VRPs will have their Netflix moment – it’s only a matter of time

Did you know that 58 years ago, direct debits were introduced to meet the need for collecting payments from thousands of ice cream vendors?

Enabled by open banking, VRP is the Netflix to direct debit’s dusty VHS player

Now, we use them to make recurring payments like utility bills, subscriptions, and mortgage repayments. But the financial needs of businesses and consumers (ice cream vendors included) have radically changed over the last six decades.

Are direct debits still fit for purpose?

Let’s face it: direct debits are clunky, expensive, and inefficient. Not to mention prone to error. Recurring payments can be a minefield (we all know what it’s like to suffer a monthly bills mishap). That’s because direct debit payments can fail for a number of reasons, from invalid bank details to not enough money being in the payer’s account.

And this has a real impact on you and me, as ordinary consumers, too. A single failed direct debit payment can negatively impact the end-user’s credit score, setting them up for being locked out of access to finance.

Up to 60% of UK businesses admit to incurring a cost of £50 or more for every failed direct debit transaction. It’s no surprise then that nearly 60% of firms are planning to invest in or upgrade their investment in recurring payment providers, according to Forrester.

So why is direct debit still the third most popular payment method in the UK today (after cash and debit cards)? The answer lies in the fact that direct debit has become so entrenched in the way that banks, businesses, and consumers move their money, that reimagining it has seemed an impossible task. Until now.

Just like VHS, direct debit will be displaced by new technology

It’s the 70s and the beginning of the Video Home System (or VHS) era. You’ve just rented your favourite movie from Blockbuster to watch in the comfort of your own home. Fast forward to the noughties and Blockbuster has gone bust, the VHS has been displaced by DVD, and the eventual but inevitable age of streaming services has begun.

You can probably tell where I’m going with this – there’s a new kid on the block when it comes to recurring payments, too. Enabled by open banking, Variable Recurring Payments (VRP) are the Netflix to direct debit’s dusty VHS player. They serve the same function, but one that suits the current needs of businesses and consumers much better.

Just like VHS, the problem with direct debits is that they’re rigid, inflexible, and create friction. On the other hand, VRP gives users an all-round better user experience, where you can set all the parameters for your monthly payments – how much, to whom, and when – without friction.

In reality, for consumers this looks like staying on top of regular payments that vary each month, such as your investments or energy bills. For businesses, this means the days of losing a customer when their card on file expires, or their card is lost or stolen and must be cancelled, are gone. Not to mention the elimination of costly interchange, chargeback, or erroneous fees.

So, how does it work?

Variable Recurring Payments enable businesses to collect regular account-to-account payments using open banking. Crucially, this is only possible with the payer’s consent, and after using strong customer authentication for the initial set-up (think fingerprint, password, or pin), you don’t need to verify every single payment. But unlike direct debit, VRP allows users to set up their maximum payment amount and any other parameters for each payment. That means no more unexpectedly large bills or sneaky subscription fees.

Today, VRP is used to move money between two accounts belonging to the same person or business. This is called sweeping – a ‘me-to-me’ payment – when one person moves funds between their own personal accounts to make their money go further (for example, by capitalising on different interest rates or avoiding overdraft fees). But to me, the really exciting use cases lie in non-sweeping – a ‘me-to-business’ payment. In real terms, this looks like a smoother payment experience across all recurring transactions.

Why this shift is inevitable – but not imminent

Though a new payments ecosystem underpinned by open banking is fast approaching, it’s not at our doorstep quite yet – regulators have been slow to mandate VRP and businesses reluctant to depart from the familiarity of direct debits. But just like all markets ripe for disruption, direct debit will inevitably become the old guard, making way for VRP to revolutionise the way we make payments.

Direct debits are no longer fit for purpose. While they have historically served an important role, the promise of a transformed payments ecosystem that works for all of its participants is the greater prize. VRP may still be in its infancy today, but if we gave it even half the time we have to direct debits, in just a few more years we will be living in an unrecognisable – but ruthlessly efficient – world of payments.