Why businesses need regulatory support for variable recurring payments
The road ahead for business leaders is uncertain: rising inflation, business costs and falling customer demand are a threatening combination of factors that will test the resilience of businesses everywhere. kinds.
Rising costs in the current climate are almost inevitable, and those tasked with weathering this storm will be looking for opportunities to cut costs. Payout fees might just be a good place to start.
We estimate that UK businesses currently spend £2.25bn on processing fees each year; for direct debits, recurring card payments and registered card payments. When put into context, the need to reduce costs associated with the most crucial function of any business – accepting money from customers – is clear. There is a potential lifeline on the horizon, but we need regulatory intervention to help make this a viable alternative.
Digital Payments for the Digital Age
Variable Recurring Payments (VRPs) represent the next major opportunity for open banking and the potential to radically reshape the way people pay for goods and services. VRP allows people to authorize future payments of varying amounts directly from a bank account through open bank rails. These payments replace direct debits, card payments on file, and recurring card payments. But VRPs are also a much faster, secure and, above all, cheaper alternative. In fact, our latest research found that VRPs could collectively save UK businesses £1.5 billion each year in payment costs.
Currently, the Competition and Markets Authority (CMA) only authorizes VRPs for general use – when an individual authorizes the transfer of money from one account held to another. This is useful for customer onboarding and account funding in digital finance. However, it fails to harness the full potential of this technology, which can also provide an improved way to manage active subscriptions, pay regular bills like utilities, and send money to businesses and consumers. other individuals.
To ensure that businesses and consumers reap the full benefits of VRP, the right regulatory framework is now needed to get things done.
A cornerstone of any incoming regulation must be a cap on VRP issuer fees, similar to card payments, to prevent banks from charging fees that discourage businesses and consumers from adopting these payment methods. We understand that banks should benefit economically from this innovation because they play a key role in making it happen. However, for VRPs to reach their full potential, they should be free to consumers and regulators should ensure fair market pricing by introducing an issuer fee cap on transfer prices (10 basis points) to encourage widespread adoption.
Cost savings and beyond
Part of the reason VRPs have so much potential is that they offer so much more than cost savings alone. Expanding the use of VRPs beyond what is currently mandated by the CMA will mean that businesses will be able to reap a host of operational benefits, as well as significant price savings.
A clear example is customizable checkout experiences: think of Amazon’s one-click checkout feature, applied to all e-commerce merchants. It might seem like a small change, but the power of enhanced checkout journeys shouldn’t be overlooked. The majority (53%) of consumer spending now happens online and digital payments are key to making the online shopping process a seamless experience. In fact, 62% of consumers would avoid a merchant with a bad payment experience, and only 6% expect to continue shopping with a merchant after a bad payment experience.
While businesses can help attract and retain customers through improved payments, they can also build their own resilience. Indeed, money transferred through VRPs is instantaneous, due to its use of the Faster Payments Scheme. Compare that to direct debits, which can take three to five days to clear; or invoices, which can take up to 30 days. According to Barclays, three out of five UK businesses owe money due to late payments. Slow settlement of funds hampers cash flow and can end the life of a business, especially a small one, even if it is profitable on paper. The use of VRP is, at least in part, a solution to the problem. It is clear which option is the most useful for companies wishing to manage liquidity and cash flow risks.
We know that to be truly effective, regulation must be constantly evolving to meet the needs of the stakeholders it serves. As pressure on UK businesses increases, the ability to leverage VRPs will be key to managing costs and improving customer outcomes. According to the British Chamber of Commerce, 50% of businesses are looking to cut costs in response to the cost of living crisis, while 73% are likely to raise prices. Businesses should therefore be the net beneficiaries of a fee cap on VRPs.
These savings would allow them to offset costs such as electricity bills, while providing savings to consumers, allowing them to pass on these lower costs or reinvest them in the business.
This price regulation is also essential for the health of the payments industry itself. Driving competition in this space will bring even more innovation and better outcomes for customers as fees come down and new services are developed.
There is a fantastic opportunity for UK businesses which could benefit both them and the consumer now more than ever, but it is only with the right policy and the right regulations to support that we can ensure success of UK plc as it strives to maintain its place as the world leader in the digital economy.