Home » Open banking shows promise in addressing UK direct debit failure crisis
By Vinay Khosla, Head of Product for Data & Analytics, Bottomline
Key performance indicators for the UK’s economy have been blinking red for some time now. The consumer price index showed an inflation rate of 11.1% in October, the highest since tracking the metric in 1997. Business insolvencies for July 2022 checked in at 5,629, up from 3,226 in July 2021. And the gross domestic product is down 0.3% while the Eurozone is up about one per cent.
All are telling signs of the current malaise and future complications. But we respectfully propose that one key metric is missing that shows an important but rarely cited statistic: direct debit failures. And they’re blinking red as well. Why are they important? Because consumers set up direct debit recurring payments when their finances are stable, and they’re confident in their ability to pay the gym membership, streaming service or utility bill without stressing about their impact on their bank accounts. Exclusive research from Bottomline’s business payments platform, PTX, shows that businesses saw over 17 million direct debit failures in the period from Sept. 2021 to Sept. 2022. Add the month of October to that rolling 12-month period, and the failures jump to over 18 million, meaning the trend toward failed direct debits is rising at a rate of more than a million per month. And that from the payments solution provider with the lowest industry direct debit failure rates in the UK, so we expect the number to be significantly higher across the industry.
Now, lest you think this KPI could be overlooked, consider that these failed payments equate to lost or delayed income for UK businesses of around 2.5 billion pounds for the Oct. 21-22 period. The impact on business cash flow is obvious. And when it happens, recovering the funds and the operational overhead to do so is at least £50 for each failed transaction. In addition to its reflection on the UK economy, direct debit failures are another thorn in the side of businesses struggling to grow in this economy, not to mention stepping back to recover lost revenue. However, there are remedies for both companies and consumers, which we will deal with later in this piece.
DD failures by the numbers
First, let’s complete the statistical picture. A large percentage of the direct debit failures were akin to a bounced check. The Bottomline numbers show that 83% of all direct debit failures over the past year were due to insufficient funds, accounting for almost £2 billion in lost or delayed revenue. A much smaller percentage is due to failed communications. 14% of failed debits were due to consumers cancelling their recurring payments with their bank but not informing the supplier. And the first-time failure rate is also surging, up 20% in 2022 over last year. The industries being hit hardest are insurance, closely followed by utilities then non-banking financial organisations (debt collection agencies, other lenders), and what would be considered luxury subscriptions (meaning anything outside of utilities). Regardless of the category, businesses are getting hit by this trend and must prepare for its momentum.
Psychology is important when considering these numbers. Consumers may be looking to avoid awkward conversations if they cancel with their bank but not their suppliers. Or because the consumers know they may need more funds to cover an upcoming direct debit and want to avoid being charged a returned direct debit fee by their bank or go into an expensive overdraft. And if they’re cancelling or failing for the first time, you can bet that new economic dynamics are behind those decisions. Bottomline expects this trend to accelerate by 10 to 20% over the next few months.
Open banking shows promise
Some elements of the bank-business-consumer equation here are beyond control. Utility bills will continue to rise. Supply chain issues will continue to drive the cost of goods, at least for the short term. Some elements are within control, especially for businesses. They can prepare for this trend and take steps to counter it. And one of the most effective and underutilised tools can come from open banking.
As a general concept, open banking has yet to be adopted at the expected levels in the UK. But this direct debit issue opens an opportunity to present practical “need to have” solutions instead of “nice to have” ideas. According to the Open Banking Implementation Entity (OBIE), as of March 2022, 21.1m open banking payments were made over the previous six months, compared with 6.1m in the same period in 2021. Month-on-month growth is running at around 10%. So far, consumers are playing right into the solutions available to help solve the direct debit crisis. They want the flexibility and data-sharing capabilities of open banking to improve financial decision-making (40% of OBIE respondents), expand payments choice (31%) and better borrowing (23%).
Open banking creates payment options. And those options come down to one word: control. By adopting open banking applications, companies gain better control of their financial relationships with consumers via open banking applications. Consumers can control their spend, including recurring payments. Open banking’s central concept enables third-party payment providers to build new applications that give consumers more control over who can access their funds and how they are processed. A good example can be seen in Bottomline’s Pay Direct open banking solution. It puts the control factor squarely between the business and its customers. Using the Pay Direct app, the consumer pays businesses directly from the payer’s bank account via Faster Payments. It reduces card fees and settles payments in real-time.
Pay Direct and applications like it open communication channels. If a direct debit fails, the options provided by open banking APIs can give consumers the option to pay the debt in full or pay in part with a notice that they will pay the balance when funds become available. And when variable recurring payments (VRP) come online direct debits can be wholly controlled and automated directly between the consumer and their supplier.
The direct debit failure crisis is real and growing. Businesses must do all they can to prepare by opening open banking channels that allow them to recover payments without high bank fees and without fracturing the relationships with consumers. Cash flow in a tough economy is king. Revisit the payment options you’re giving your customers. Make it easier for them to pay. Increase the strength of your relationships with them and make open banking a key part of your strategy.
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