Filed Under: Money, Payment systems

Direct debits are a dated hack

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[Dave Birch] When I was at a mobile payments event a couple of weeks ago, someone asked the usual question in the coffee break: why bother? The existing payment systems works pretty well, they said. Who cares about mobile wallets, they said. (And so do the public, incidentally!). You can see why people think like this.

“Credit, debit and cash all work pretty good in the United States,” says Gene Signorini, a vice president at Mobiquity, which designs and builds mobile applications for corporate clients. “Those payment options aren’t really broken.”

[From Are Mobile Payments Fixing Something, Or Just Hot Doggin’ ? | Wired Business | Wired.com]

Gene is a smart guy, and he knows what he’s talking about it. The payment options aren’t broken. But as to whether they are pretty good or not, you have to ask: “pretty good” for who? Who does cash work pretty good for? Not for me. Last time I went to an ATM in the US I got charged $5 to draw out some money. Who do credit cards work pretty good for? Not for merchants, apparently, as they are in the process of turning down a multi-billion dollar settlement and continuing legal action against Visa and MasterCard.

A long-running legal dispute pitting Visa and MasterCard against a group of retailers over payment processing rules and fees might finally be reaching a settlement that would compel the card networks to relax some of the regulations they currently impose on merchants who accept their cards.

[From Credit Card Surcharges May Be Coming to a Retailer Near You — moneyland.time.com — Readability]

Credit cards do work for me, since I never use a debit card for anything except getting money out of an ATM. One of the reasons they work for me is all the people using debit cards are subsidising the frequent flier miles I get from my credit card — thanks guys — for no benefit of their own. Does debit work pretty good? Well, if it did surely Congress wouldn’t have found it necessary to regulate debit interchange, would they?

How to make sense of this? How should we think about what’s “good” and “bad”? You have to separate the medium from the message. There are two different issues here and they need to be discussed separately. One is the payment instrument — prepaid, credit, debit etc — and the other is the payment mechanism — paper, card, phone etc. — and the feedback loop is complex.

So, for example: I really, really want a good set of mobile payment options because I always have my phone with me but I don’t always have my wallet with me. This leads to one set of potential outcomes that centre on taking the existing plastic card products and shoehorning them into the mobile phone.

But there’s another, more general path. Suppose mobile doesn’t replace cards payments. Suppose it replaces other payments. Cash, obviously, but there are electronic options that may be open for disruption. Consider another commonly-used payment mechanism, the direct debit, another example of something that appears to be working well. But is it?

I like reading the problem pages in the personal finance sections of newspapers because they give a useful window into practical issues. Can we find any guidance there? Well, yes. In the Daily Mail (23rd October 2013, page 48) is just such a useful sidelight. One of the letters concerns an SME account (for a charity) that keeps losing small amounts to direct debits. Each time it happens, they complain to the bank, and the bank (acting entirely correctly under the terms of the direct debit scheme) refunds the money. The customer is protected, yet everyone’s time and money is wasted (and not accounted for). The root of the problem, as noted in the response to the letter, is that it is too easy to set up a direct debit and no way to approve them individually. Of course, it’s not only criminals and idiots who fill out the wrong numbers who can loot your bank account using this mechanism, it’s also companies with legitimate mandates who, for one reason or another, take money and infuriate customers. Here’s just such a typical member of the public (well, actually, a typical sister of the Mayor of London and fully-paid up one-percenter, I should clarify, which is why her whinge is in the national press in the first place):

What makes this so easy and legal for companies, and maddening and opaque for consumers, is partly the direct debit system. In theory, it should make life easier – about six billion automated payments, worth £4.3 trillion, are made in the UK per year.

[From RACHEL JOHNSON: We’ve been mugged – and they did it by direct debit! | Mail Online]

Once you have set up a direct debit mandate, the money can be taken from your bank account without you knowing anything about it. I remembered seeing another news item about direct debits in the same newspaper a few months ago. A quick google, and sure enough….

A holidaymaker was left £27,000 in debt after mobile phone company Orange extracted £120 an hour from her account for almost a week.

[From Woman is left £27,000 in debt after her new Orange pay as you go mobile withdraws £20 from her bank account every TEN MINUTES | Mail Online]

I know this is just a stupid technical error, but it served to make me think about the future for the direct debit as a payment instrument in a world with laser beams, transistors and mobile phones. It seems to me that direct debits exist because of a technical limitation on the communications between the the biller, the bank and the consumer. It the olden days, before year zero (1995, when the Netscape IPO heralded the modern age), it was impossible to imagine how a biller might communicate a bill to a consumer instantly, have the consumer authorise payment instantly, and the the money transfer from the consumer’s bank account to the biller’s bank account instantly. So it made sense to set up the complex, centralised, batch process around direct debates and introduce the notions of mandates and then pass a new set of laws around them.

But now imagine that someone has invented just such a mechanism. The gas bill falls due, a message pops up on the consumer’s phone, the consumer looks at the bill, the consumer is bounced to their bank app for authentication and they then authorise the bill payment. The payment is sent by FPS directly from the customer’s bank account to the gas company’s bank account. That’s it, sorted. I think the generalised solution of pushed e-billing has wide applicability in a mobile age and might well have the potential to replace a significant fraction of existing non-cash payments in time.

What I found quite interesting is the strange obligation for non-bank payment operators to be able to offer direct debits and account services to former bank-account customers.

[From The proposed Bank Account Directive: wrong tool]

There is no need for direct debits, whether SEPA or otherwise, in a world that has FPS and Dwolla, smartphones and apps. Direct debits are a hack, a disco-era (my new favourite payments phrase) workaround for the days before real-time payments, the internet and mobile phones. They are, in essence, an anachronism.

These are personal opinions and should not be misunderstood as representing the opinions of 
Consult Hyperion or any of its clients or suppliers

3 thoughts on “Direct debits are a dated hack”

  1. gendal@gmail.com' Richard G Brown says:

    Agreed. I put “direct debit” in the same box as “card schemes” and vendor-specific payment systems (e.g. Starbucks app): they’re all examples of the discredited, out-dated “pull” model.

  2. andrew.hewitt@zapp.co.uk' Andrew Hewitt says:

    ‘But now imagine that someone has invented just such a mechanism. The gas bill falls due, a message pops up on the consumer’s phone, the consumer looks at the bill, the consumer is bounced to their bank app for authentication and they then authorise the bill payment.’
    Sounds like a great idea but it needs a catchy name, maybe Zapp?

  3. gendal@gmail.com' Richard G Brown says:

    @Mark – my problem with pull is that it is fundamentally broken – and requires ridiculous amounts of cost/complexity to make it safe (PCI-DSS, DD guarantee, etc, etc). You could still achieve “autopay” with push – simply configure (a putative) wallet to automatically pay invoices (“pulls”) from certain suppliers.

    i.e. first time you receive payment request from energy provider, press “automatically pay this bill in future” (perhaps with a configurable limit that would trigger a check).

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