The increased popularity of Open Banking is making waves in the banking sector and changing the way we make payments. So, is it the end of Direct Debits?
The New Payments Architecture
The new payments architecture (NPA) is also known as interbank payments and is the new program used between banks in the UK. The main principle of NPA is to help streamline interbank payments into a single settlement system, rather than numerous systems that were in place before. The NPA is to serve the variety of payments needed for both companies and customers including paying staff salaries, buying goods, and transferring money to friends. This new streamlined payment system will be the biggest change in payments in decades.
The current systems in place include BACS and cheques. Whilst these help facilitate interbank payments, they all operate on different rules due to different infrastructures. The NPA is coming into play in order to create more flexibility but also to accommodate the following changes:
- New regulations
- New anti-money laundering requirements
- New technology
- A significant move to digital payments since the COVID pandemic
- The need for real-time payments
With all these factors to contend with, and the changes in the banking sector throughout the world, there has never been such a need for a new payment system that is easy for banks, businesses, and consumers to use and trust.
Push Vs Pull
Open Banking inverts the payment authorisation model used by Direct Debits from “pull” authorisation to “push” authorisation by consumers. What we mean by “push” is that when a company creates a payment, they send a request to the customer. This request will need to be authorised each time which is great for the consumer as it means payments are driven by them and not the organisation collecting payment.
This is, in essence, the complete opposite of how Direct Debits work. Currently, having a direct debit means the customer is granting the company authority to set up a series of payments which they can change the frequency of and the amount charged as they wish. This “pull” model of payments can put the payer in a potentially dangerous position as the company has the power to change the amount.
Direct Debits currently do not have much of a place in the new “push” led VPA. Direct Debits do have their merits. They have proven to be an extremely successful payment scheme and are still being used to process a huge amount of payments as they are convenient and cheap. However, direct debits will inevitably need to change significantly to fit into the new way of paying if it can find a place at all. Learn more about how TrustistTransfer’s use of Open Banking compared to standard direct debit or credit card payments here.
Variable Recurring Payments (VRPs)
Open Banking’s next big thing is the introduction of variable recurring payments (VRPs) and this can put direct debits on the back foot. VRPs are a type of Open Banking API, using Open Banking rails to connect banks with Third Party Providers (TPP) in a secure manner.
They are similar to Direct Debits in the way that they help enable recurring payments and vary the amount being collected. Perfect for collecting payments such as utility bills which often are different amounts each time.
VRPs are not currently ready for businesses to start using with consumers. VRPs are only available with some of the top banks to automatically transfer money between accounts owned by the same person. For example, a customer can give permission for excess funds to be transferred from a current account to a savings account, with the amounts varying accordingly. Whilst this has benefits for the consumer, the possibilities of VRPs expand much further than this and it is the aim to have VRPs rolled out to businesses in the near future. If and when this does happen, it could significantly change the way we make payments forever.
VRPs whilst acting similarly to Direct Debits, will provide more control to the consumer. Direct Debits currently allow consumers to make payments on the same day each month however this does not provide the customer control over how much is taken each more. VRPs will allow consumers to set caps on their monthly and total payments to the supplier.
VRPs also have great potential in businesses that work within the gig economy or with subscription-led business models that will benefit greatly from this variable payment scheme.
Direct Debits are dominant at the moment, but as we have discussed in this article, seismic changes are coming to the world of payments that will put direct debits at threat of dying out. Currently, in the UK it is not possible to set up a variable, a repeated payment that is automated, so Direct Debits still play a vital part. However, with the pioneering VRPs as a possibility through Open Banking providing a new way to pay that is secure and hassle-free, the way we pay is inevitably going to continue changing.
TrustistTransfer can help you collect bank transfer payments easier. We allow you to collect bank transfer payments from your mobile phone using a unique QR code or PayLink. There’s now no need to carry around a card machine, no expensive fees, and 0% risk of fraud or chargebacks. Learn more about what TrustistTransfer can do for your business.