In our last blog, Tim Johnson, Head of Strategy at Payit by NatWest answered some questions about an exciting new development in the world of payments – Variable Recurring Payments, or VRPs. This time, we look in a bit more depth at how VRPs compare with direct debits and card-on-file payments.
VRPs: a recap
Let’s start off by reminding ourselves what VRPs actually are and how they work. They enable you and your customers to set up recurring payments securely and quickly. These payments can be for different amounts and don’t have to be taken at regular intervals. The customer authorises the maximum amount that can be taken from their account over a given time period (which could be, for example, per day, per month or per year), and when in the future the payments should stop. They can also cancel or amend these payments whenever they want. As they’re based on Open Banking, customers safely connect who they’re paying with their bank without the need to input any card or bank details.
Direct debits: an overview
A direct debit is an automated payment that people (and businesses) can use to pay for things like utility bills or gym memberships, with the money coming straight from the customer’s bank account. They’re also often used to spread the cost of paying for expensive items like a car over time. They’re widely used, and they help businesses receive regular payments in a timely manner – there’s no risk a customer will forget to make a payment.
Setting up a direct debit can be a bit of a chore – the customer needs to fill in an instruction online, by phone or on paper telling their bank they’ve authorised the organisation to ask for the money from their bank account. They also need to give information including their bank account details, so there’s scope for mistakes to be made and fraud to occur. And from the perspective of the company receiving the money, it needs to tell the customer three working days before the payment is taken if it’s a different amount to normal.
Other drawbacks include slow settlement – it takes three days for the money to make its way to the recipient’s bank account – and the costs and risks involved with keeping customers’ banking details secure. What’s more, 0.83% of all new direct debits fail – an expensive problem to put right, especially for smaller businesses.
Drawbacks from the customer’s perspective include if they decide to cancel the direct debit they need to do so at least a day before the next payment is due. They also need to make sure they have enough money in their account every time a payment is taken – if they don’t, they may be subject to being charged by their bank.
VRPs: the advantages over direct debits
VRPs are often described as the Open Banking equivalent of direct debits, and there are clearly some similarities in terms of what they’re designed to do. But VRPs involve some advantages, avoiding many of the drawbacks of direct debits that we mentioned above. In particular:
- They take just a couple of clicks to set up and the customer can cancel the VRP any time, right up to the moment before the payment is taken.
- They’re settled within two hours.
- There’s no need for customers to input their bank details, so there’s less chance of fraud or human error.
- They’re much more flexible – they can be for fixed or variable amounts and taken over different time periods, as long as it’s all within the parameters agreed to by the customer at the outset.
- Money can’t be taken if the customer doesn’t have enough in their account.
- VRPs are less likely to fail than direct debit payments. Low failures rates are due to
- Using biometrics to authorise/consent to a recurring payment – the payer will be aware of the parameters that they are signing up to.
- Digital Journeys are being used to set up Recurring Payments, which helps to avoid manual input errors and provides validation that account is live at sign up
- VRP active 24/7 - no lags for consumers/businesses over weekends or bank holidays
- The ability to retry a failed payment is within merchants' control.
Card on file: an overview
Card-on-file payments involve a customer providing their card details to a merchant, which can then bill the customer whenever needed without the customer needing to provide their details each time. They’re often used for paying for subscriptions, taxi apps and expenses at hotels.
Card-on-file payments provide a good customer experience, and from the merchant’s perspective they’ve been shown to increase sales because the customer doesn’t have to input their card details every time they want to buy something. But they do involve some drawbacks.
One of the biggest is the responsibility of storing customers’ card details securely. Any business holding its customers’ card details needs to make sure it’s compliant with the Payment Card Industry (PCI) Data Security Standard – a set of requirements to make sure companies store this information in a secure environment.
Another is that there are quite high payment failure rates – typically in the range of 5-10% – with the main cause being customers’ cards expiring or being frozen. The merchant still has to pay processing fees for any failed payment, including subsequent further attempts to take a payment.
Finally, card-on-file payments generally take 1-3 days to settle.
From a customer's perspective, card-on-file payments can be difficult to cancel, and sometimes they simply forget that they’ve left their card details with a company. It can also be hard to keep track of what’s going out of their account as banks are unable to provide an overview of card-on-file mandates other than details of the transactions once the money has left their account.
VRPs: the advantages over card on file
Just as VRPs provide some important advantages compared with direct debits, they also do with respect to card on file. These advantages include all those we mentioned above, and also:
- There’s no need for PCI compliance as no card details need to be used or stored.
- The customer has a full overview of mandates they’ve signed up to on their banking app.
- Simple, cost-effective pricing structure.
- Low failure rates.
- VRPs are always taken on the intended date, regardless whether it falls on a weekend or bank holiday, making money management easier for both merchants and consumers.
Why choose NatWest for VRPs?
Sweeping use cases are already providing businesses and customers with some benefits, but there’s no denying that we’ll only really see VRPs come into their own once non-sweeping VRPs are authorised. At NatWest we’re ready to go as soon as the industry has agreed a framework.
Meanwhile, a number of fintech companies offer VRPs, but as a major bank we’re subject to stricter regulation, providing you with greater confidence in our long-term commitment. We also offer some product features that fintechs don’t, such as Confirmation of Payee.
NatWest is among the first banks in the UK to offer its customers VRPs. To find out more about the benefits they could provide your company and how they could make your customers’ lives easier, please click on the link below.
You’ll need to sign up to Payit terms and conditions and you may need to hold an account with us. Your business must be based and trading in the UK with a turnover above £2 million. You must be 18 years or older. Fees apply. Speak to a NatWest Relationship Manager (where relevant) for further information, or request a call back.