Introduction

Cashflow remains the lifeblood of any business organisation and getting the monies in on time and with minimum fuss and effort can be critical to viability and profitability.

Whilst the payment method, or perhaps more appropriately payment methods, have to work for the recipient organisation (the payee), they have to be effective and appealing to the payer.

Today, it is unlikely that an organisation can rely on a single payment method to obtain funds, and understanding which payment method works for which group of payers can minimise non-payment, late payments, and/or payment failure.

Let’s consider some of the payment types and where they may work best.

This is a guest blog by Don Hollingum from Direct Debit 101. For more information visit: www.directdebit101.co.uk

Payment types and their usage

Payments broadly fall into two categories; payer initiated (‘push’ payments) or payee initiated  (‘pull’ payments).

Lets start with the former:

The cheque – has been a core payment mechanism for very many years and whilst there have been a number of significant changes relating to cheque processing over recent years, including the cycle and the ways in payees can submit cheques to their payment services provider (PSP), volumes have fallen. 

The cheque remains however a very important vehicle for some sectors, typically for single or one-off payments. Payers who may not be “tech savvy” may continue to rely on this payment mechanism. It is not unknown for single payments to charities to be made using a cheque. Some clubs and societies remain reliant on cheques for annual subscriptions.

This said, some organisations (payees) have announced that they will no longer accept cheques as a payment method.

Whilst cheques work for some they do not represent ‘instantly cleared’ monies, the payee has no assurance when and if they will be issued and they can still get mis-addressed or ‘lot in the post’.

Standing orders – whilst being less commonly used than in the past, are still effective where a series of payments are required to be made and the amount doesn’t or is unlikely to change.

Standing orders leave the payer in control, i.e., payers instruct their PSP to initiate the series of payments that are required and can set the date on which the payments are initiated, which may not aline with the payees view of the due date.

Debit cards – are typically used in shops and other outlets. In many cases therefore the cardholder (payer) is in the presence of the payee when the transaction is undertaken. Events of recent months have seen an increased use of cards through contactless payments as payees have been less willing to accept cash payments.

Debit cards can of course be used remotely, e.g., for telephone or internet based purchases but tend to be of a one-off nature. This said recurring Debit card payments can and do occur. Here the difference between ‘push’ and ‘pull’ becomes blurred as with recurring transactions the payee makes the call for payments using the payers card details. Recurring Debit card transactions are not however the same as Direct Debits, which we will touch on later, with a number of the consumer protections being different.

With very few exceptions the payer is assured that if the transaction is completed they have received instantly available monies, i.e., there is no risk of payment failure/reversals.

Credit cards – much of what has been said above about Debit cards applies to Credit cards. A key difference of course is that the payer does not need to have the funds available in their account at the time the purchase is completed, albeit the amount must fall within their Credit card limit.

Whilst it is not the purpose of this article to reflect on the cost of different payment mechanisms, it could be that paying by Credit card may attract, for payees, a higher cost for processing than Debit cards.

Paypal – is an example of a payment mechanism that can be used as an alternative payment mechanism to Debit or Credit cards It offers additional layers of security to the payer in that the payee does not have access to the payers card or bank account details.

Request to pay – is the ‘new kid on the block’ in terms of payment mechanisms. It is designed to put the payer in control and may work particularly well for some groups of payers.

[A useful overview of Request to Pay can be found in Payments, Payments, Payments newsletter No 32]

Put simply the payee generates a message to the payer seeking payment on/by a due date. The payer can elect to pay all, some or not pay the amount in question. Described in this simplistic way the payer can decide when (and if) the payment is made. The ability to decide when to pay and indeed if or how much to pay may be particularly useful for those on an irregular income, by which we are referring to the income date rather that the income amount although both could apply. Needless to say a decision not to pay or part pay may have negative implications for both the payee and payer.

Request to Pay can work for both single or multiple payments although at the time of writing this article it is understood that multiple payments would require multiple payment requests from the payee, (similar to advance notice for Direct Debits).

Customer initiated on-line – in many, but not all cases, this payment mechanism will involve the payer effecting a payment on-line from their PSPs offering, either to self created payees or from a library of pre-authorised payees.

For the purposes of this article payments made by the likes of mobile phones and watches are included in this category.

Other entities, e.g., Payment Initiation Service Provider (PISP)s are now operating in this space, with payments being made once authorised by the payer.

Person-2-person instant payments, e.g., when settling a restaurant bill is an example of use of this Customer initiated payments.

Faster Payments – has been listed after the above deliberately. Whilst it can be described as a payment method, it is often a vehicle used by other payment methods to generate instant available payments. 

Cash – also falls within the push payment category because it requires the payer to hand the money to the payee. The volume of cash transactions continues to fall and it is perhaps likely that the increased use of instant electronic payments will continue to erode its use.

Generally, and ignoring potentially dubious transactions, cash will tend to be used for small value transactions.

Bacs Direct Credit – is the final push payment mechanism referenced in this article but is not being referenced in detail as it tends to cater for B2B and B2C rather than C2B payments.

Direct Debit– is, recurring debit card transactions aside, the only pull payment mechanism referenced in this article. 

Direct Debit works well for those organisations collecting one or a series of payments from payers on a number of levels; it works equally well for busy payers and those payers not wanting to involve themselves in having to initiate regular individual payments, because monies will be collected on the due date without the payers involvement. Payees are assured monies will arrive, subject to collection failures, and as they include the payment reference they will be able to reconcile the monies to the payers account. There are also a well publicised number of safeguards available for the payer such as the need for advance notice and of course the Guarantee.

The benefits and challenges

There are a range of aspects that may be important to both payees and payers.

For payees:

  • Will the payment(s) arrive – on the right dates(s) and are the amounts correct? – use of Direct Debit should help to address this. Similarly card payments at time of purchase provide this assurance as does receipt of cash
  • Can the payer be recognised – e.g., is a valid payer reference included? – use of either Direct Debit or Request to Pay should address this
  • Will the correct amount be received should the payment amount change? – use of Direct Debit should address this
  • Payment reconciliation – this will ideally be undertaken across all payment mechanisms rather than each mechanism individually and the payment reference(s) will be a key component
  • Establishing an escalation process for both non and failed payments – use of card payments and customer initiated on-line/faster payments should address the failed payments aspect
  • Any cost associated with supporting use of multiple payment mechanisms.

For payers:

  • Do they trust the available payment mechanism(s)? – can the protections available and the associated security measures fully be more clearly explained by payers and/or the payment industry such that they are fully understood by payers?
  • Do they want/need more control? – this may be influenced by the level of trust in the payee and/or the payment mechanism in use. Equally it may depend on the payers given circumstances
  • Do they want to be involved in generating multiple (regular) payments? – invariably simplicity, speed, security and trust will impact the payers thinking
  • Is there a cost to using a given payment mechanism? – cost could be financial but cost could be calculated in other ways.

In conclusion

Over the next decade further market developments, such as those brought about through Open Banking, the advent of PSD2, Strong Customer Authentication and the anticipated New Payments Architecture for the UK, may bring changes to the UK’s payments landscape.

This said, all of the payment mechanisms referenced in this article and perhaps some that have not been specifically called out provide effective ways for monies to move from the payer to the payee and each has its advantages and disadvantages.

There has over time been speculation about the demise of cheques, standing orders and/or cash and we do not seek to enter into this debate here, safe to say that each payment method currently has its place in today’s society. Time will tell as to which survive and which don’t. Indeed the emergence of further payment mechanisms may help to determine the mechanisms of choice for payees and payers in the future.

Payees will doubtless know from their own records which methods work best for their organisations. This doesn’t mean to say other offerings should not be made available. Payers may be cajoled into migrating from one payment mechanism to another which may suit the payee but there may well be impacts of limiting payer choice. Payees understanding of their customers/clients and donors remains the key message, payees invariably have a choice over who to do business with!

We would welcome the opportunity to engage with you directly on any aspects within this article, please email us   at DirectDebit101@northeypoint.co.uk or visit us at www.directdebit101.co.uk

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Comments in this article are support by statements in UK Finance’s published summary of the report, that can be found at: UK Finance Payment Market Report 2020.

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