When I describe direct debit to anyone outside of financial services, the simplest way to explain it is being the regular payment they set up to pay for their gym membership, utility bills, or loan repayments. Most people consider direct debit to be an ‘old’ style of payment, associated with paper forms and even fax machines (remember those?). It is hardly surprising, when many countries still have a paper-based setup and use traditional banking rails to process a payment, leading to delays and significant dishonours. Whilst it’s easy to highlight the limitations, direct debit is still a core payment management solution for most businesses across the globe, handling significant transaction volumes. The problem is, direct debit hasn’t evolved as fast as the rest of the payments ecosystem. Until now.

Direct Debit is essentially two separate things working in unison:

  • Consent Management
  • Payment Initiation

 

Tomorrow’s direct debit solution is entirely different to the traditional model – According to Split Payments, handling the consent layer in an ever-changing payments landscape is the critical piece of the payments puzzle.

 

It’s common sense really, a business shouldn’t be able to initiate a payment without the necessary consent being in place between parties. Traditionally, consent is established via paper or electronic mandate, and regular bank transfers are scheduled for payments. Simple. But there are big global shifts that have already gained significant momentum that are forcing a rethink on how to approach direct debit and, ultimately, provide a more relevant service. Here are two key driving forces:

 

1. Instant Payments as the New Norm

 

With real-time payments, the concept of ‘payment pending’ is so last year…

 

Globally, there are more than 61 real time payment schemes at different stages of development. Of those, 40 are active (in-market) real-time payments programs, with a further 21 to go live in the next 12-18 months. Below is a snapshot of those countries.

 

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In countries that were early adopters, such as the UK, the introduction of a Faster Payments Service (FPS) resulted in an unfortunate reality – faster fraud. So as the global financial services community embrace and innovate with real-time payments, there also has to be innovation in regulatory technologies such as consent management.

 

2. Open Banking

 

Open Banking APIs will open the flood gates for innovation and collaboration between Financial Institutions and FinTechs.

 

Put simply, Open Banking is about Financial Institutions making data more readily available to a consumer. In so doing, they can make their own choices about who they share this transactional data with in order to obtain better financial outcomes. Below is a summary of countries who are leading the way with Open Banking availability.

 

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Whilst regulatory change will be the ultimate driver for Open Banking adoption in specific countries, we have noticed that the race is being led by the banks themselves, who are readily releasing API platforms across multiple markets to encourage an open banking ‘ecosystem’ or ‘service fabric’ of financial services in partnership with FinTechs. This is ultimately a win-win for businesses and customers. Dare I suggest a future of financial inclusion is on the horizon. Read more about Open Banking in this recent article Open Banking:The Real Financial Revolution

 

How have Split innovated in this changing landscape?

In 2018, Split launched a Direct Debit solution that flipped the traditional model on its head. Delivering electronic mandates, faster settlement, no dishonours, and lower fees. A solution that checks consent in real-time rather than relying on the faxed form in the filing cabinet in the back office! This is the new direct debit, and I am constantly surprised by how revolutionary it appears to businesses with significant direct debit volume, who simply didn’t understand that it can be handled differently. Beyond the product plug, we genuinely believe that the world is about to shift rapidly towards instant payments as the norm, and open banking as the consumer expectation. This introduces an entirely new way of thinking about payments – an exciting time indeed. Now is the time to better understand these changing tides.