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 have 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. Research by Redshift Research for Bottomline Technologies reveals that over 60% of UK businesses face a cost of £50 or more per failed Direct Debit, with finance teams spending an average of four hours a month resolving these issues.
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?
In this article:
- What are variable recurring payments?
- VRPs vs Direct Debit
- Why use Yapily for VRPs?
- How Volume is leveraging Yapily VRP to disrupt payments and the subscription economy
To find out how VRPs can help your business, book a call with one of our open banking experts
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.
The first type of VRP was limited to “sweeping”—moving money between two accounts belonging to the same person or business.
Sweeping use cases 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
Read through some of the most popular use cases for sweeping VRP.
For example, 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 could also help them build a savings pot to improve their financial well–being, providing a safety net when faced with unexpected costs. Since 10.7 million adults in the UK rarely or never save, sweeping has the potential to help people break volatile borrowing cycles.
More recently, the introduction of commercial VRPs (cVRPs) has expanded the potential of VRPs, enabling businesses to collect payments directly from consumers. This allows for broader applications like:
- Automating subscription payments for services
- Facilitating flexible instalment payments for purchases
- Collecting recurring payments, such as utility bills or gym memberships
Yapily is currently one of the only providers in Europe offering commercial VRP.
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, no ongoing maintenance is needed. |
Learn more about open banking payments: The complete guide to open banking payments
How VRPs will evolve over time
As we mentioned, sweeping VRPs can currently 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, or commercial VRPs. Although commercial VRP (non-sweeping) isn’t yet mandated by the Open Banking Implementation Entity (OBIE), Yapily is currently tackling this significant use case supported by NatWest Bank.
In the subscription economy, which Juniper Research predicts will be worth $1 trillion by 2028, non-sweeping VRPs offer a faster and more cost-effective alternative to traditional Direct Debits. By integrating VRPs, businesses can streamline recurring payments, improve cash flow, and provide customers with greater control and flexibility—all while cutting transaction costs.
You can learn more about getting started with VRPs here.
Three reasons to use Yapily for your VRP
Yapily is on a mission to empower businesses by enabling them to harness the potential of open banking. We securely connect hundreds of companies to thousands of banks across the UK and Europe, giving them access to real-time financial data and seamless payment solutions.
But why should you use Yapily for your VRP? Here are three reasons:
1. You get cheaper, faster payments with direct bank connections, bypassing card fees
With Yapily’s VRP, you connect directly to customer bank accounts, cutting out card networks like Visa and Mastercard. This means lower transaction fees, saving you money on every payment. The direct connection also speeds up payment processing, giving your customers a smoother user experience.
While your competitors may still rely on recurring payments via card networks, you’ll benefit from faster, more cost-effective payments with open banking from Yapily.
With Yapily, you can handle both sweeping and commercial VRP, offering flexibility in how you manage recurring payments.
Wondering if VRPs are right for your business? Talk to our open banking experts
2. Scale effortlessly with Yapily’s extensive UK and European coverage
Yapily gives you access to almost 2,000 banks across 19 key European countries, including the UK, France, Germany, and the Netherlands. Unlike other open banking payments providers which may have limited reach in the EU, Yapily allows you to operate in multiple regions with a single provider.
You won’t need to juggle multiple partnerships, and Yapily’s enterprise-ready API ensures your business can handle large volumes as you grow. This gives you the freedom to expand across Europe without operational headaches.
However, you still maintain flexibility: you can always decide to use a specialised partner in specific countries, and Yapily for your main operations.
3. Maintain control over the payment process with Yapily’s white-label infrastructure
When you rely on a provider that isn’t white-label, you often lose control over your customer journey. This disconnect between your brand and the payment process can cause friction, leading to lower conversion rates and a lack of trust.
Inconsistent branding across the checkout experience can confuse customers, leading to cart abandonment and a drop in overall customer satisfaction. This concern is particularly relevant in the context of commercial VRPs where merchants need to ensure a seamless payment experience.
With Yapily, you avoid these pitfalls. As an infrastructure provider, we empower you to fully customise your payment experience, ensuring brand consistency at every touchpoint. This not only builds trust but can significantly boost conversion rates.
Yapily also offers hosted payment page for cVRP, so you can quickly enter new markets while maintaining control over your brand identity, keeping you flexible and adaptable.
If you have your PIS licence, you can take full advantage of Yapily’s complete white-label solution: the entire payment process is white-labelled. Alternatively, you can use Yapily’s licence, with small branding for compliance purposes.
How Volume is leveraging Yapily VRP to disrupt payments and the subscription economy
Volume, a Yapily customer, is transforming the way merchants handle payments by leveraging VRPs. Their mission is to eliminate hidden fees charged by card networks, which can range from 2% to 8% of each transaction, and pass those savings back to businesses and consumers.
By using Yapily’s VRP technology, Volume enables direct bank connections, bypassing the need for card networks and offering merchants quicker, cheaper, and more secure payment options.
Through Volume’s Transparent Checkout feature, powered by Yapily, merchants benefit from instant payment settlements and a seamless authentication process.
This frictionless experience has led to significant improvements in conversion rates, with some merchants reporting up to a 250% increase. For example, a merchant in the travel sector saw reduced payment costs and simplified data handling, making their operations more profitable.
“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
Read the full case study: How Yapily & Volume are killing hidden fees for businesses and consumers
Unlock cheaper and faster payments with Yapily VRP
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.
Sources:
https://www.cleardebit.com/direct-debit-unpicking-statistics/
https://www.legendfinancial.co.uk/news/energy-firms-direct-debit-failures/
https://www.moneyhelper.org.uk/en/everyday-money/banking/direct-debits-and-standing-orders
