in Business

Open banking and the rise of bank-to-bank payments

We’re reaching a tipping point for bank-to-bank payments and PSD2 might just push us over the edge.

Direct Debit, the most common means of collecting bank-to-bank payments, was devised in the 1964 by a Unilever executive, as an automated way to collect recurring, variable payments from ice cream vendors, without having to ask permission each time.

  • In 2016, Direct Debit made up 20% of all 122 billion cashless payments taking place in the EU (source: European Central Bank, Payment Statistics for 2016).
  • Direct Debit volumes in the UK reached 4.2 billion in 2017 (more than double what they were at the turn of the millennium), representing a 3.8% growth on 2016 (source: Bacs Payment Schemes Ltd, 2017).

There are several factors that have contributed to the growth of Direct Debit in the UK and Europe:

Better access
Third-party providers like GoCardless have opened up access to Direct Debit to thousands of SMEs in the UK who could not previously meet the revenue and bond criteria set out by banks. These providers act as a merchant account for businesses, developing and managing banking relationships on their behalf.

Ease of use
More commercial providers offering Direct Debit has led to significant improvements in user experience. While the former paper-based Direct Debit system was clunky and disconnected from the rest of a business’ workflow, GoCardless now gives merchants a simple, automated way to collect payments, through an app within their billing or CRM software, through an online dashboard or by building their own integration with our REST API.

Macro-economic trends
The growth of the ‘subscription economy’ in the last decade has led businesses to seek payment solutions more suited to a recurring revenue business model. Bank-to-bank mechanisms like Direct Debit allow these businesses to collect recurring payments against a subscription plan with a single mandate, while reducing involuntary churn and transaction costs (payment failure rates and transaction costs are lower for Direct Debit than for cards).

So, why doesn’t everyone use Direct Debit?

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