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December 06, 2021

Variable Recurring Payments - turning the mundane magical

Kat Cloud

Now, more than ever, consumers want products and services that fit their financial needs. Open banking has only increased that demand and paved the way for embedded finance products and services, like ApplePay and GooglePay. Both rely on having their users add a card-on-file and  make payments without needing to input their details or use their physical card.  However, we have the technology to make these products even easier for people to use -- we just need to put it to work.

Take for example card-on-file transactions--it was revolutionary when first introduced as consumers no longer had to always remember their card details in order to make recurring payments they could just trust the merchant to do it for them. But that in itself is the challenge, consumers no longer have to actively think about the payment, instead it is taken out automatically without the consumer knowing until they check their online banking. That can pose significant risk and cause people to incur additional fees if they accidentally go into their overdraft. However open banking’s latest innovation Variable Recurring Payments can help mitigate that risk. 

Variable Recurring Payments, the newest functionality within open banking can help mitigate that risk. VRPs resemble card-on-file transactions in that they allow firms like Plaid to initiate payments of varying amounts on behalf of consumers. A key difference between card-on-file and VRP is the “three C’s” - control, consent and choice.

VRPs are based on a specific set of parameters that the consumer controls. Before a payment initiation service provider (PISP) can initiate a payment order they are required to get the consumers explicit consent. Without the consumer's explicit consent, the financial institution will prevent the PISP from initiating the VRP. In comparison to card-on-file the consumer doesn't have the same level of control: there are no parameters merchants must follow and  instead they have complete control. In a world with VRP merchants can now give consumers more choices at checkout, ultimately helping both consumers and merchants make the most of open banking. 

From a merchant’s perspective, VRP provides another payment option that is safer and faster than traditional card-on-file transactions. VRP transactions will run on Faster Payment rails meaning merchants and consumers would be able to benefit from same day settlement compared to BACS 3-day settlement arrangement for direct debits/card-on-file transactions. Having the immediate influx of cash can be instrumental to a business’s growth and profit generation. Because of the additional consumer controls in place with VRP, a consumer would not run the risk of receiving an unexpected large payment and would no longer have to share their card details, thus decreasing the risk of fraud.

Card-on-file is not new but rather another mundane part of everyday banking. With VRP we can turn the mundane into magical empowering consumers and merchants to control their recurring payments. To support this market,  Plaid is developing a VRP product that will fuel open banking adoption. Contact our sales team to learn more.