WIRED REPORTS

Are you ready for the ‘variable’ future of payments? 

5 minute read
 

Ideas bank

There is a big change coming in the way we pay—and businesses stand to benefit

Taking a payment typically involves a credit or debit card—and a more convoluted process than most consumers realize.  The business must obtain card details from the customer and pass them to the payment processor, which gives them to the card network, which sends messages back and forth between various entities before authorization, clearing and—finally!—settlement can take place. And in the middle of that, perhaps the customer also receives a code via a telco to type in to prove that it was really them using the card in the first place. 

That seems like an awful lot of work—and intermediaries, all taking a cut—to get money from the customer’s bank to the business’. In an age when the internet has disintermediated countless industries, you have to wonder why things are still done that way. 

Imagine you’re a retailer. Wouldn’t it be more cost-efficient for you—and more frictionless for your customer—if you could just say: "Hi, it looks like you’re buying from us again—thanks for that—why don't you just let our bank take the money from your bank”? And if convenience isn’t enough to persuade customers that’s a good idea, perhaps you might sweeten the deal by saying: "Oh, and if you do that, we will give you triple points as a thank-you”—paid for, of course, with some of that money you’re saving. 

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Soon you will be able to, thanks to “Commercial Variable Recurring Payments” or CVRPs.  

CVRPs will let merchants take payment directly from a customer’s bank account, provided that the amounts are within the limits and frequencies defined by that individual. In the case of buying goods from their favorite retailer, for instance, the retailer might be permitted to take a payment of up to $1,000 no more than four times per month. All the customer has to do is verify their identity at the point of sale using a form of strong authentication, such as a passkey, and the funds are transferred automatically. The retailer gets their money quicker, there are fewer intermediaries taking a cut and, best of all, the customer does not have to do anything to trigger the payment.

CVRPs are a major innovation to emerge from open banking, a wider movement that mandates financial institutions to open their data to third parties. We’ve seen the launch of one form of VRP already: ‘sweeping’ VRPs, which enable individuals to automate payments between their own bank accounts. CVRPs take this out into the world of commerce—effectively a real-time, customizable version of a direct debit. Because CVRPs make account-to-account (A2A) payments so much more frictionless, they are forecast to cause a surge in A2A transaction volumes.  

Businesses have good reason to get excited. Not only are CVRPs a fast and cost-efficient payment method, but they are also less likely to fail: card transactions are more susceptible to processing errors, and card details can expire.  

CVRPs can also help to obviate the security risks associated with traditional means of payment. CVRPs don’t require businesses to store card or bank account details, so if an organization suffers a data breach, there is no sensitive financial information to lose. What’s more, CVRPs must be initially set up using strong authentication, which isn’t true for direct debits or for all card transactions. At a time when fraud is a significant and growing problem for businesses, that is a boon.  

In the future, CVRPs could also reimagine B2B payments. If a supplier is regularly invoicing for providing goods or services, a CVRP could enable this payment to happen automatically. You might imagine that a whole new class of “supplier-initiated payments” could emerge, where trusted suppliers are permitted to circumvent the lengthy, error-vulnerable and admin-intensive invoice payment process by simply triggering the correct payment themselves. 

These virtues are relevant to all organizations, but CVRPs offer a specific benefit when it comes to subscription services: as consumers can audit and cancel CVRPs all in one place—their banking app—they offer an extra degree of control that may increase the number of subscriptions consumers are willing to sign up for.  The UK—with its expanding open banking ecosystem—is in the vanguard, with CVRP services on the way, and ready to be embedded into a wider range of customer journeys including utilities, subscription services, retail and financial institutions. Phase one rollout of commercial CVRPs is expected in the latter half of this year, although some commentators have suggested that this may be delayed until early 2025. UK payment providers report that they expected over half of their payment flows to convert to such open banking-based payments in the next three years.2

So, what has to happen to realize the benefits? Consumers will need to be educated to ensure they not only understand the advantages of this as-yet-unfamiliar payment method, but are also willing to trust CVRPs. Given that businesses do not get access to any sensitive data other than the name of the consumer, this should be achievable. Perhaps more complex will be incentivizing banks to invest to deliver CVRPs to their customers, and incentivizing merchants to accept CVRPs, with a commercial model that works for all parties. But when the agreements come together, the impact will be significant. In Brazil, CVRPs in the form of the upcoming “Pix Automatic” is expected to reduce companies' operating costs and collections costs by up to 50 percent, giving them more resources to invest and stimulating economic growth.3 In other words: get ready. The frictionless future of payments is about to get a little closer. 

SOURCES: AS PER WIRED, SEP 2024

IMAGE: ED TUCKWELL

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