The future of VRPs in e-commerce payments: Interview with Michael Bridgman, Product Director at GoCardless

By Gaia Lamperti

Variable Recurring Payments (VRPs) are automated payments from account to account that are enabled by open banking and are mandated to come into effect in July 2022 in the UK.

The most immediate use case for this technology are me-to-me transfers of money – for example, from a current account to a savings one – however, VRPs could open the door to yet more exciting use cases in the world of e-commerce.

Speaking with Michael Bridgman, Product Director at GoCardless, a payment company that makes collecting payments by direct debit and recently reached unicorn status, IBS Intelligence explored some of the opportunities VRPs open as a replacement for card-in-file payments.

Could you explain in detail what Variable Recurring Payments (VRPs) are?  

VRPs are quite a global phenomenon now, but in the context of the UK, are the automated movements of money from a consumer’s bank account or business bank account as directly as possible into a merchant’s or a seller’s bank account. 

Typically, what’s really unique about them is they’ll leverage more modern payment rails, which obviously speeds up both the confirmation and settlement timings of VRPs. They also leverage bank authentication mechanisms which allow for the payment to be more secure than some other alternatives. 

When were they first introduced?  

When back in 2016 the CMA published their remedies in terms of expanding competition and providing more transparency to the market, which eventually gave rise to open banking and the open banking implementation entity, and one of those orders was to make it easier to switch between current account and savings accounts between different banks.  

At the time, there was a lot of friction when trying to move money from your current bank into a different savings account or to pay off a different lending product. So, the CMA suggested developing a remedy for this and the open banking implementation entity came up with this concept of VRPs. The CMA agreed that VRPs are necessary to achieve the sweeping-related remedy.  

However, there’s a whole universe of other use cases that are available outside of that and over the next couple of months or years, it’s going to be interesting to figure out how we move from a mandated world of ‘me payments’ only to, potentially, more commercial use cases for sweeping. 

In 2019, GoCardless along with Starling took the first live VRP transaction through the OBIE’s regulatory sandbox. How has your journey in this space been since then?  

About three years ago, the OBIE was looking at how they could actually implement variable recurring payments, and so they were looking at entities in the ecosystem that they could partner with who had clear use cases for this.  

They were looking for both parties who would be most interested in testing out the technical capabilities, but also more importantly interested in figuring out with the FCA a regulatory environment and protections to be put in place.  

So, with the OBIE, we processed the very first variable recurring payment as a sandbox and within that process, we obviously then consulted with the FCA on how we might be able to improve the process to become appealing to consumers as well as to merchants. 

Since then, we’ve been working with various bodies and the banks to find a medium that satisfies the sweeping need, but also creates an environment where we may be able to expand VRP beyond that use case in a way that’s responsible to consumers and can create value for the rest of the ecosystem. 

Today, we see two parallel threads running: VRPs have been mandated for sweeping fully, and the CMA has just released additional guidance on what use cases can be classified within the limits of sweeping, but also alongside that, there are a couple of pilots that some of the larger banks are beginning to look at that would enable VRPs to be used outside of purely sweeping context,  

This spring we’re going to be, I guess going into our second VRP pilot, but this one is slightly more longer-term looking at what they are going to mean in a commercial scenario. 

And what are some of the friction points that VRPs can alleviate in such mentioned commercial scenarios?  

At GoCardless we think that the best way of processing payments is as quickly and as seamlessly as possible between bank accounts, rather than introducing intermediaries into the process. And so it’s from those primitives that we see most of the benefits of VRP emerge.  

Cost is a big one, not just the cost of the actual payment transaction but also the cost of payment failures, for instance. But also, fundamentally, because you don’t lose your bank account like you would lose your card and your bank account doesn’t expire as your card would, when you have a payment set up on a bank account, it’s more likely to be longer-lasting and therefore introduces fewer admin costs.  

Fraud prevention is another important one, VRPs are very secure because they basically have an authentication mechanism built-in and it would be much more difficult for a fraudster to hack that compared to a stolen card. And finally, the speed of confirmation of settlements is way faster than cards.  

On the other hand, what are some of the barriers to adoption that GoCardless has identified so far? 

I think that Open Banking is still a challenge that not everyone has necessarily overcome yet. The fundamental barrier is going to be how the consumer views this and how accustomed they are to this type of payment.  

When you look at places like the Netherlands, India, Brazil, this payment mechanism is really well adopted, either because it was introduced early on, before cards were dominant online, or because the government has put quite a lot of work into trying to encourage the payment mechanism, promoting advantages for businesses and improved security for consumers.  

So, the biggest challenge we are going to face here I think is, how do we find those core use cases that we’re all experiencing in our day-to-day life, where automatically moving money from one account to another is very useful and this is going to help build trust that payment mechanism. Associated with that, we’ll have to think quite hard about the consumer protections that we build and at what point in the journey we place them.

So, do you think that there is a correlation between card usage and the level of potential VRP adoption?  

Yeah, absolutely. To illustrate the point: in South Africa, 80% of the consumer market is banked, so has a bank account. But many of those accounts don’t come with card payments, so you’ve seen massive growth in what we call EFT, which is essentially the ineffective equivalence VRPs, and an online payment method that now makes something like 30 to 40% of all e-commerce transactions in South Africa.  

On the basis of this, you could make pretty strong assumptions about the role that having cards as the incumbents is likely to have on VRPs adoption. So, it’s definitely harder in the UK, but if the benefits are there, I see no reason that we wouldn’t make significant headway in the usage of VRPs.  

Do you believe that eventually, one day, VRPs will fully replace direct debit? 

I think the important thing here is the time horizon that we’re looking at. If you look at Australia, they’re introducing what they call PayTo, which works very similarly to variable recurring payments, although it has some distinctions. And there the payments regulator is planning on sunsetting their direct debit equivalent in the next 10 to 20 years. So, I think the answer probably has to be: yes, over time it’s very possible, but a lot still has to happen.  

How is GoCardless actively spreading awareness of the potential for VRPs and their several use cases?

We’re starting with our merchants and partners first, as they need to believe in the value of variable recurring payments before they can communicate it themselves to their consumers. 

We believe we already have a strong and trusted name in the market and we are investing in ensuring consumer trust, that way they don’t necessarily have to worry about what’s happening underneath, but they can just trust that GoCardless will move the money.