In a recent Retail Banker International article, BankiFi Founder and CEO, Mark Hartley, shared his take on Variable Recurring Payments (VRPs) vs Direct Debits and whether VRPs actually benefit businesses.
With pros and cons for each payment method, Mark focused on the impact to small businesses. While VRPs offer flexibility and convenience, is that right for SMEs who are already grappling with late payment issues?
This blog post delves into key points from the article, exploring the need for a balanced approach that safeguards the interests of small businesses.
There's no denying that Variable Recurring Payments (VRPs) have a huge appeal and potential in the payments space. With Direct Debits being the most well-known method of collection for a recurring payment, VRPs are part of a popular wave of payment options designed to give more flexibility to the payer, such as BNPL and A2A.
With convenience and adaptability at its core, VRPs are 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.
This makes VRPs an attractive option for businesses wanting to leverage digital payments - enabling businesses to adapt to dynamic pricing models and billing cycles.
While VRPs give the payer greater control and flexibility around transactions, their benefits for tackling the problems facing small-to-medium sized enterprises (SMEs) are less obvious.
Take late payments for example, according to Time Finance’s 'Invoice Finance' team, SMEs are owed an average of £250k in late payments and are waiting between 60 and 100 days for invoices to be paid.
"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." - Mark Hartley
That being said, there is a use case in favour of the variability of VRPs and the ability to pay partially or flexibly. Direct debits may not be suitable for payers who are unlikely to have sufficient funds in their account month-to-month, with data from GoCardless showing that 2.38% of direct debits fail due to this issue.
Whilst it's important to be aware of new and improved solutions, it's not clear cut that direct debits are in need of replacing. VRPs may offer significant advantages for the payer, but for SMEs the knock-on effect could be disastrous when they're already in a battle with late payments.
"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
For now, the valid concerns of SMEs when it comes to the application of VRPs mean it's important to strike the right balance with these payment methods.
Read Mark's interview in full.
Arrange a time to talk to Mark, here.