Brian Hanrahan, Chief Executive Officer, Nuapay (an EML Payments business) argues that too much attention is paid to what VRP might become in the years to come, rather than focusing on opportunities unlocked in the ‘here and now’ by  Open Banking combined with Direct Debits

When the CMA mandated that the 9 largest UK banks must support VRP for the sweeping use case, it was a fundamental pilot for VRP but did not address the largest market opportunity: non-sweeping VRP, which is likely to account for more than 95% of use cases and has the potential to play a leading role in the vast and growing subscriptions sector as well as bringing Open Banking to the Point of Sale (POS).   

There is certainly more work to be done today to follow up on the use cases unlocked by the VRP sweeping mandate. However,  we must also focus on expanding the role Open Banking plays in recurring payments. It offers a range of benefits including strong authentication, accurate data, good customer experience, and can be used to enhance existing recurring payment methods significantly. 

The anatomy of a recurring payment 

This year marks the 20th anniversary of Nuapay. When Nuapay launched, there was really no concept of what we now call “fintech”. We looked at payments and felt they could be improved significantly. Services available from banks were limited.

Since then, we have enabled businesses of all shapes and sizes to set up and process recurring payments. Nuapay has worked with every major type of recurring biller, including utilities, insurance companies, streaming companies, and even thousands of gyms around Europe. Our connectivity reaches 2,350+ banks in 32 countries across Europe, with the potential to reach 420 million customers through its world-class banking platform. Global banks and PSPs use our white-label platform to deliver their services to businesses. We have deep experience with what a recurring payment solution needs to be and how it should work.

Primarily, it must have wide population coverage – which means it needs to be consumer-friendly to achieve this level of adoption. It must be reliable, accessible, and popular. Consumers have to be comfortable with the recurring payment solution. Businesses also need to see clear benefits and will not tolerate having to re-enrol their customers for a new payment method due to the attrition it may cause. 

In praise of Direct Debit

 VRP may not hit widespread adoption in the near future due to existing solutions that manage particularly well for most use cases. For example, Direct Debit excels at its role. It was the original tool that first enabled consumers and businesses to make regular, repeating payments. Consumer protection is very well-considered, and it is cost-effective. However, Direct Debit is now more  than 50 years old and has some opportunities for improvement. Let us not forget that for a long time, many businesses were unable to get permission from their bank to use the service. It was only the large enterprises that used Direct Debit,  whilst many SMEs struggled to gain the then necessary sponsorship from a bank to collect by Direct Debit.

However, it has been noticed that Direct Debits can fail due to rejected mandates, incorrect entry of account details, and many other reasons. This can be especially concerning for the merchant when the first payment is taken. On the other hand, it is also a pain point for the customer. When this happens, often customers churn. Ultimately, correcting the issue takes time, and it can prompt the customer to have second thoughts about the buying decision. 

It is also worth noting,  that VRP will likely be much more expensive than Direct Debit and might not even offer any cost savings versus card on file. Why would merchants go from paying very little for Direct Debit to paying a large amount for VRP?

Awareness and Adoption 

When considering adoption, it must be noted that there is an exceptionally long lead time in payments. Adoption does not follow the curve of an overnight hit consumer product. It takes time to migrate customers and introduce new rules and systems.

In the UK, the biggest hurdle right now for VRP is the fact that it is only sweeping that is a reality – which is a small subset of recurring payments.  The non-sweeping VRP is currently only available from one of the high street banks and there is no defined timetable or certainty that wider market coverage will emerge However; the other banks are not yet putting their weight behind VRP.

Authenticated Mandates – a successful combination of Open Banking and Direct Debit

Nuapay has been using Open Banking in recurring payments for many years. We recently created a product called Authenticated Mandates which uses Open Banking for consumer signup and payments, as well as Direct Debit rails for the recurring payments, which is where the money movement occurs. Depending on the use case, we use either an AIS or PIS process. 

We can check that the payer owns the account and confirm the payee’s details during payment to cut the risk of people entering the incorrect details- which happens all the time. We have the flexibility and population reach of Direct Debit with the power of Open Banking. It may also have the benefit of serving as a stepping stone into VRP eventually because as banks become reachable for VRP we can enable that for our merchants in the same platform. 

What should future regulation look like? 

 Whether there will be further Regulation in this area is unknown, which moves the possibility of mainstream VRP adoption even further into the distance. It will take time to shape the right regulation. At the Joint Regulatory Oversight Committee (JROC) and other committees, including the OBIE, we argued that VRPs must not be over-complicated in terms of consumer protection.  Consumers are unlikely to be fully aware of the difference between VRP and card-on-file – let alone remember the rules for each type of payment. I would argue that there are a few ‘must-haves’ in a fuller rollout of VRPs:

1. There needs to be the same approach to a common API standard as was the case with the Open Banking implementation in 2018. The OBIE, or whatever follows on from this organization, should work across the industry to agree a common standard that all providing banks accept. This reduces the technical overhead on the fintech community, allowing them to focus on delivering new propositions that consumers and small businesses want.
2. There must be some form of common legal framework. Now we can look at NatWest’s terms and conditions, but whichever bank comes next will produce their own T&Cs, followed by the next one. This becomes unworkable for TPPs (Third Party Providers) and consumers because each will therefore be different, and that complexity will spill over and complicate the merchant and customer experience.
3. The commercial base should be agreed across the participating banks. We are certainly not arguing for free access, but a consistent and realistic charge for API access would be helpful to fintechs in building and pricing their VRP solutions.
4. And finally, there should certainly be consistent consumer protections across payment methods. So, there is certainly a compelling argument to be made for regulating consumer protection, rather than letting it be the proprietary fiefdom of a handful of companies. 

We do not need to reinvent the wheel here. We have done this already with sweeping VRPs – let us use our combined knowledge and adapt what has worked previously for the next challenge. 

Opportunities and use cases

Today, there are many interesting use cases around VRP, with the mandate enabling the delivery of sweeping services which were not possible in the past. Moving money into a challenger bank is a compelling use case, for instance, because it is not as simple as it should be using traditional rails.

In Europe, many consumers will also be willing to move away from a system that requires them to manually type in IBANs are hard to remember and all too easy to enter incorrectly during sign-up. With Open Banking, that problem is solved. You select your bank, get biometrically identity checked by it, and the signup is complete.

VRPs are not the ultimate incarnation of recurring payments and are not likely to subsume Direct Debits within the next ten years. Whilst the opportunities of VRP are clear, we doubt they will be fully realised in 2023 or even 2024 unfortunately. Therefore, we should work within the current provisions to encourage sweeping use cases enabled by VRP – the so-called “me-to-me payments” – whilst at the same time using Open Banking to enable consumers to set up recurring payments using Authenticated Mandates in a faster and more reliable manner on Direct Debit rails. If, and when, the regulators move to make a full suite of VRP a workable solution, using either hard or soft powers then we will undoubtedly see the industry continue to evolve.

Helen Child, Founder & CEO, OBE