Part 1: The Future of Direct Debit – it’s competitive, lower cost, frictionless and instant… and a once in a generation chance

By Ordo
This is a four part series on what’s next to come in Open Banking and currently being much talked about: Variable Recurring Payments. It’s the UK’s chance to not only overhaul the decades old direct debit system and make it fit for how society works today, but also, has never been more needed as consumers and businesses grapple with high inflation exasperating a cost of living crisis, meaning juggling finances and real time payment receipt is now an impertive.
Table of Contents

The UK has a once in a generation, low cost, low risk opportunity to bring further competition and innovation into banking and payments for service users that could deliver much needed reform to the Direct Debit market this year. This is set to transform the financial lives of many, from the automating of the management of savings and investments this year, to dynamic maintenance of subscriptions and making utility payments lower cost and more efficient, especially for those who can least afford premium prices, next year. We at Ordo are at the forefront of ensuring repeated payments, a end to end fully hosted white labelled service that businesses can get up and running with, straight out of the box, from day one, are fit for 2022 and beyond.

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Overview

Businesses and their end customers are asking for new types of bank payments that can move funds in real time, keep end-customers fully in control of their finances, and yet allow business transactions (including the underlying payment) to happen safely and securely, with the minimum of friction. Whether as a replacement for the ageing and inflexible centralised Direct Debit service, or as a gateway for true interbank systems competition for cards at Point of Sale, the opportunities and customer demand are clear and immediate.

Already, TPPs like Ordo and others are live with Open Banking powered single immediate payment solutions, from request for payment billing and invoicing solutions and fully hosted and white labelled Request to Pay services, to “Pay Now” button eCommerce and QR Code Point of Sale solutions. All delivering: lower cost payment collections – around 80% less compared to cards, cash flow boosts with real time transfer meaning liquidity is optimised, indirect cost and time savings through the automatic reconciliation that comes with Open Banking, increased security, and intuitive customer UX.

But there’s a gap in the current Open Banking capability, without the filling of which, Open Banking will be unlikely to become the go-to lower cost, competitive choice for businesses, and in turn fail to deliver the significant cost savings for UK plc that are possible, not be the compeition desired for the dominant card schemes, and risk the UK’s forefront FinTech position.

With the cost of living crisis following a Pandemic and the war in Ukraine, with most services becoming on-demand and controllable at the click of a button, the time is now right to change how these payments are collected because:

  • consumers’ need for control and flexibility is no longer fully met by the existing Direct Debit functionality and service,
  • businesses increasingly want to be able to collect funds in real time from their customers using pre-agreed mandates; Direct Debit operates on a multi-working day only cycle, and takes weeks to set up,
  • wherever possible the industry, and particularly its regulators, now wish to see payments services delivered competitively, rather than defaulting to central infrastructures, to minimise any unnecessarily monopolistic arrangements,
  • new technology in the form of Open Banking Variable Recurring Payments (which we discuss below) coupled with the real-time low-cost Faster Payments Service and its New Payments Architecture successor offers a platform to deliver competitive recurring payment delivery services, and
  • the Payments Systems Regulator (the PSR) sees that Direct Debits may be better delivered as competitive overlay services, and has taken action with regard to the current updating of the Faster Payments rails to allow FCA regulated FinTechs, like Ordo, to be able to overlay Faster Payments (and its successor) and provide DD competitively, rather than multi-day working Bacs; the PSR has carved Bacs put from the elements of the NPA being currently procured.
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The new technologically enhanced payment mechanism that will fill this gap beginning in 2022 is called Variable Recurring Payments, or VRP, as the industry likes to acronymise.

Many, like Ordo, have built the enhancements necessary to deliver the new services needed that will plug the current Open Banking payments landscape gap: VRP (Variable Recurring Payments) is a simple, swift and secure Open Banking real time payment method that deals with repeated payments, both regular and irregular, for the same or varying amounts. These builds are well under way and going live at the end of 2022, first for the sweeping use case, and are in hot client demand. 

The UK’s centralised interbank Direct Debit service has served business’ needs for collection of regular customer payments for over 50 years. Open Banking Variable Recurring Payments could enable a new competitively provided set of real time debit services to succeed the centralised interbank Direct Debit service (as well as enabling new competition to cards at Point of Sale) such that is fit for 2022 rather than the 1960s.

Detailed Context and Challenges

UK businesses have been able to collect automated regular payments from their customer’s bank accounts for more than half a century with the centralised interbank Direct Debit service.  While the delivery of the service has evolved over this long life, moving from paper instructions to magnetic tape to the internet, and the underlying processing technology has been refreshed, most recently fifteen years ago, the capabilities of the service have remained largely unchanged. 

So for the last 50 years, Direct Debit has served UK businesses and their customers well, but now a number of factors are coming together that mean it is time to rethink our approach to collecting these regular payments.

  • Consumers’ expectations of how they manage their money, and the degree of day to day control they want over their bank accounts, are changing. With instant access to their bank accounts via mobile apps, and a growing proportion of the adult population moving from receiving a regular, fixed monthly salary, to zero-hours contracts, the uncertain income of self-employment and the current sky rocketing of the cost of living and inflation, consumers want (and need) to be in control of all their payments and cannot see why they can’t be.

The current direct debit service no longer fully meets the needs of consumers.

  • Meanwhile, with growing adoption of e-commerce and enhancements to other parts of the UK banking system (Faster Payments real time 24 x 7 payments from 2008), businesses are getting used to a much more dynamic flow of funds into and out of their companies. Delivery of services (both digital and physical) in near real time, increasingly as a result of direct interactions with their customers via the internet is making Direct Debit, with its multi-day process of requesting and delivering funds and multi-week set up time an ineffective payment solution and is forcing businesses away from these direct bank payments to quasi-real time, but much more expensive card payments.  

UK businesses want to be able to collect regular payments from their customers, at low cost, and in real time, without customers having to repeatedly reapprove every payment they make to their supplier

Just look at the success and adoption of Amazon One-click

  • The long-term default model of single centralised payments systems infrastructure provision is changing. The UK industry-wide Payments Strategy Forum (PSF) proposed a New Payments Architecture (NPA) for the UK that seeks to minimise centrally provided services where competition for service provision is constrained to competition for the market in the form of 10 yearly central infrastructure retendering processes to the absolute minimum. Wherever possible the NPA seeks to maximise the opportunity for ongoing competition in the market where customers can choose services from amongst multiple overlay service providers. 

If payments services, like Direct Debits, can now be provided end to end competitively by multiple suppliers as overlay services, then they should be competitively provided, allowing the market (businesses and consumers) to choose which services serve their needs and which don’t make the cut.

New, competitive ways of delivering payments services, enabled by the 2nd Payment Services Directive (PSD2), Open Banking and the CMA Order are allowing FCA authorised Third Party Providers (TPPs) to drive competition and innovation. To start with, this will be seen as a result of the CMA mandated account sweeping services using Open Banking, and will be used for those ‘me-to-me’ payments – from an account in the same name as the account receiving the money – helping with paying off credit cards, loans, and making savings and investments.

Variable Recurring Payments (VRP) has created a common capability amongst at least the CMA9 that is perfectly designed to enable a completely new way of delivering recurring payments to businesses and their end-customers.

The so-called CMA9 banks are the 9 largest banks in the UK and Northern Ireland that were mandated by the CMA, as a competition remedy, to build Open Banking access into their systems. These 9 banks are: AIB Group (UK) plc (trading as First Trust Bank in Northern Ireland), Bank of Ireland (UK) plc, Barclays Bank plc, HSBC Group, Lloyds Banking Group plc (including Halifax and the Bank of Scotland), Nationwide Building Society, Northern Bank Limited, trading as Danske Bank, The Royal Bank of Scotland Group plc (including NatWest), and Santander

Jargon buster:

- PSD2 is the 2nd Payment Services Directive which mandates innovation in payments to provide better services for end users. It’s intention is to ensure competition in payments, enabling FCA regulated companies like Ordo (a TPP….see next jargon bust), to provide services that lower costs and mean people can be in control of their finances.

-TPPs or Third Party Providers, were created under legislation, the 2nd Payment Services Directive (PSD2). TPPs are authorised and regulated by the FCA with assessed and approved business and security models, and people, so you can be sure they’re fit and proper and have secure systems and processes. Only TPPs regulated by the FCA can provide Open Banking payment services, so you know they’ll be as safe as bank systems.

  • And finally, Pay.UK (The UK’s central interbank payments system operator) are required by the Payment Systems Regulator to concentrate their procurement of the NPA’s clearing and settlement service on a slimmer and simpler initial infrastructure retendering for an ISO 20022 successor to the Faster Payments push payment service alone, rather than re-tendering for a Bacs batch multi-day replacement payment system at the same time. The removal of Direct Debits from this initial scope de-risks progress towards NPA delivery of a new clearing and settlement service, and it is also regulatory recognition that Direct Debit functionality should now be provided competitively

The future of recurring payments (Direct Debits) sits in competitive overlays rather than core central clearing and settlement services.

So what does this mean for UK businesses and their FinTech partners?

With the drivers for change laid out as to how Open Banking VRP can be deployed to provide the UK with new, competitively provided services that can better meet the needs of businesses and their customers, in due course, this will also allow the retirement of the existing central Direct Debit service, removing the need for a costly and high-risk retendering exercise for a single, less competitively dynamic solution.

And, in the first instance, for the remainder of this year, if your business involves people transferring money between their own accounts, be it from their current account to their savings account with you, repaying loans or topping up pre-pay cards, you can take advantage of the first VRP use case to come to market: sweeping. Get your customers transferring their funds in real-time in no time, with a one-time mandate set up in minutes, and endless friction free secure repeated payments.

In the following episodes, we’ll consider:

  • Part II – The future – the new kid on the payments block, ‘Variable Recurring Payments’ (VRP), and how VRP can deliver enhanced services over and above the limitations of using Direct Debit, reaping benefits for businesses and their customers
  • Part III – WIIFM? What’s in it for me, and why business need to keep ahead of the competition and adopt now to retain their customers and deliver growth
  • Part IV – the Regulatory drivers – how are we going to get to the future?

 

Open Banking and VRP is the solution that will deliver convenience without compromising control. Get in touch today for how we can help you.

To find out how Ordo can help your business:

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