Nancy McCaw at ORG has been thinking about whether the revised NPA scope and timeline means that Direct Debit is now doomed.
The recent Payment Systems Regulator (PSR) determination that Pay.UK must revise both the scope and timeline for the introduction of the New Payments Architecture (NPA) was no great surprise to industry observers.
Progress to date had been slow and the PSR was rightly concerned about the implementation risks. The focus has narrowed to supporting most Faster Payments transactions through real-time payments capabilities, with any other payment types coming later.
While the PSR’s prudence is welcome, navigating the future payments landscape has become more complex for payment processors and financial institutions. The Bank of England’s RTGS replacement and adoption of ISO20022 remains on track and in line with the SWIFT move to ISO20022. By 2025, international and CHAPS payments will have migrated fully to the new standards.
All of this means that financial institutions will need to have systems and payment rails which can run both ISO20022-formatted payments and current payment flows for a number of years, making system investment decisions potentially more difficult and more costly.
But, asks Nancy, what of Direct Debits?
The Direct Debit underpins most regular payments in the UK economy with around 4.5 billion payments made annually. Backed by an indemnity in case of bank error, it is safe for customers and is cheap for financial institutions and billers to run. However, as a payment product, it is almost invisible. It rarely appears in the press and has had very limited product development in recent years. Nine out of ten current account customers have at least one Direct Debit, but is the set-up process still fit for purpose in the digital age? Customers are becoming more digitally adept and savvy, and expect to be able to set up and manage financial transactions via a smart phone app.
The plethora of ways of paying being developed by fintechs is proof of this. Many of the innovative payment methods are underpinned by card payments or Faster Payments via Open Banking, but the latter have no indemnity if things go wrong. Research* by Pay.UK points to growing generational differences in attitudes to money management and payments. These attitudinal changes may lead to very different approaches to managing those regular bills that have been the driver of Direct Debit growth. Without investment to adapt to those changes, for example allowing more flexibility to direct collection from different accounts, the product may lose its appeal to those younger generations.
- Nancy McCaw: Is the Direct Debit in danger of going out of fashion due to invisibility and not keeping up with the times? If so, should anyone care?
- Phil Kenworthy POV: Five years on: The UK’s retail payment infrastructure.