If the sessions and discussions at Open Banking Expo UK and Europe on 18-19 October were anything to go by, then Variable Recurring Payments (VRPs) are generating plenty of interest and excitement across the ecosystem, including among merchants, payment services providers (PSPs) and banks.
The reason for the hype is because VRPs deliver better outcomes than both card-on-file and direct debit, in virtually every way.
This is evidenced in the findings of our latest survey report, ‘The Future of Dynamic and Variable Recurring Payments’, produced in partnership with Open Banking Expo.
In a comparison of the perceived main benefits of recurring payment methods, VRP scored higher than both card-on-file and direct debit on cost, risk, settlement time, conversion, security and frictionless setup.
VRPs are considered lower risk by 73% of respondents, compared to just 7% who think card-on-file is lower risk, and direct debit at 42%.
Speed of settlement is perceived as one of the main benefits of VRPs by 74%, versus card-on-file (30%) and direct debit (18%).
Respondents to our industry survey also identified fewer downsides in every single category benchmarked, including success rates, fraud, chargebacks, compliance burden and cancellation notifications.
This article aims to bring these benefits to life through examples of seamless user experiences, and then to take into consideration what is required to bring them to fruition.
User experience permutations to consider
Typically, VRP setup is easier than for alternative payment methods – card-on-file or direct debit – because there’s no requirement for manual data entry, but there is native Strong Customer Authentication (SCA) and immediate push notification confirmation.
Each of the user experience examples that follow focuses on payment execution as opposed to set up, and have three variables:
(1) the party initiating the payment,
(2) whether the amount is variable or consistent,
(3) whether the timing is variable or consistent.
Use case 1: ‘one-click ecommerce payment’. This is typically user-initiated and involves a variable amount and variable timing. For example, a consumer is buying clothes online and, when it comes to checkout, they can pay for their chosen items in one click or tap. There is no need for CVV entry, push notification nor a one-time passcode. With minimal ‘clicks’ on the part of the consumer, the overall UX is seamless.
Ben Rattue, product partnerships and propositions manager at Token.io
Use case 2: ‘automated periodic payment’ is merchant-initiated, with consistent amounts and timings. This could take the form of a regular subscription or transfer into an investment account. In advance of initiating payment, the merchant can check if funds are present and notify the user to take action if they are not. In this example, VRP is better than card-on-file, where merchants have no ability to check for sufficient funds in advance to ensure payment success at the first attempt. Whilst paying by direct debit does not give the merchant the ability to check for sufficient funds.
Use case 3: ‘automated recurring payment’ is similar to the previous example in that it is merchant-initiated and has consistent timing, but where it differs is that the amount is variable. A utility bill payment would be considered an automated recurring payment and, similar to the second use case, funds can be checked in advance. This allows for better customer communication, contributing to a positive user experience.
Use case 4: ‘automated one-off payment’. This permutation is merchant-initiated, and typically involves a variable amount and variable timing. Users could be paying via ride-hailing apps, or for public transport, parking, or in cashier-less stores. These are all in-person experiences where the automated payment is in the background. Using VRPs means that, unlike card-on-file, there are no potential issues with 3D Secure authentication, and no possibility of card expiry.
Use case 5: ‘automated rules-based payment’ is initiated by the merchant for the same amount each time, but with variable timing. Pay-as-you-go services, such as a mobile phone auto top-up or utility pre-pay auto top-up, come under this example; if your balance hits ‘x’, you can enable auto top-ups by ‘y’ amount to ensure you never get caught short. Here, too, VRP offers the better user experience, given that with card-on-file there is the possibility of 3D Secure issues or card expiry.
In summary, all of these permutations have one thing in common, which is that the consumer user experience for both initial setup and payment initiation is superior to that offered by the alternatives. And, of course, the merchant reaps numerous benefits, such as faster settlement, reduced operational costs, reduced per-transaction costs versus card-on-file, and increased conversion. The latter is as a result of easier user setup and better user communication for execution, including confirmation of funds, preventing failure.
Disputes
Beyond payment setup and execution, VRP also offers the opportunity to improve upon the chargebacks model.
Today, users can expect to wait anywhere between 30 and 90 days for a chargeback to be resolved and, for merchants, there are costly fees involved. As an industry, we have the opportunity to redress this imbalance by developing and deploying an arbitration process that is cheaper and quicker to deliver better outcomes for all involved.
Calls to action – the path to critical mass
The use case permutations and dispute mechanism represent a north star for the industry to aim at. However, there is much to be settled before this becomes reality.
In our VRP survey, we found that 60% of merchants want to convert card payments to VRP. Card payments have the highest penetration in the one-click ecommerce and automated one-off payment permutations, meaning these use cases represent the greatest opportunity relative to direct debit use cases, where only 33% of merchants want to convert to VRP. This potential must be tested and proven through the JROC pilot process, backed by our survey, which showed that 47% think the pilot should prioritise ecommerce, compared to 26% for utilities.
If the JROC pilot does not include ecommerce, we risk pushing a development roadmap that does not account for the most important use cases and will deliver a sub-par product.
Bank coverage is also key because no sensible merchant will launch without critical mass. Our survey revealed that banks are near-unanimous in their belief that VRP can bring commercial upside for them, so this belief must be translated into reality through an accelerated commitment to test, then scale, VRP.
Therefore, we need clarity from banks around the cost to provide VRP, to define an appropriate price where there is upside for them, but it’s still cheaper for merchants than cards.
Another clear consensus emerged from the results of our VRP Survey, which is that a consumer protection framework can be better than chargebacks. Now, the onus is on the industry to come together to define this.
At Token.io, we are driving the industry towards this north star. Our hope is that this will deliver better outcomes for our PSP clients and their customers by offering frictionless user experiences.
Ben Rattue is product partnerships and propositions manager at Token.io
