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What does Open Banking mean for Direct Debit - and how does it tie in to Star Wars?

I went to see the new Star Wars film recently. At the time, I had Open Banking on my mind. I was thinking about its effects on Direct Debit, as the two could easily seem to conflict in a galactic, well UK-wide, struggle. It made me think back to the original films and ask myself: is Open Banking Vader to Direct Debit’s Obi Wan Kenobi? And, will Direct Debit also rise up after being struck down to become more powerful than we can possibly imagine? I was thinking tentatively that it just might.

It may sound melodramatic, but many fear that Direct Debit will get struck down to irrelevance by the Open Banking Initiative. The world of payments in the UK is going through seismic changes. With PSD2 (European Payment Services Directive) and the Open Banking Initiative (UK Competition and Markets Authority Remedies), the democratisation of payment services is imminent and many smaller organisations will be able to set up account-to-account payment systems. Direct Debit looks, on the face of it, to risk significant threats from Open Banking. The New Payments Architecture that’s been designed to support these changes inverts the payment authorisation model used by Direct Debit, turning “pull” authorisation to “pushes” by consumers. This could be a problem.

In the new “push” world, when a company creates a payment, it becomes a request that the consumer has to authorise each time - so the payments are driven by the payers, not the collecting organisation. The ultimate aim is to give consumers the power not only to authorise payments, but to decide when and how much is paid during a transaction. Putting aside the many operational implications of this for a moment, the first issue for Direct Debit is that this is completely opposite to the way that Direct Debit currently works. Direct Debits have authority granted at the beginning for a series of payments, with the amounts and frequency ultimately controlled by the Direct Debit collecting organisation. This is very much a “pull” model, and because of the potential danger to payers from unscrupulous organisations, the Direct Debit Scheme has a set of guarantees and checks unlike any other. This firmly puts right of redress in customers’ hands. With the new push model, there seem to be no pre-defined scheme rights for consumers; they just have to rely on banks’ normal complaint processes. That is why the Direct Debit scheme has worked so successfully for many years and is why it is hugely convenient and protected for both consumers and collecting organisations.

How then does this Direct Debit “pull” model fit into a “push-only” payments architecture? Well, the simple answer is that it doesn’t. On the face of it, the New Payments Architecture (NPA) will just side-step Direct Debit to make way for pure “push” model payment schemes. So will Direct Debit die quietly after being struck down? Of course not. There are many reasons it will continue: it is far too successful; it processes huge amounts of payments; it is incredibly convenient and cheaper to administer than push payments; it provides extraordinary protection to payers. The pros and cons of push vs pull as a model can be debated at length, but the NPA architects are already looking at how Direct Debit can fit, or even be improved, within the architecture they are building.

Okay, so in the stretched analogy I’ve made, what will cause Direct Debit to rise up to become something greater than it ever was before? Well, there is a strong argument that the Open Banking changes could strengthen Direct Debit for organisations that use it, beyond what it can do on its own. The reason to think this comes from the fundamental way push payments and the new regulations work together. All transactions in the new world happen from bank account to bank account. This means that credit card processing organisations don’t get a look in; it’s account details that form the basis of the transaction model. And what already uses bank details for all its fundamental processing? Direct Debit, that’s what.

Direct Debit organisations are perfectly placed to integrate new push payment mechanisms into their existing workflows. They already have the data and protection mechanisms to store bank details; they just need new processes and appropriate permissions from payers to use them for push payments. It’s not difficult to imagine a scenario where the combination of Direct Debit and push payments together will become a more strategic and much simpler payment pairing than push payments and credit cards. This presents Direct Debit, and the organisations that use it, with huge opportunities over the next few years. Even for one-off payments, costly card payments will get relegated only to situations where consumers need to be physically present.

This means that Direct Debit using organisations could massively reduce their payment costs with Open Banking systems and Direct Debit together, while keeping all the advantages and simplifications over a purely push model that Direct Debit already provides. While the original Star Wars changed science fiction cinema forever, Open Banking will undoubtedly do the same for payments in the UK, but I hope there is still a place for a plucky band of pull payment systems to exist and thrive with diversity in this new universe.


Comments: (2)

Jeremy Light
Jeremy Light - pingNpay - London 22 January, 2018, 12:582 likes 2 likes

The role of the Direct Debit in the New Payments Architecture is confusing, although the NPA in its final report on its consultation makes very clear that DDs are here to stay and will be complemented by a new request-to-pay service, rather than replaced by it.

The confusion occurs because "push" and "pull" normally are used to refer to the way a payment is initiated - a "push" by an account holder, resulting in a credit transfer, and a "pull" by a third party (biller, retailer etc) resulting in a direct debit or a card payment.

However, my understanding of the NPA is that it refers to "push" in the context of clearing. Currently, UK direct debits clear by aynchronous application (i.e. separate processing) of the credit on the beneficiary account and a corresponding debit on the sending account. The issue with this, is that if the sending account rejects the debit (eg lack of funds), the credit on the beneficiary account has to be reversed, creating a processing/reconciliation problem/exception and a credit risk.

With the NPA, I understand the intention is to apply the debit on the sending account first (and this I believe is the NPA's definition of "push"), and allow the credit on the beneficiary account only if the debit is successful, thus simplifying the process, reducing exceptions in clearing and removing the credit risk (from the payment system, the beneficiary is still at risk).

Under the NPA, I assume billers still submit DD files ("pull" payments) into clearing as they do now, but each DD is first checked against the sending account before it is cleared ("push" clearing), and any where there are insufficient funds are rejected from clearing. I further assume that this is a synchronous process, where the debit and credit are applied synchronously (as in Faster Payments), so that if there are multiple DDs on the same account in the same file, they are individually cleared, thus ensuring the funds-check on each DD is always against the cleared balance after the previous DD was cleared.

To me, this is a sound approach, and I agree it will open up many opportunities under open banking and PSD2. For example, recurring payments for subscription services which are increasingly popular, and also DDs at POS (used extensively in Germany for example) can be done without credit risk to the retailer. Additionally, DDs are exempt from strong customer authentication under PSD2, potentially making them more flexible than credit transfers in some use cases.

DDs have a bright future.

Gavin Scruby
Gavin Scruby - SmartDebit - Bagshot 02 February, 2018, 23:451 like 1 like

Thanks for the thoughful clarifications Jeremy. In the NPA reports, Direct Debit is indeed both confusing and unclear. That kind of payment system was not really part of the design, but from listening to NPA discussions, it does seem that they are (begrudgingly?) looking for the best way to merge it. My use of "push" and "pull" here is perhaps oversimplistic for a strict reading - I'm bypassing the detail of the NPA to just think about who initiates/controls/drives the particular payment. There's a lot of interesting material in the new architectures, and I think there's a huge amount for end users to get excited about.  

Gavin Scruby

Gavin Scruby



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19 Jan 2018



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