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Commercial variable recurring payments (VRPs) are a promising alternative to cards, but it looks like regulatory intervention may be necessary.
Commercial VRPs seem to have hit a brick wall. Although regulators acknowledge that this provides a beneficial route to more payment choice, movement has slowed.
VRPs offer a comparable outcome to direct debits and, currently, only sweeping VRPs are mandated for banks in the UK, involving transactions between a customer's account and a merchant.
Non-sweeping, commercial VRPs are less common at present and entail direct transactions between a customer and a merchant.
Although the utilisation of commercial VRPs presents various opportunities, including streamlined bill payments, subscriptions, and B2B invoicing, they have not been embraced by the big banks nor merchants.
Speaking at Money 20/20, Jana Mackintosh, the payments director at UK Finance, pointed out that pricing is a key factor hindering the widespread adoption of account-to-account payments, particularly commercial VRPs.
“For merchants, that is front of mind. That is always where the conversation starts,” she said.
Mackintosh emphasised the importance of considering adoption drivers in light of this.
“When you think of a big merchant like Tesco in the UK, for one bank’s customer base to be offered an open banking or VRP proposition is not attractive because that’s only going to cover 20 percent of your customers maybe?”
She pointed out that merchants desire ubiquity for adoption to be worthwhile.
Kate Fitzgerald, head of policy at the Payment Systems Regulator (PSR), also emphasised the importance of merchant adoption, stating that it is something the regulator is looking “really closely at”.
“It is critical. We see massive interest from merchants and they are knocking on our door,” she said.
She said that engagement with merchants had shown that they are wanting VRPs, and wanting adoption.
“There are things that aren’t right for them yet, some of them regulatory,” she said, adding that the PSR would prefer competition and market driven forces here.
Fitzgerald noted that the PSR sees two areas requiring intervention. "From the conversations we are having with merchants and the industry, we think there is likely a need for us to mandate some of the incumbent sending banks."
She highlighted the importance of participation in open banking, crucial for the success of products such as VRPs.
Acknowledging pricing as another issue, Fitzgerald stated that “there are great areas where competition can thrive and drive market forces but there is a critical point around pricing and sending banks".
Regarding regulated pricing, she mentioned that the PSR will "keep an eye" on this, to see if it needs a regulated price.
Fellow panellist Charles Damen said that his company, Token.io, has seen a number of clients that have “literally turned off cards”.
As for other merchants, he said that price is one element, as well as functionality. “Ultimately, why does a merchant pick one type of payment? Typically the user experience needs to be better and there needs to be adequate protections and coverage.”
“This is where commercial VRPs come in,” he said. “You can enable a one click payment which is better than cards with SCA, you can do recurring payments, even instalment payments,” he said.
Speaking to Vixio outside the session, Damen said that “there is a significant opportunity for commercial VRPs given that the existing infrastructure for VRP is already in place with the main UK banks”.
“In the short term, the commercial model could be negotiated bilaterally, and this could be a way to accelerate commercial VRPs to see how it works in the market while progressing towards a scheme-based model including consumer protection provisions, a multilateral commercial model and a trust mark,” he suggested.
Echoing his fellow panellists, Damen said that he thought that there was a huge appetite for commercial VRPs from the merchant community. “The PSR has been clear about its competition remit and the need for stronger competition among payment options. There is interest from the banks, but timing is crucial.”
For Damen, this is "a chicken and egg situation”.
Sweeping VRPs are available across all major banks, for example, and there has now been significant growth from that perspective, with sweeping VRPs now representing 12 percent of all UK open banking payment volumes since launch.
This has been driven by single-click account loads from financial institutions such as Revolut, Wise or Monzo.
“Yet, commercial VRP is currently only supported by one bank,” he said. “From my experience working with merchants, commercial VRPs can offer an improved user experience and lower costs across a much wider variety of use cases.”
Yet, he concluded, given this chicken and egg scenario, it is hard to achieve widespread adoption without pilots that include all major banks.
