely manner. For bills and other transactions, they can have peace of mind knowing that they won’t incur a late fee for delayed payments.
- Work with Banking Apps: Customers can view the VRPs deducted from their bank accounts in the banking app. They can log into their online banking app and get a clear picture of the VRP record. It’s easier to adjust payments and the frequency of transactions within a few clicks. The best part is they no longer need to call the merchant to end the payment terms. Everything can be done within the banking app.
How VRP Makes Sweeping Smoother?
Moving money between your bank accounts has become easier with sweeping. Instead of having to withdraw funds from one account and deposit it into another, you can activate variable recurring payments, which automatically move money between your banks. The biggest benefit of sweeping is the reduced overdraft fee. Earlier, we mentioned how enabling VRP can protect customers from incurring a heavy overdraft fee. Here’s how.
Suppose a customer has a checking and savings account. All their transactions are processed from checking accounts. This includes bill payments, school fees, and other charges. If the checking account doesn’t have enough balance to cover the bills and other payments, they can enable sweeping through VRP. It automatically identifies a low balance in an account and transfers funds from the savings account to a checking account. With direct deposits, the customer will incur an overdraft fee if they pay more than their account balance.
It’s not just beneficial for the customer, but it’s good for merchants too. Oftentimes, customers associate a business with the reason they are incurring a high overdraft fee. They stop doing business with you. With VRP-enabled sweeping, that’s never an issue.
Likewise, a customer can move money from their checking account into a savings account. Automating savings ensures that you have money to finance your big investments.
VRP Use Cases
Other than sweeping, VRPs have many use cases. Let’s explore the most common ones.
Utility Bills: An energy company can adjust the total bill a customer pays, given that they do not override the payment parameters.
Tax Payments: The government is considering integrating VRPs into tax payments to prevent unpaid taxes and enjoy great control and efficiency over commercial tax payments. In the VRP-enabled payment system, the government automatically deducts the taxable payment from each invoice a merchant issues to their client.
Other than these, the variable recurring payments are useful for subscription-based service providers that need to charge a fixed amount to their customers on a monthly basis.
The key difference between VRP and conventional payment methods is that the latter involves one-time access to your bank account. The third-party can deduct the payment from your account once and that’s it. In VRP, you agree to let them pay on your behalf on a weekly, monthly, or quarterly basis. Customers do not have to authenticate each payment manually, as the process is automated. This payment method is secure, instant, and beneficial for each party involved in the transaction. It’s also easier to keep track of the payments and cancel them any time you want.