Winter is coming, and as the cost of living continues to rise across Europe, more households are looking for ways to reduce their spending.
For many people, subscriptions are one of the first cuts to be made — not so much because people don’t find subscription services valuable, but that managing payments often comes with friction and a few surprises.
In fact, a recent study from YouGov and open banking platform TrueLayer, found that three-quarters of participants are spending money on subscriptions that they don’t use. Additionally, one quarter of people said they don’t know how much they’re spending on subscriptions at all.
So, now is a prime moment to review the way we pay for subscriptions and a new type of open banking technology — being pioneered by fintechs like TrueLayer and UK banks like NatWest — might be a solution.
Opening banking, a new era for subscriptions
Open banking is when regulated third parties are able to access people’s financial data using open APIs or take a payment on their behalf — without using a card. It essentially connects people’s bank accounts to digital services and products with greater ease, and has been steadily growing across Europe.
People in the UK and other countries are gaining muscle memory around open banking
“People in the UK and other countries are gaining muscle memory around open banking,” Jana Reid, head of commercial bank partnerships at TrueLayer, tells Sifted. “Many people started using online or mobile banking during the pandemic, and people are also more used to authenticating transactions with their face ID or fingerprint — both of which are involved when you pay by open banking.”
In the subscription world, open banking makes sense because of the visibility and security it brings to users, and there are a number of benefits for businesses too.
A long term subscription solution
But first, what’s wrong with subscriptions? Well, the majority of subscription payments are made using card-on-file payments — where people share sensitive card information with merchants who collect the payment as required. This process is vulnerable to fraud, expensive for businesses and the payment is more likely to bounce, as cards can expire or get lost or stolen.
Paying subscriptions this way also makes it harder for consumers to keep track of their payments since card-on-file payments don’t show up in banking apps.
VRPs or Variable Recurring Payments — the newest feature of open banking in the UK— may have the answer. Essentially, they allow customers to keep their bank account "on file" instead of a card, to pay for recurring services or products. Customers set the initial parameters of the VRP — such as the maximum amount and frequency — and then regulated parties manage it in the background.
VRPs began as a way to help people in the UK put money into their savings regularly. Under the current mandate from the Competition and Markets Authority (CMA), the UK’s nine biggest banks must offer VRPs as a way for customers to transfer money regularly between their own accounts — a process called sweeping.
Every mandate is done with strong customer authentication, no sensitive details are shared, which takes away risk of error
But through partnerships like NatWest’s collaboration with TrueLayer, some banks are voluntarily extending the scope of VRP beyond sweeping to include payments to businesses.
These types of payments differ from Single Immediate Payments (SIPs) — the current most popular form of open banking payments — which are one-off payments that occur immediately.
VRPs lend themselves particularly well to subscriptions because they don’t require customers to manually enter card details, so there’s less room for error or fraud, and payments won’t bounce if a card has expired. Businesses also don’t have to cover the high card transaction fees that come with card-on-file payments, nor wait days for a direct debit to be received.
“Every mandate is done with strong customer authentication, no sensitive details are shared, which takes away risk of error,” adds Reid.
More control over subscription payments
Because people trust their bank(s) and are familiar with how their bank displays digital payments, merging subscription payments directly into online banking also brings more confidence around repeat expenses, and allows users to streamline how they view and organise them.
Subscription payments should be easier to keep track of, particularly as the cost of living crisis intensifies. VRPs could play a role in making that happen
“It’s still early days for VRPs but we envisage that subscribers will be able to see all their subscription mandates in their bank account and have the power to change them instantly,” says Jana Reid, “giving them more control of their outgoings.”
There’s also the customisable component that open banking brings to subscribers and businesses. In the future, subscription companies could design payment flows that most closely match their audiences’ financial preferences by using open banking data to understand their customers’ finances. For example, they could offer more flexible subscription timeframes or the ability to pause memberships — and in turn, significantly boost subscriber retention.
Giving subscribers more control and transparency could help businesses grow too: people are more likely to subscribe to a service if it’s easier to manage and cancel, according to the YouGov and TrueLayer study. The European subscription market is worth an impressive $18.8bn.
"When subscriptions are difficult to manage, it’s not just painful for customers, but it can cost merchants future business,” says Reid. “Subscription payments should be easier to keep track of, particularly as the cost of living crisis intensifies. VRPs could play a role in making that happen.”