VRPs give the payer greater control and flexibility around transactions. But their benefits for payees, especially small-to-medium sized enterprises (SMEs) are decidedly less obvious.

If you’re like me, then you probably spend a lot of time reading stories about the future of finance and as a result, have more than likely come across the term Variable Recurring Payments (VRPs). Simply put, the term refers to a form of payment instruction where customers connect authorised third parties via Open Banking to their bank account to initiate payments on their behalf in line with agreed limits.

Proponents claim that VRPs offer more flexibility than other recurring payment methods, such as direct debit agreements and can provide greater transparency and control for those wanting to use them. Unlike direct debit agreements, which are limited to a fixed, month-by-month expense, VRPs can fluctuate, with the payer contributing more or less each month towards an outstanding balance.

Are VRPs the VIPs of payments?

VRPs fit a growing trend of new payment options designed to enhance payer flexibility. From ‘buy now, pay later’ to A2A payments, the market is currently awash with solutions that fit this description, many of which seem to be designed to address the nation’s cost-of-living crisis, as well as escalating inflation rates. Nobody is doubting that VRP is a solution highly en vogue right now, but does that mean it can deliver on its promises?

Personally, I’m not sure. Up until this point, much of the discussions within the broader media around VRPs have focused primarily on the benefits they can deliver to payers. However, it’s always important to remember that there are two parties involved in every transaction: payer and payee. At this point, it seems like the benefits for one side of that equation are well-established, so why are we still in the dark about the other?

Understanding benefits, recognising challenges

Personally, I think the answer to that previous question is pretty straightforward. The benefits of VRPs for payees aren’t nearly as well-established as they are for the payees. In fact, it could be argued that the introduction of VRPs may only serve to exacerbate existing problems already affecting businesses, especially SMEs.

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Let’s start with the aspect of VRPs that makes them so unique, the simple fact they are ‘variable’. The benefits of this flexibility for payers are manifold, but for businesses, especially SMEs there’s also a clear case to be made that ‘variable’ payments could end up further disrupting cash flow. That would be a huge issue, especially as many companies are already stretched thin dealing with this problem.

However, there is a use case in favour of the variability of VRPs. Direct debits are not the perfect method of payment for everyone. According to GoCardless, 2.38% of direct debits fail due to insufficient funds within the payers’ account. Let’s go deeper and consider the use case of vulnerable consumers, for example. Those payers who are unlikely to have sufficient funds in their account month-to-month would not benefit from the fixed nature of direct debits, but rather the ability to pay partially and flexibly with VRPs would benefit them greatly.

Can we afford to adopts VRPs?

The figures around late payments affecting SMEs are frankly staggering. According to Barclays, three in five SMEs across the UK are currently waiting on late payments from customers 1. Similarly, research from Xero shows that small business owners in the UK lose £684m each year because of late payments. In general, most SMEs receive payments 5.8 days late on average, an alarming figure that needs to change.

Research from the Credit Protection Association further compounds the issue. In 2021, they found that a third of small businesses experiencing late payments must rely on bank finance to contend with the issue. Likewise, the Federation of Small Businesses found that around 400,000 businesses go bust each year due to cash flow problems caused by late payments, making it the biggest single cause of business failure.

Given these worrying statistics, is it wise to embrace new solutions that generate more payment variance with open arms? More importantly, can we honestly say that the concerns of SMEs have been factored into the debate around this seemingly inevitable technological shift? I’m not sure that anyone can answer either question with a ‘yes’. Moving forward, we need to ensure that this changes and changes fast.

Better the devil you know?

Until then it’s very hard to make a solid case that VRPs will benefit payees more than traditional recurring payment methods, such as direct debits. In fact, at the time of writing, I’d argue in the opposite direction, and make the point that while not perfect, at least conventional direct debits afford payees a degree of consistency and reliability, which is ultimately lacking from VRPs.

It’s also important to recognise that failure rates around direct debit arrangements are relatively low. Research from GoCardless shows that failed direct debits only typically account for 2.9% of all direct debit collections. Compare this to the failure rate associated with card payments, which commonly stands at around 14%. Given the statistics, there’s no obvious need to abandon this trusted system.

What’s more, this research also highlights that for the most part payers aren’t typically struggling to fulfill direct debit obligations. Once again, there’s very little evidence to support that there’s much demand for the enhanced flexibility offered by VRPs. This is worth highlighting, especially as it’s one of the biggest drivers of VRPs, and the benefit most commonly cited by the solution’s biggest proponents.

It’s always important to stay on the lookout for new solutions, but even more essential to ensure that new technologies and systems are only embraced when they can deliver real, tangible benefits to those adopting them. Right now, I think that VRPs fail to satisfy that latter objective with work still needed to properly clarify and articulate how these solutions preserve reliability within cash flow.

New era, same problems?

Here at BankiFi, we’re big proponents of the power of fintech to change things for the better, and huge believers in the industry’s ability to improve outcomes across a myriad of sectors. However, we also appreciate that the wants of those at the forefront of the sector don’t always correspond with the needs of the SMEs. Right now, VRPs seem to fit that description, but that doesn’t mean the technology is doomed for failure.

However, we’re ultimately concerned that the commercial model underpinning VRPs will not be suitable for the needs of SMEs. Right now, there seems to be little demand for solutions of this nature, especially from this important section of the economy. If we continue to push forward with the technology, we risk introducing a payment model that undermines SMEs across the country in a moment of critical need.

The heft of support behind VRPs means they’re unlikely to go away anytime soon, and it surely won’t be long until we see them more broadly adopted within mainstream business. In the meantime, there are some very valuable VRP use cases for SMEs, mainly pertaining to non-sweeping. For example, if I automatically want to sweep surplus cashflow to another account on a periodic basis or set aside a portion of all sales to cover a future tax obligation. For non-sweeping uses cases, all I hope is that before we reach that inflection point, those championing the technology as an alternative to established collection payment methods do some work to consider the valid concerns of SMEs, especially as it pertains to late payments and how they can derail cash flow.

Mark Hartley is CEO and Founder of BankiFi