The direct debit payment system is a simple and effective means of making payments between bank and customer, but in a highly competitive landscape, dominated by marketing and cost-reduction initiatives, how much longer will it hold sway?
For more than 30 years the direct debit (DD) has been seen as the ever-reliable warhorse of business-tocustomer (B2C) banking. However, it remains unable to pass the 40 per cent take-up rate even in the UK, its original and strongest base, while newer markets have proved increasingly hard to penetrate. So how far should users rely on its continuing existence?
Direct debit is a highly efficient means of effecting periodic payments from consumer to creditor, for example, a utility company or a sports club. A simple, one-off mandate authorizes the consumer’s bank to settle the creditor’s demand on presentation. Ordinarily, it requires no further consumer intervention. This, plus its fully-automated nature, makes for the cheapest and simplest settlement instrument around.
This low cost and simplicity govern its appeal to the three main stakeholder groups: the consumer proposition is a once-only “fireand- forget” instrument requiring zero ongoing effort and ensuring no bill is ever paid late again; billers’ collection costs are minimized and costly reminders eliminated; and with no handoffs, banks enjoy maximum leverage of the payment system without any expensive branch traffic.
The psychological impact
However, DD carries opportunity costs. Consumers must trust both billers and banks to debit only what is truly owed, without error – a lot to ask for when, each year, 39 per cent of UK consumers report mistakes with their bills. Billers and banks gain very little marketing information at the outset from DD and virtually nothing thereafter, unlike a credit card application or statement. Media coverage of the small number of DD errors ensures that consumer fear burns disproportionately brighter than the reality. The concern is fuelled by exposés of bank charges and investment irregularities and the “we-love-you-more” brand marketing by the likes of Virgin and Tesco. Unsurprisingly consumer trust in both the integrity and competence of banks has fallen consistently over the past 20 years.
Since deregulation, billers are undergoing the same experience, while regulatory and insurance costs ensure periodic shockwaves to even “choice” payments, such as sports clubs. Internet shopping teaches consumers to value active control of payments, a contra-DD learning. Similarly, they ingest security messages that say: “Keep control and don’t give confidential details to someone you don’t know or trust.” Although the message primarily targets cards – and DD’s security has never been in question – the psychological knock-on is obvious. With so many marketing, cost-reduction and efficiency initiatives underway, it is hardly surprising that some are now colliding. For example:
- In many countries, urgency of migration has meant DD being launched “from cold”, without interim instruments that permit greater consumer control, such as the UK’s standing order. This has frequently proved too big a step, with mistrust of institutions prevailing over economic rationalism, even where itemized bank charges clearly underscore the relative cost to the individual.
- Some “newer” type billers, ironically often those who accept only DDs or prepayments, are creating further timebombs. For example, contrast the mindset of the traditional, quarterly-billed landline telephone customer with that being created in those teenagers buying mobile top-ups from funky outlets and ATMs.
- Banks, seeking to migrate traffic, for example, from branches and paper, promote and reward online banking offerings – again an active, user-controlled tool.
- Both banks and billers underscore the security – witness UK Chip and PIN communications – convenience, ubiquity and “tech-cool” nature of their newer offerings, but say little about DDs; consumers infer their own messages.
- Direct debit affords no opportunity to cross-sell or enhance satisfaction. And its customer data is minimal and painful to extract.
Direct debit has lost none of its strengths and remains a simple, cheap means of effecting payment. However, it inhabits a world unrecognizable from the one into which it was launched. The demise of DD is perhaps a question of when, rather than whether.
Direct debit will continue to serve its purpose for many years to come but for all the reasons above it is unlikely to penetrate much further; it is certainly not the future. The time has come to “milk” rather than “promote”, focusing new marketing on instruments that respond to and anticipate more completely the needs of the 21st century.
A version of this article first appeared in Australian Banking & Finance magazine.
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