HomeBusinessMoneyAll change for direct debits as banks gear up for instant transfers

All change for direct debits as banks gear up for instant transfers

A new way of making payments and moving money between your accounts is on its way, but when can you use them and how does it work?

The UK’s nine biggest banks and building societies have been told by the Competition and Markets Authority (CMA) to be prepared to implement smart direct debits, also known as variable recurring payments (VRP)s by July.

The new payments are designed to make life easier and allow consumers to give consent in advance for money to be instantly transferred – between their own accounts and to third parties.

Consumers can set up payments, choose when they end, and set limits on the amounts in advance, and they’ll all be listed in their banking app.

They are set to work alongside existing payment systems, such as direct debits.

But the CMA has already extended the deadline for the banks to be ready to start using the new payments, from the end of January. It has been put forward six months after most of the banks said they weren’t ready for the new system.

Charlotte Crosswell, chair of the Open Banking Implementation Entity (OBIE), said at the time it wasn’t realistic that the banks would meet the January deadline.

The new payments have been introduced because of Open Banking, the technology allowing financial institutions to share consumer data, with consent. It has created a world of apps and platforms where we can access all of our financial accounts in one place and information about our money can be shared between the banks.

Open Banking became a regulatory requirement in the UK in January 2018, following the Payment Services European Union Directive (PSD2) and more than 5 million people and businesses are using the service in the UK.

When VRPs are in place, they will allow what’s called “sweeping”. This is a way of letting someone instantly move money – either to pay for something, such as a subscription, or to transfer money into another account, such as a savings account or an investment portfolio.

At the moment the main process of doing this is with direct debit. But it usually requires the consumer to agree to each payment being made in advance.

Direct debits have been in place since 1964 and while they’re probably the most common way of setting up payments and allowing companies to take money from our accounts, one of the criticisms towards them is the time they take.

Unlike paying with a card, a direct debit usually takes three days to clear.

Usually advance notice must be given by the person or business requesting the direct debit, before the payment can be taken as well. This is the case unless the customer has already agreed to a one-off payment being taken, or there is a payment schedule set up for a set amount on a specific date.

Given the delay in the payment being finalised, this can cause issues if there isn’t enough money in an account, or if you need to make a payment more urgently.

However, with sweeping, consumers should be able to give their consent in advance, speeding up the entire process.

Some of the expected benefits of the new system include funding savings and investment accounts at a faster rate, so interest can be earned straight away, clearing credit card debts faster which will avoid charges from late payments or interest occurring, and speeding up the process of using surplus money to pay off outstanding loans.

Duncan Barrigan, chief product officer and chief growth officer at GoCardless, explains:

“With inflation putting the squeeze on our budgets and interest rate hikes just around the corner, the new technology couldn’t have come at a better time.

“Sweeping will allow you to set up automatic recurring transfers based on parameters of your choosing, moving money between the accounts you hold at different financial institutions.

“This includes money from your bank account to your savings and investment accounts on platforms like Plum, and helps you put spare money to work faster – without lifting a finger.”

The banks now have until July to have completed the testing phase of VRPs but it’s still not clear exactly when consumers will be able to start using the new technology.

Given that payments are likely to work through banking apps, this is also going to exclude anyone who doesn’t manage their money this way, or those who don’t consent to Open Banking.

Victor Trokoudes, CEO and co-founder of investment app Plum, said: “While direct debit is currently the most feasible way for automated deposits, we’re looking forward to being able to add variable recurring payments.

“It’s one way to make it much easier for customers to save and invest small amounts quickly and reliably, without having to depend on the constraints of direct debit.

“It’s really important that we as an industry still apply pressure to the Open Banking system, to help ensure that innovation and improvements continue for the benefit of consumers.”

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