In the ever-changing realm of financial technology, VRPs, or variable recurring payments, have revolutionized the industry.
VRPs allow customers to make variable recurring payments with greater freedom and control than traditional payment systems such as direct debits.
This comprehensive guide will explore what VRPs are, how they work, their benefits, their use cases, and how they compare to other payment methods like direct debits.
After reading this article, you’ll know exactly why VRPs are becoming a popular option for both individuals and organizations.
What Are Variable Recurring Payments (VRPs)?
Variable Recurring Payments (VRPs) is a recurring payment mandate that allows customers to make variable recurring payments.
Unlike fixed recurring payments (e.g., loan repayment or subscription), VRPs allow payments of varying amounts based on usage, consumption, etc.
For example, a customer can use VRPs to pay bills for utilities that vary monthly based on usage.
VRPs are normally facilitated via Open Banking, wherein third-party agents can view the customer’s bank account (on consent) to initiate payment.
This makes VRPs a secure, convenient, and adaptable payment tool for both consumers and business organizations.
How Do Variable Recurring Payments Work?
The usage and application of VRPs occur in the following steps:
- Customer Authorization
The customer asks the third-party provider (e.g., utility firm or fintech app) to make payments from their bank account. It is through a secure Open Banking interface.
- Payment Agreement
The provider and customer agree on VRP parameters, including maximum payment amount, frequency, and duration.
- Payment Initiation
The customer makes payments from their account on terms agreed. The payment can vary with each collection based on parameters like usage or consumption.
- Notification
The customer is informed (e.g., by email or SMS) before each payment is collected to provide transparency and control.
- Payment Processing
The payment is made via the Open Banking infrastructure for effective and secure processing of the payment.
Read about: How Payment Processing Works? Best Payment Processor.
Variable Recurring Payments vs. Direct Debit
Although both VRPs and direct debits allow for payments periodically, they vary in the sense that Variable Recurring Payments (VRPs) and Direct Debits both facilitate recurring payments with some differences in their core operation.
VRPs facilitate variable payment amounts, i.e., the payment amount can be varied for each occurrence, whereas Direct Debits typically refer to fixed amounts per payment.
In authorization, VRPs require customers’ explicit consent via Open Banking, whereas Direct Debits utilize a signed mandate.
VRPs are more flexible, as customers may alter terms comfortably, Whereas Direct Debits require an update for each change.
Transparency is also higher in the case of VRPs because the customer is informed for each payment, whereas the same may not always be feasible in Direct Debits.
Speed is also a significant difference—VRPs allow real-time payment and hence are much faster than Direct Debits, which take 2-3 working days to clear.
Direct Debits are most suitable for subscriptions, loan repayments, and membership fees, while VRPs are more suited to utility bills, single payments, and subscriptions.
Read about: What is a Direct Debit Mandate? Complete Guide.
Types of Variable Recurring Payments
VRPs are classified into two broad types:
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Sweeping VRPs
Sweeping VRPs allow customers to sweep funds automatically from their accounts (e.g., from a current account to a savings account) to settle their accounts.
Consumer VRPs entail consumers’ payments or funds transfer between accounts with varying frequencies and sizes of payment.
At the end of the month, one initiates a sweeping VRP to transfer surplus cash from a checking account to a savings account.
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Commercial VRPs
Commercial VRPs enable corporations to accept fluctuating payments from buyers for products or services.
Subscription services, utility bills, and pay-per-use.
An energy company uses commercial VRPs to be paid monthly by consumers for consumption.
Variable Recurring Payments Use Cases
VRPs can be used in many industries. The following are some of the most common use cases:
- Utility Bills
VRPs are particularly suited to utility bills, where the amount payable varies each month based on usage (e.g., electricity, water, or gas).
- Subscription Services
Subscription businesses that offer variable pricing (e.g., fitness club membership or streaming service subscription) can accept payment in the form of VRPs.
- Pay-As-You-Go Models
There are valid uses of VRPs for pay-as-you-go services, e.g., cloud storage services or ride-hailing services, where the user pays per usage.
- Budgeting and Savings
Sweeping VRPs can help customers automate savings or budgeting by transferring money between accounts.
Read about: What is Recurring Billing? Key Benefits Explained
Advantages of Variable Recurring Payments
VRPs have numerous advantages for consumers as well as for companies.
Some of the main advantages are stated below:
To Consumers:
- Flexibility
Variable payments are easier for customers to use than periodic fixed payments.
- Control
Customers have control over payments and can place limits, change terms, and send notifications.
- Transparency
Real-time alerts and reminders provided by VRPs keep customers apprised of payment activity around the clock.
- Convenience
Spare time and energy by automating variable payments without the need for manual payments.
For Businesses:
- Enhanced Cash Flow
VRPs enable businesses to receive payments promptly, improving cash flow and removing delays.
- Lower Administrative Burden
Automating variable payments removes the need for manual payment and invoicing processing.
- Enhanced Customer Experience
VRPs offer a seamless and flexible payment experience, improving customer satisfaction and loyalty.
- Cost Savings
By reducing payment settlement time and administration work, VRPs can offer cost savings for merchants.
Read about: The Best Way To Receive International Payments In India
Challenges of Variable Recurring Payments
VRPs have multiple benefits, yet there are challenges in implementation as well:
- Customer Take-up
Customers may not be willing to take up VRPs since they are ignorant or lack faith in Open Banking.
- Compliance
Organizations will be required to adopt Open Banking and data protection regulations, which are intricate and time-consuming from a technical point of view.
- Technical Interoperability
Technical interoperation with the Open Banking APIs for triggering VRPs, and technical resources and skills might be required.
- Fraud Prevention
Organizations need to have good security controls capable of preventing fraud and securing the data of the customers.
The Future of Variable Recurring Payments
As Open Banking takes growing steam, Variable Recurring Payments (VRPs) will revolutionize the payments space.
With payments happening in real time, which is flexible yet more secure and open, VRPs will emerge as an enticing alternative for payments compared to existing methods.
Over the next two years, a succession of trends will push VRPs into the future, stimulating growth and penetration across sectors.
- Extending Use Cases
To date, VRPs have been applied to utility bills and subscription services, but their applications should go much further.
Healthcare, education, and e-commerce are just beginning to find out how VRPs can be used to streamline transactions and maximize cash flows.
Hospitals and clinics, for instance, can apply VRPs to auto-billing for medical services on actual consumption, and schools can apply them to tuition fees with price elasticity.
As businesses seek simpler payment options, VRPs will be the uppermost choice in the majority of new enterprises.
Read about: Subscription Payment Processing 101: How It Works?
- AI and Machine Learning Integration
The integration of VRPs with AI and machine learning can further make payments wiser and secure.
AI-powered analytics can help businesses predict customers’ spending patterns and offer tailored payment choices depending on the prevailing financial situations.
Moreover, machine learning algorithms will have the capability of detecting suspicious activity, marking possibly dubious transactions, and reducing the risk of unauthorized payments
The coming together will yield more trusting consumers with a frictionless payment experience and businesses streamlining their payment strategy without losing security.
Read about: AI in Payments: How It’s Transforming the Industry?
- Global Adoption
VRPs are increasingly being adopted in nations where Open Banking legislation is most advanced, i.e., in the UK and Europe.
With more Open Banking rising globally, however, VRPs will facilitate cross-border payments in other economies and make financial efficiency across borders even greater.
Cross-border firms will utilize VRPs to their benefit in pooling payments across borders, removing currency conversion latencies, and improving overall financial efficiency.
Widespread adoption of VRPs will democratize digital payments, making global transactions simpler and smoother.
Read about: Top Online Payment Methods Across The World.
- Improved Security
As VRPs become more and more popular, security technologies will be essential to preserving consumer confidence.
Emerging technologies like biometric verification, blockchain, and tokenization will secure VRPs by reducing the scope of fraud and illegal transactions.
Biometric verification, i.e., fingerprint or facial recognition, will ensure that payment initiation is from the intended individual only.
Additionally, blockchain technology will be capable of facilitating transparent and tamper-evident transaction history, which will further enhance trust in VRPs.
All these will make VRPs one of the safest and most secure payment methods around.
Conclusion
Variable Recurring Payments (VRPs) represent a revolution in the payment industry, providing flexibility, convenience, and control for both consumers and businesses.
With the ability to make recurring payments with varying amounts, VRPs obliterate the constraints of traditional payment systems like direct debit and provide a highly personalized payment experience.
Though there are challenges to the adoption of VRPs, the advantages outweigh the disadvantages. With Open Banking advancing, VRPs will be a payment norm, transforming industries and financial management for consumers and businesses for the better.
Regardless of whether you are a consumer who wants to gain more control over your payments or a business that wants to streamline your payment streams, VRPs offer an innovative and effective solution.
Knowing how VRPs work and how they can be used, you can open up new opportunities and stay ahead in the constantly changing landscape of finance.
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