The Direct Debit was invented back in the early 1960s. Since then, over the decades, the Direct Debit has become the go-to payment method for convenience and low friction, for those that can afford it and want little oversight of their subscription payments and bills, and for businesses who are afforded Direct Debit collection functionality from their bank.
However, that was all in recent history known as ‘before COVID’. Since UK’s first lockdown, people’s finances, the way businesses collect money and conduct business, online payment solutions, the Direct Debit and its soon to follow this year upgrade, VRP (or Variable Recurring Payments) for those repeated bills and subscription payments, have changed radically.
In this blog, we’ll go through:
- The Direct Debit in context
- How the Direct Debit came about
- How the Direct Debit works
- What effect the Pandemic had on the Direct Debit and subscription payments
- What is VRP – Variable Recurring Payments
The Direct Debit in context
Let me put the Direct Debit into context: invented 60 years ago, when the UK was venturing out of post World War II struggle and into a freedom loving world of hope and promise and when:
- US President JF Kennedy was shot;
- Martin Luther King was shot;
- The Vietnam war was a constant; and
- The Cuban missile crisis was playing out.
Despite this, there was some promise and hope, such as;
- The first man landing on the moon;
- Fred, Wilma and Barney making their Flintstones UK TV debut;
- Coronation Street, first airing; and of course,
- England men winning the World Cup.
How did the Direct Debit come about?
The Direct Debit came about in the early 1960s, and it was dreamed up by Alastair Hanton who needed to collect variable recurring payments for ice cream!
Alastair Hanton worked for Unilever. Unsurprisingly, given British weather, sales of ice cream were volatile, and there was a need for a more efficient and seamless way to collect these variable recurring payments to cover different amounts of ice cream bought and sold.
Whilst men may have been walking on the moon and gaining football victory, businesses could accept cash or cheque for goods and services, standing orders were to become a type of online payments solution but they cannot be varied in amount. No help to Unilever’s Alastair.
How does the Direct Debit of the 1960s work?
When it first came into being, even bankers were reticent, and so it came with an elongated 3 day clearing cycle. The 3 days is meant to allow businesses and banks to check for any anomalies in the Direct Debit run. In practice, very little checking is done and whilst other aspects of our lives is dynamically changeable up to the last minute via our smartphone, this old style Direct Debit is now feeling a bit like the Flintstones’ Flintmobile as a way to make variable recurring payments and an online payments solution.
Direct Debit is complex too. Many businesses aren’t afforded this electronic convenient for some but slow, largely managed online, payment solution. With banks only allowing only the most established and biggest and corporates the ability to collect payments via Direct Debit, most other businesses are excluded and forced to turn to much more expensive payment facilitators like PayPal, Stripe etc.
What effect did the Pandemic have on the Direct Debit and subscription payments?
Ordo carried out some research during the Pandemic. We discovered that:
- 80% of people gave themselves a ‘Financial MOT’
- 40% of those who had a Direct Debit were going to cancel at least one Direct Debit
- 40% of those cancelling a Direct Debit would move to expensive card payments
- 30% of those cancelling a Direct Debit would move to costly and time consuming to reconcile bank transfers and cheques
- More than 50% of people who cancelled a Direct Debit will not put them back now the Pandemic is manageable, threatening subscription payments.
Not only the Pandemic, we’re now in a recession and a Cost of Living crisis putting pressure on consumer and business pockets too. Businesses and consumers are looking at their repeated variable recurring payments, subscription payments, Direct Debits and, for businesses, their online payment solutions, and wondering which ones they could live without and what online payment solutions meet their needs, if any.
What is VRP – Variable Recurring Payments?
Variable Recurring Payments, or VRP, is an instant and low cost mobile and online payment solution. It transfers money to the collecting business in real time, is up to 80% cheaper than taking a card payment, lands automatically correctly reconciled in your account and is easy, flexible and convenient for your customer to use.
VRP will be available to all businesses, through an Open Banking provider like Ordo, later this year.
It works by a business setting up a maybe variable, recurring payment agreement, just like a subscription payments agreement or Direct Debit bill payment arrangement, with their customer.
The difference between VRP and Direct Debit is that set up is in minutes rather than weeks. The business will have the first instalment of money in its account instantly and can therefore provide goods or services immediately.
Customer repayments can be adjusted to meet customer needs, in agreement with the business. For example, more can be repaid on a loan or extra invested if additional funds become available. The VRP for that instalment can be adjusted up to the moment it’s collected from the customer’s bank account – because payments are instant, there’s no 3 day clearing cycle to wait for as with Direct Debit.
Similarly, if a customer is short of funds, with agreement with the business, a lesser amount can be taken under the VRP agreement, on the basis that a utility company, for example, is happier to receive some money rather than no money in payment for an energy bill. This VRP feature is an improvement to the blunt bilateral options available with Direct Debit which are pay or cancel.
If consumers have control over their payments, they’re more likely to keep those subscription payments rather than cancel – every business needs every subscription payment agreement it can get to survive the economic downturn.
What’s available now?
VRP will be available later this year for all subscription payments and variable recurring payments.
Get the benefits of Open Banking and your customers accustomed to Open Banking now by using the single immediate online payment solutions that are available today: billing and invoicing, contact centre payments, eCommerce, ‘Pay now’ buttons, Request to Pay and in-person QR codes that are all powered by Open Banking delivering lower cost payment collection and instant payment.
If you want to talk to Ordo about your payment collections today, and VRP and subscription payments for the near future, get in touch now…don’t wait for the next 60 year innovation!