Do Variable Recurring Payments have a SME blindspot?
Many people seem to be excited about Variable Recurring Payments (VRPs), but do they actually benefit businesses? In this article, Mark Hartley (pictured), Founder and CEO of BankiFi assesses this issue in more detail. As Mark highlights, while these systems give the payer greater control and flexibility around transactions, their benefits for payees, especially small-to-medium sized enterprises (SMEs) are decidedly less obvious.
Conversations around Variable Recurring Payments (VRPs) are gaining traction in the world of finance and fintech. This new form of payment instruction allows customers to connect authorized third parties via Open Banking to their bank account to initiate payments on their behalf in line with agreed limits. Importantly, unlike direct debit agreements, which are restricted to a fixed, month-by-month expense, VRPs can fluctuate, with the payer contributing more or less each month towards an outstanding balance.
Advocates argue 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. However, up until now, conversations around VRP systems have tended to focus more on their potential upsides, and not the problems that they could pose, specifically to SMEs. Amidst a challenging economic outlook, it’s essential we take all sides of the argument into consideration if we are to continue moving forward with this method.
A NEW DAWN FOR 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. On paper, VRP seems to be a highly relevant solution, but will it be able to live up to 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?
A PROBLEM IN DISGUISE?
In my view, 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 payers. In fact, it could be argued that the introduction of VRPs may only serve to exacerbate existing problems already affecting businesses, especially SMEs.
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 favor 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 payer’s 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.
VRPs & SMEs
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 2. In general, most SMEs receive payments 5.8 days late on average, an alarming figure that needs to change 3.
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 4. 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 5.
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.
IS CHANGE NEEDED?
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 per cent of all direct debit collections 6. Compare this to the failure rate associated with card payments, which commonly stands at around 14 per cent 7. 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 supporters.
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.
TAKING THE NEXT STEPS
The extent of support for the adoption of VRPs means they’re likely here to stay, and it surely won’t be long until we see them being used more broadly within mainstream business. Clearly, there are some helpful VRP use cases for SMEs, mainly pertaining to non-sweeping applications. For instance, it’s very handy to have the option to automatically sweep surplus cashflow to another account on a periodic basis or set aside a portion of all sales to cover a future tax obligation.
However, for non-sweeping use cases, the arguments to support VRPs are less obvious. Personally, my hope is that before we hit that inflection point, those advocating the technology as a real alternative to traditional collection payment methods consider the valid concerns of SMEs, especially as the application of VRPs could directly exacerbate the late payments crisis and further derail cash flow in a moment when we can ill afford to.
For more information about BankiFi, please visit: www.bankifi.com
