Back in February I wrote about the grandfather of instant payment systems - Faster Payments: The world’s first 24*7*365 payment system and last week I covered all you needed to know about the Faster Payments scheme.
This week we take a look at Bacs and the push and pull retail payment schemes that Pay.UK operate under the Bacs banner - Direct Debit and Direct Credit.
Bacs has an unprecedented track record and it was my privilege to serve as its CEO for 2003 until 2018.
Demonstrating decades of growth, offering economies of scale, firmly embedded into our payment habits, being established in business’ processes and with a proven strong trust model Bacs can be proud of how it has served the payment needs of the UK since its inception in the late 1960’s.
But, the key thing to note about Bacs is the sheer scale of the operation - the numbers are staggering!
A product of the late 1960’s / early 1970’s Direct Debit has seen unprecedented and sustained year on year growth. Despite the emergence of alternative payment options, has still grown within a 3 to 5% range over the past few years.
The following table demonstrates the growth of Direct Debit in the UK over the last 30 years.
Data source: Pay.UK
Notwithstanding the numerous alternative payment challenges (including Request to Pay, Open Banking, systems from other geographies and the proposed New Payments Architecture), my prediction is that Direct Debit will see continued short and medium term growth in the range of 2-4% per annum.
It is difficult to predict what will happen over the longer term but the richness, value and high regard of Direct Debit to both consumers and businesses will be hard to replicate.
Bacs’ ‘pull’ scheme (Direct Credit) has been a payment stalwart for a long time.
Volumes doubled as the payment of wages, salaries and account payables migrated from cash and cheques during the 1980’s and 1990’s but the biggest growth was experienced in the early 2000’s as government related benefit and pensions moved to direct deposit into a bank account via Direct Credit.
Direct Credit volumes are currently experiencing a slight adjustment due to a relatively small migration to Faster Payments although, in the short term, the COVID-19 related governmental payments will partially stem the slight downward adjustment.
Data source: Pay.UK
Over the next few years the debate will focus on the customer requirement for a cost efficient, bulk, Deferred Net Settlement, frictionless, push payment system and how this end user need might be fulfilled under the proposed retail payments New Payment Architecture or through other alternative payment systems (especially Open Banking).
In their own right both Direct Debit and Direct Credit are significant payment systems based on volume but in aggregate the numbers add up to a cool 6.5 billion transactions per annum.
As Direct Debit established itself as a firm favourite in the UK’s payment habits and the Direct Credit scheme crystallised its late 1990’s / early 2000’s growth spurt the balance shifted in favour of Direct Debit.
The split between Direct Debit and Direct Credit now stands at 70:30.
Data source: Pay.UK
Push and Pull | Linked but Different
Offering both a (scale) push and pull system offers many benefits including shared investment costs, processing costs and similar customer journey experiences.
However, a combined push / pull system can present strategic challenges if the individual payment instruments are on a differing strategic direction, face different alternative payment challengers, different potential disintermediators or have diverging end user needs.
All these issues are better described as different lifecycle stage challenges - this is certainly true for Direct Debit and Direct Credit.
Bacs Total Volume
Data source: Pay.UK
From humble beginnings at the Inter Bank Computer Bureau in 1968, the emergence of Direct Debit in the early 1970’s and the, unprecedented year on year growth, driven by wholesale consumer and business adoption the aggregate Bacs volume now stands at 6.5 billion transactions per annum.
Future growth is more likely to be driven by Direct Debit (although the Direct Credit COVID-19 related payments will provide a helpful contribution). I suspect we will see continued growth of the aggregate Bacs volumes for a few years (perhaps within a range of 1-3%).
Longer term predictions are more difficult to make in the context of a future New Payments Architectures, Request to Pay (RtP) Open Banking (especially Variable Recurring Payments) and other emerging Alternative Payment solutions.
Whatever the future holds the fundamental need for UK consumers to make frictionless recurring payments for goods and services backed by a trustworthy consumer guarantee will not go away.
In a similar vein, the corporate and government need to make large numbers of cost effective and frictionless supplier, salary and benefit / pension payments will remain.
The guardianship of the Bacs schemes may have changed over the years but the underlying ability of the Direct Debit and Direct Credit schemes to meet a clear end user need is proven.
Supporting Pay.UK, the community needs to help determine the future definition of ‘pull’ payments, the strategic future for bulk payments, the existence of Deferred Net Settlement push and pull payments in a new (and perhaps) alternative payments environment.
Determining the future is mission critical for the 6.5 billion transactions that flow into and out of our bank accounts each year.
The three day clearing cycle within Bacs is often commented upon, my response is that the payment is simultaneously debited and credited on the day of value (although I acknowledge that it does have a submission cycle).
For example, if your salary was paid by Faster Payments you wouldn’t receive it any earlier than your pay day - in fact salary payments by Bacs appear in your bank account before you wake in the morning, whereas by Faster Payments it could arrive in your bank account at any point during the day. Equally, the date your mortgage payment is due is well known in advance and can’t be taken any earlier than the due date.
My mantra has always been appropriate payment mechanisms for the payment need and for regular recurring debits and credits both Direct Credit and Direct Debit clearly fulfil 6.5 billion needs each year.
This subscribers email was due to be sent on Thursday but given it was about Bacs I thought I’d adopt the three day window and send it on Saturday morning - not really, I’ve just been a bit busy over the last few days).