Variable Recurring Payments vs Direct Debit: The next wave in payment innovation

Written by Yapily · September 1st, 2022

Earlier this month, we announced the launch of Variable Recurring Payments in the UK. To better understand the benefits, let’s explore how they compare to Direct Debit, how businesses can leverage this new form of payment, and how Variable Recurring Payments will evolve over time.

Direct Debit, which runs on BACS payment rails, has long served its purpose as an automated payment method to collect recurring purchases and regular expenses like subscriptions and utility bills.

But, despite being the preferred payment method for over 50% of bill-payers, Direct Debit has flaws. Whether it’s because of insufficient funds or a cancelled mandate, hundreds of thousands of Direct Debits fail every year. In fact, 500,000 electricity and gas consumers experienced a failed Direct Debit so far this year, resulting in a charge of up to £25 per transaction.

There are hidden costs for merchants, too. According to research, over half of UK businesses face a £50 fee for every failed Direct Debit transaction, costing finance teams 4 hours a month to correct.

This is precisely why Variable Recurring Payments (VRPs) are primed to disrupt Direct Debit; they’re more secure, more cost-effective, and less prone to error. But what exactly are they, and how can businesses benefit from offering them?

Learn more about Yapily Recurring Payments here.

What are Variable Recurring Payments

Variable Recurring Payments enable businesses’ to collect regular payments using open banking. While VRPs represent a significant milestone in open banking, they’re still in their infancy. Today, VRPs can only be used to move money between two accounts belonging to the same person or business. This is called sweeping.

Some examples include:

  • Moving funds between current accounts to avoid falling into overdraft
  • Moving funds to accounts used for loan repayments
  • Moving funds to a credit card account
  • Moving funds to cash savings accounts that pay interest

Let’s say a customer uses a personal finance management app like Emma to track their disposable income and manage their spending. With the introduction of Variable Recurring Payments, the customer can set up a VRP, so surplus money automatically transfers to their savings account.

Sweeping may also help them build a savings pot to improve financial wellbeing - providing a safety net when faced with unexpected costs. And since 10.7 million adults in the UK rarely or never save, sweeping has the potential to help people break volatile borrowing cycles.

How VRPs will evolve over time

As we mentioned, today, VRPs can only be used to move money between two accounts under the same name. But what about the movement of funds between separate accounts?

Some examples include:

  • Streaming subscriptions
  • Utility bills
  • One-click checkouts
  • Repeat invoices
  • Gym memberships

If sweeping refers to the movement of money between two accounts under the same name, these examples are referred to as non-sweeping. Although non-sweeping isn’t yet mandated by the Open Banking Implementation Entity (OBIE), Yapily is currently exploring ways to tackle this significant use case via a pilot supported by NatWest Bank.

You can learn more about the pilot here.

VRPs vs Direct Debit

Functionally, VRPs are similar to Direct Debit. But VRPs offer better security and more flexibility, and here’s why.

Direct Debit Variable Recurring Payments
Security Merchants will have to store the Direct Debit instruction for each customer which can be subject to data breaches and increased risk of security. Strong Customer Authentication is embedded in the VRP payment set-up, making these payments more secure and less prone to fraud.
Flexibility Cancellations must be applied within three working days of receiving a notification from the customer’s bank. Customers are in charge of their VRP set-up, giving them full control over their payment parameters.
Speed Direct Debit payments are processed using BACS clearing system which has a 3-day settlement cycle. VRPs are processed using Faster Payments, meaning funds will settle instantly.
Costs If a Direct Debit fails due to insufficient funds, BACS will charge up to £50. Accepting Direct Debits can be expensive depending on the provider. VRPs will compete at a competitive rate to rival Direct Debit providers.
Failure rates Direct Debit has a steady failure rate of 2.6% to 3%. Failure rates are expected to be low and similar to standing orders, where the customer is in charge of the payment.
Admin Customers will have to set up Direct Debit instruction either by paper or electronically. The process is cumbersome and impacts the customer experience. Since there’s a lead time to set up a Direct Debit, the first payment will only reach the merchant on a specified date. Setting up VRP payment can be automated with pre-filling payment details to avoid human error. Once it's set up, there's no ongoing maintenance needed.

Use case: How Volume is leveraging VRPs

For Yapily customers like Volume, VRPs will enable their merchants to save costs, increase payment volumes, and provide a frictionless alternative to Direct Debit payments over time. In a nutshell, non-sweeping use cases have the potential to transform the retail landscape.

“VRP has triggered the next wave of disruption at the checkout. It is the Direct Debit equivalent of open banking, except where the movement of money is quicker, and cheaper, and the customer has more control. This has the potential to be transformative for any business.” - Simone Martinelli, Co-founder and CEO at Volume

Use case: How VRPs will disrupt the subscription economy

Non-sweeping VRPs will be a revolutionary step-change for the subscription economy providing a cheaper, faster and more convenient method for payment collection.

A study from UBS reveals that the subscription economy will be worth $1.5 trillion by 2025, implying an average annual growth rate of 18%. This represents a huge opportunity for alternative payment methods like VRPs that will undercut Direct Debits on price and improve speed. That means more streamlined cash flow for merchants.

Learn more about Yapily

Yapily is the largest open banking payments platform in Europe and is proud to be at the forefront of payments innovation, meeting the evolving needs of banks, merchants, and payment service providers.

If you’re looking for an alternative to Direct Debit, check out Yapily Variable Recurring Payments to see how they could streamline your processes, and provide more flexibility and security for your customers.

Get in touch to find out more.

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