When Open Banking arrives in Canada next year, we can expect Variable Recurring Payments (VRPs) to be hot on its heels. Variable recurring payments are one of the hot topics, taking the world by storm. As a matter of fact, according to the experts at Plaid, they will likely be the next frontier in Open Banking payments.
With many in the financial services space beginning to tout their game-changing innovation, although they haven't yet arrived, you can say you heard it here first. This new payment innovation simultaneously puts consumers in the driver's seat while adding revenue to a company's bottom line. This article outlines, what they are, how they work, how they differ from recurring payments and most importantly, how businesses can benefit.
In comes, Open Banking and outcomes variable recurring payments. International law firm Bird and Bird defines VRPs "as the new open banking APIs which will enable Payment Initiation Service Providers (PISPs) to initiate a sequence of payments for a customer at specified intervals and amounts." In short, with Open Banking in place, customers can safely and securely connect their bank accounts to authorized payment service providers. In turn, payment providers can then make a series of payments on behalf of a customer within agreed-upon parameters ( the critical takeaway here - agreed-upon parameters).
VRPs Big Advantage - Consumers can establish payment guidelines and limits. As a result, consumers gain more control and better clarity in their day-to-day payments.
Consumers and businesses are likely quite familiar with a recurring payment collection. The U.K. refers to them as continuous payment authority (CPA). Meanwhile, in Canada, we know them to be Pre-authorized debits (PADs). PADs have increasingly become an easier way for consumers to pay bills and make payments automatically.
Let's take a cell phone bill, for example. In essence, the merchant mobile provider posts a charge every month using the consumers' provided debit or credit card details.
So if we already have recurring payments in place, what is all the fuss about VRPs?
While VRPs appear pretty similar, how they differ is what makes them shine better and brighter than what we already have. VRPs will deliver better transparency, enhanced security and greater flexibility.
As illustrated below, the Open Banking Implementation Entity (OBIE)establishes the critical differences between recurring payments and variable recurring payments.
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• A decrease in risk by lowering card fraud
• Enhanced cash flow management from real-time settlements
• Providing friction-free, seamless customer experience with easy one-click payments
• Easy automated money movement between various types of accounts
• A decrease in NSF and chargebacks
A typical lending scenario - Lender XYZ and customer have automated monthly loan set up for repayment. Lender XYZ automatically processes the monthly transaction, yet the customer unaware of all automated transactions taking place in their account may not have the correct funds on the day of withdrawal. Thus, the bank rejects the transaction, and the charge is now NSF. Bank charges merchant, and merchant charges customer.
Meanwhile, lender XYZ is still missing the payment and the ensuing bank charge.
The Solution - Using Open Banking technology adds a layer of data intelligence to online bank account transactions. VRPs introduce the ability to find out right away if there are enough funds. This is done without sharing bank account details or submitting to security risks. As a result, the transaction is flagged, and everyone involved is alerted. With the consumer's consent, Lender XYZ can wait a day and try again. This is the difference between out-of-pocket for a day versus out-of-pocket for weeks chasing up payments. VRPs put an end to NSF fees.
In September 2021, the world's leading community of Open Banking and Open Finance pioneers got together to discuss the in's and out's of variable recurring payments, including where consumers can expect to benefit. Kat Cloud, U.K. Policy Lead at Plaid, had this to say
"VRPs put the client at the heart of the payment. The consumer remains in control of their payments without the need to monitor them all the time. They can easily go about their daily lives with the assurance that it is taken care of."
This hour-long discussion was lively and delivered many insights and takeaways any business looking to learn more about these payments and their use cases would benefit from.
The short answer is no. Every day, we are getting closer; however, we are not quite there yet. VRPs remain relatively new in the Open Banking world, but they are exciting to look forward to and definitely a trend to stay on top of. Open Banking arrives in Canada in January 2023. With more than four million Canadians already accessing Open Banking-style services, we believe that the benefits run wide and the potential unlimited.
While it is true the benefits of variable recurring payments are still a touch out of reach for businesses in North America, here at VoPay, we have the next best thing: iQ11.
Known for its revolutionary technology, our iQ11 service can help move your payment processing into the next generation.
Using Open Banking powered technology, we have added a layer of data intelligence to online bank account transactions to enable businesses to accept instant bank account verified payments, improve payment speed and reduce failed payments.
iQ11 Use Case: Lenders can easily set recurring monthly loan collections from borrowers, improve cash flow with same-day collections, simplify client onboarding with one-click payments, automate reconciliations and much more with our Intelligent EFT / ACH (iQ11) service.
Whenever the conversation turns to Open Banking in North America, we often look to the U.K. The United Kingdom, a recognized leader in the fintech space, is known for creating the "blueprint" for Open Banking. For instance, the market growth of Open Banking payments makes a pretty compelling case. For example, in February 2021, the OBIE recorded 1 million Open Banking payments in just one month; this is up from 300,000 payments in all of 2019. Now that is what we call significant year-over-year uptake.
The next payment space disruptor will arrive in Canada sometime next year. Fintech Magazine states it best; VRPs solve one massive problem–the need for consent via Strong Customer Authentication (SCA) for every transaction. Not to mention the friction that goes along with it. VRP enables a single-click payment experience for trusted beneficiaries by giving a third-party provider authentication.
Expect the impact of VRPs to be massive. As discussed above, variable recurring payments give consumers more control over the regular payments that automatically leave their accounts.
Further, businesses can automatically make payments of different amounts to their suppliers or set caps on amounts to be paid. Think of it as a "set it and forget" payment method that leaves you in complete control and utterly confident in the security.
In other words, when consumers are placed in the driver's seat, the rewards are big, and everyone wins. Open banking propositions make today's existing processes easier, faster, and better for consumers. And that means better for businesses and better for overall economic health.
Remember the good 'ole days when the customer manually typed in their credit card information every time they needed to pay? Today, we would call this a "friction-filled payment process." We live in an on-demand world where transactions need to be seamless. This is the point where today's consumers will abandon ship, abandon their cart and find an easier way to pay. And likely as not, that easier way will often be a competitor.
Then came card-on-file transactions where the customer could "set it and forget it." And that they did. Maybe there was enough money in the account, and maybe there wasn't. Perhaps the card had expired or was simply no longer valid. Although initially a payment improvement, the "set and forget it" poses significant drawbacks for merchants and consumers. Merchants would find themselves wasting valuable resources chasing consumers' information and payments, while NSF charges would mean the consumers' aggravation would be high.
For this reason, Open Banking's latest innovation has become a hot topic. Variable Recurring Payments can help mitigate those challenges and more.
The use cases for VRPs will be numerous and varied. Customers will be able to use VRPs for retail websites, monthly payments and in-app purchases, among a myriad of other options. OBIE found that Open Banking made existing processes easier, faster, and more accurate. Moreover, they indicate it would facilitate and enhance all forms of consumer borrowing. In particular, everything from unsecured personal loans to mortgage applications and approvals.
More and more businesses are turning to Open Banking solutions, and those businesses also include lenders. As companies look to solutions like cloud accounting and cash flow forecasting, the importance of clarity and control over finances has never been more vital. It is expected that how we pay and when we pay will be a significant growth of opportunity. The case is clear lenders need to provide alternative ways to pay and get paid. It is for this reason, VRPs have numerous advantages for businesses, including lower costs, reduced customer churn, and potentially the most significant benefit of all, no more chargebacks.
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