Much has been made about investment and recurring payments this year, the importance of recurring revenue and these sorts of payment methods being a marker for how stable and assured your business is.
If that’s the case, how stable and assured is your business or, to put it in an easier way to answer:
- what per centage of your income is recurring revenue made from recurring payments?
- to what extent does your business rely on Direct Debit?
- are those Direct Debits being cancelled?
- is any Direct Debit cancellation going to hit your recurring revenue significantly?
- do you have an alternative plan to recover those lost recurring payments?
- are you sure you’re up to date on the latest available variable recurring payments (VRP) capability?
- could your business take advantage of the variable recurring payments (VRP) use case already live, called Sweeping?
Answer these questions to establish how steadfast your business is, and read on to find out about variable recurring payments (VRP) and Sweeping to ensure you keep ahead of the competition.
In this blog we’ll cover:
- What’s the big deal about recurring payments and recurring revenue?
- What is the problem with Direct Debit?
- What is Open Banking?
- What are Variable Recurring Payments (VRP)?
- What is Sweeping?
What’s the big deal about recurring payments and recurring revenue?
When times get tough, the tough get going and start keeping a closer eye on financials, and the same goes for whether you’re a consumer, SME, public organisation or established corporate. Cash is king, as they say, and it’s important to know where you are with your finances.
One of the aspects of business planning that comes to the fore, especially when the economy is battling with a slowdown, is a business’s capacity to generate, or adopt a business model that accommodates, recurring payments being received, that is to say, recurring revenues, usually paid via online payment methods.
The reason recurring payments from recurring revenues is important is because recurring payments smooth revenue, which enables a business to predict what income it can expect to receive, it aids cash flow and liquidity, and enables the business to plan accordingly. All of this makes a business more stable, and allows it to plot a route to, or to continue to, profit and growth; and equally, if profit and growth are too far-fetched at a time when consumers are tightening their belts, then plan and manage the downturn till times allow for a more fruitful market.
What is the problem with Direct Debit?
You may be thinking that your business is covered because its business model, or at least a portion of it, is to have customers pay by Direct Debit. Direct Debit is certainly a payment method facilitating recurring payments and, whilst not exactly one of the online payment methods, it’s quite low maintenance once set up, so what’s the problem?
The problem with Direct Debit is:
- people can, and have been, cancelling them! In an Ordo survey, we learned that 80% of people were worried about money meaning they gave themselves a ‘Financial MOT’ to sort out their finances,
- 40% of people had already, or were about to, cancel at least one Direct Debit, and
- 50% of people cancelling Direct Debits were not going to put them back again.
Where are all those lost simple to collect, track and reconcile recurring payments going….?
- 40% of those once easy recurring payments are now on expensive and slow to pay cards, and
- 30% of those cancelled Direct Debits are now on hard, costly, mistake and fraud prone, and time consuming to reconcile ad hoc bank transfers.
And that’s not all that’s wrong with the multiple decades old Direct Debit! Direct Debit agreements take weeks to set up, meaning a business has to either take the customer on risk and hope their Direct Debit doesn’t bounce upon first payment weeks later, or convince the customer to make an expensive card payment as well as setting up the Direct Debit, which at best is confusing and dissatisfying, and at worst, can cause the customer to abandon the Direct Debit set up due to mistrust and misunderstanding.
So the once relied upon staple for collecting recurring payments being the Direct Debit, the darling for recurring revenue, turns out to be not that attractive after all and, upon closer inspection, appears to have covered over some flaws.
What is Open Banking?
Open Banking is technology backed and encouraged by government eg HMRC are using it to collect taxes, and implemented in the UK by the competition regulator, the Competition and Markets Authority.
It enables companies that are regulated by the Financial Conduct Authority (the FCA) to connect to bank systems via API, so that those FCA regulated FinTechs, like Ordo, can provide innovative and competitive payment methods to businesses and organisations. The Open Banking online payment methods include direct and instant, low cost, account to account payments for single payments, and now, Variable Recurring payments (VRP) and Sweeping too.
Open Banking powered single payments enable businesses and organisations to send secure messages containing a tokenised link to request a payment. Within a few taps from the tokenised link, the payer can have sent immediate payment to the business without having to type in account or card numbers. Using these Open Banking online payment methods, payments land in the businesses account in real time, automatically correctly referenced and reconciled.
What are Variable Recurring Payments (VRP)?
Where Open Banking meets that oh so important metric and business fundamental of recurring payments is Variable Recurring Payments (VRP).
Variable Recurring Payments (VRP) allow businesses to collect repeated payments where the customer is happy to not have to authorise every payment every time. Typically, a customer may have set up a Direct Debit for this functionality in the past, but Variable Recurring Payments (VRP) powered by Open Banking are much more convenient, secure and attractive than Direct Debit.
Given the stats quoted above regarding customers cancelling Direct Debits, businesses need to find alternative convenient online payment methods that still give them their recurring revenue but which customers are content to sign up to, and these will be payment methods where the customer feels they retain control.
And Variable Recurring Payments (VRP) are good for businesses as well as customers: Variable Recurring Payments (VRP) set up is in minutes rather than multiple weeks for Direct Debit, and every Open Banking payment instalment thereafter is instant transfer, not the three day cycle of Direct Debit. Variable Recurring Payments (VRP) can also be flexible, taking different amounts providing amounts and frequency are within business and customer parameters; in short, Variable Recurring Payments (VRP) mean convenience and control.
What is Sweeping?
Sweeping is a type of Variable Recurring Payments (VRP), a particular Open Banking use case of Variable Recurring Payments (VRP).
The feature of the particular Variable Recurring Payments (VRP) Sweeping use case is that both sender and receiver accounts must be in the same name. This gives a sweet spot for Sweeping in credit and lending, credit cards, pre-payment and pre-pay cards, that sort of thing. It’s where a customer would set up a mandate that, for example, on the day before pay day, if there’s money left in a person’s current account, they agree for an Open Banking Sweeping mandate to sweep money from their current account onto their pre-payment card, or into their loan repayment account, or their credit card or savings account.
Variable Recurring Payments (VRP) and Sweeping are going to turn recurring revenue collected via recurring payments into easy mainstream throughout 2023. If you want to ensure your online payment methods are Direct Debit cancel proof and your payment methods survive a tough 2023, talk to Ordo today.