How VRPs could help your customers weather the economic storm

7 min read|Published December 14, 2022
How VRPs could help your customers weather the economic storm

The rising cost-of-living has left swathes of people looking for alternative ways to manage their finances and pay their bills. Here’s a summary of how Variable Recurring Payments (VRPs) could potentially offer consumers some much-needed support.

TL;DR – Quick summary
  • Variable Recurring Payments can help vulnerable consumers avoid overdraft fees and cancelled payments during the economic crisis.

  • VRPs are different from direct debits as it allows the customer greater control over when and how often a recurring payment will occur. 

  • With greater control over their recurring transactions, consumers can avoid traps such as ‘set and forget’ subscriptions and improve financial health.

TL;DR – Quick summary
  • Variable Recurring Payments can help vulnerable consumers avoid overdraft fees and cancelled payments during the economic crisis.

  • VRPs are different from direct debits as it allows the customer greater control over when and how often a recurring payment will occur. 

  • With greater control over their recurring transactions, consumers can avoid traps such as ‘set and forget’ subscriptions and improve financial health.

In the current economic climate, consumers are understandably looking for ways to optimise their monthly costs. It doesn’t help that the means by which people actually pay their bills, such as direct debits, offer little in terms of control and flexibility. In the UK, people tend to pay through one of two recurring payment types:

  • Direct debits: An instruction from you to your bank that authorises a merchant to collect an amount from your account on an automatic basis

  • Card-on-file: A transaction in which the cardholder authorises a merchant to store their card information ‘on file’ and charge them when appropriate

VRPsare similar to direct debits in the sense that the customer gives a business permission to collect payments on a recurring basis without the need for additional action. But that’s pretty much where the similarities end. Read on to learn how VRPs could offer consumers greater flexibility and visibility when times are tough.

New to VRPs? Watch the video below or get the latest on our VRP beta program with NatWest.

Fewer missed or cancelled payments

Over 25% of UK adults have suffered from low financial resilience since the pandemic. Add to this that income patterns are changing – 15% of UK adults are now part of the gig economy – and it’s easy to see how locking people into a fixed, inflexible payment schedule could lead to missed payments and customer churn.

A missed direct debit payment drives up costs for everyone. Consumers will see their bills increase as penalty fees are added, and it could harm their credit score too. For businesses it leads to extra back-office work with high hidden costs. It’s a lose-lose scenario for both sides, but the experience for consumers can be especially terrible and may ultimately cause them to seek alternative providers.

VRPs offer a much more flexible payment schedule when compared to a direct debit mandate. It gives the user more choice in when and how much they pay – within the predefined limits of the mandate – and even make occasional, ad-hoc payments. This means they can pay when they actually have the funds available, rather than being forced into cancelling instead.

More control for consumers

Other drawbacks of traditional recurring payments are that they’re based on open-ended mandates, meaning there’s no end date, and you can only see the amount debited on your latest bank statement. This lack of control and visibility understandably makes consumers less willing to sign up in the first place.

The cancellation process is pretty difficult, too. Bacs, the scheme that manages direct debits, advises consumers to provide written confirmation to their bank with five different pieces of information – including their branch sort code and customer reference number. Whether you write to your bank or deal directly with the merchant, you’ll likely have to wait a day or two for them to respond.

Consumers are understandably wary of entering into ‘set and forget’ subscription traps as the cost of living rises. Recurring payments today are tricky to keep track of and equally tricky to opt out from. Consumers know this, and it increases their reluctance to enter into new subscriptions.

VRPs are different in that the user can set up multiple recurring payment mandates bound by specific parameters: the merchant, the amount, and the start and end date. They’ll be able to see the maximum amount that can be drawn from their account and when the mandate ends in their banking app, allowing for greater visibility.

At some point VRPs may also let users review and change or cancel any subscription in a few clicks through their bank app, enabling maximum transparency and control for consumers. In any case, merchants that offer VRPs over the traditional, opaque alternatives can expect a lower barrier for consumers at sign-up.

Protection against overdrafts

Helping consumers avoid overdraft fees was a big factor behind the CMA’s decision to mandate sweeping VRPs, and it’s easy to see why. Interest rates on unarranged UK overdrafts can be as high as 40% or more and the fees are typically 10 times, sometimes even 20 times, more than those for payday loans. With 14 million Brits entering into an unarranged overdraft each year, this is no small issue.

Sweeping VRPs let consumers and businesses move funds between their own accounts on an automated basis, with the funds settled instantly. This enables the use of rules in setting up financial safeguards, such as automatically topping up an account when the balance runs low or it goes into overdraft. Banks and financial management apps that unlock this feature and others like it will help protect their customers and generate long-term loyalty.

More tools to help your customers

Aside from VRPs, there are a number of ways to apply open banking to recurring payments to better support consumers and protect revenue.

  • One-time payments: Businesses can offer a Pay by Bank as a fallback method if and when a user misses a payment, sending a link to pay directly through an email or push notification.

  • Balance verification: By verifying a user’s real-time balance you can confirm that their account has sufficient funds before attempting to debit it. Tink’s Balance Check feature lets you do exactly this, on an automated or ad-hoc basis. 

  • Income verification: With Tink’s Income Check you can validate a user’s income in real time, letting you identify vulnerable customers at risk of churning and tailor payment schedules to their income patterns.

Tink recently partnered with NatWest to launch our VRP beta program. To learn more about how your customers can benefit from VRPs, check out our recent deep-dive or get in touch.

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