What does Open Banking mean for direct debit
I went to see the new Star Wars movie recently. At the time, I had Open Banking in mind. I was thinking about its effects on direct debit, as the two could easily seem to clash in a galactic fight, well UK-wide. It made me think back to the original movies and ask myself: is Open Banking Vader Obi Wan Kenobi from Direct Debit? And, will direct debit also increase after being removed to become more powerful than we can imagine? I timidly thought it might well.
It may sound melodramatic, but many are concerned that the direct debit will be canceled by the Open Banking Initiative. The UK payments world is going through seismic changes. With the PSD2 (European Payment Services Directive) and the Open Banking Initiative (UK Competition and Markets Authority Remedies), the democratization of payment services is imminent and many small organizations will be able to set up account-to-account payment systems. At first glance, direct debit seems to risk significant threats from Open Banking. The new payment architecture designed to support these changes reverses the payment authorization model used by direct debit, transforming authorization from “pull” to “push” by consumers. It could be a problem.
In the new “push” world, when a business creates a payment, it becomes a request that the consumer must authorize every time – payments are therefore driven by the payers, not the collection organization. The ultimate goal is to give consumers the power not only to authorize payments, but also to decide when and how much is paid in a transaction. Putting the many operational implications of this aside for a moment, the first problem with direct debit is that it is completely the opposite of how direct debit works today. Direct debits are initially authorized for a series of payments, with the amounts and frequency finally being checked by the direct debit collector. This is essentially a “pull” model, and due to the potential danger to payers from unscrupulous organizations, the direct debit system has a unique set of safeguards and controls. This puts the right of recourse firmly in the hands of customers. With the new push model, there does not appear to be any pre-defined plan rights for consumers; they just have to rely on the banks’ normal complaint processes. This is why the direct debit system has been working so successfully for many years and is why it is extremely convenient and protected for both consumers and collection organizations.
How then does this “pull” model of direct debit fit into a “push-only” payment architecture? Well the simple answer is no. At first glance, the new payment architecture (NPA) will simply rule out direct debit and make way for purely “push” payment schemes. So, will the direct debit quietly die after being invalidated? Of course not. There are several reasons for this to continue: it is far too successful; it processes huge amounts of payments; it’s incredibly convenient and cheaper to administer than push payments; it offers extraordinary protection to payers. The pros and cons of the push vs pull model can be debated at length, but the architects of the NPA are already exploring how direct debit can fit, or even be improved, into the architecture they are building.
Okay, so in the stretched analogy I made, what will make direct debit something bigger than it has ever been before? Well, there’s a strong argument that the changes to Open Banking could make direct debit stronger for organizations that use it, beyond what it can do on its own. The reason to believe this comes from the fundamental way push payments and new regulations work together. All transactions in the New World are done from bank account to bank account. This means that credit card processors don’t take a look at it; it is the account details that form the basis of the transaction model. And what is already using bank details for all of its basic processing? What is automatic debit.
Direct debit organizations are ideally placed to integrate new push payment mechanisms into their existing workflows. They already have the data and data protection mechanisms to store bank details; they just need new processes and the appropriate payor permissions to use them for push payments. It’s not hard to imagine a scenario where the combination of direct debit and push payments together will become a more strategic and much simpler payment coupling than push payments and credit cards. This presents direct debit and the organizations using it with huge opportunities over the next few years. Even for one-off payments, expensive card payments will only be relegated to situations where consumers need to be physically present.
This means that organizations using direct debit could significantly reduce their payment costs with Open Banking systems and direct debit, while retaining all the advantages and simplifications over a pure push model that direct debit already offers. While the original Star Wars forever changed sci-fi cinema, Open Banking will undoubtedly do the same for payments in the UK, but I hope there is still a place for one. brave band of pull payment systems exists and thrives with diversity in this new universe.