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15 December 2014

I want it all and I want it now

 
Chris Dunne,
Payments Director,
VocaLink

There is no doubt about it, we live in a 24/7 world. Here, Chris Dunne, Payment Services Director at VocaLink shares his views on how payments need to match this faster pace of life.

At first glance, not much has changed in payments in the UK over the past 30 years. Cash is still in widespread use with just under three billion pounds a year taken out of cash machines, helped by the proliferation of devices.  Over the past decade the UK has seen another 20,000 ATMs arrive on street corners and in shops, taking the total to 67,500 in 2013.  

We still have cheques and as a nation appear very resistant to losing them, as the Payments Council rather painfully discovered when it announced plans to phase them out.  The furore over the proposal to retire cheques highlighted two significant aspects of retail banking.  First is the endowment effect, which is universal: as human beings we attach greater value to things we have rather than things we may have in the future.    

The other aspect is more specific to the UK: free-if-in-credit banking.  Consumers have no explicit charge from their banks for making payments, so there is no consideration in a customer’s mind about the relative cost of different methods of payment.  I can pay my window cleaner with cash (97% of cash withdrawn in the UK is from free to use machines), by cheque (free to a consumer) or by online banking using Faster Payments, which again is free for a consumer.  The new Paym mobile service adds another free option to the mix. 

So as a nation of consumers we want more and better ways of paying for things, without letting go of any of our existing options. 

Wanting more, and wanting it free, are not new concepts. However over the past thirty years we have collectively given up on waiting. We Want It Now.

This is not just about mobile – that is simply a device.  What a mobile gives you is immediacy.  Instant interaction on social media, up to the minute bank balances via online banking and the ability to buy with one click on Amazon whilst sitting on the bus.

So does everything payments related need to happen in the blink of an eye? Probably not. The Bacs processing cycle takes three days for Direct Debit collection, but these are regular collections and there is no float (debits and corresponding credits happen together on the third day), so whilst you wouldn’t build it this way today, there isn’t a compelling case for change. You can make more of an argument for speeding up Direct Credits which deliver the vast bulk of salary, pension and benefit payments via the current three day cycle, but there is a ready-made alternative in Faster Payments for urgent or one-off payments. 

For cheques the UK Government has made it clear that there is a compelling case for speeding up the current system, which is limited by the need to transport vast amounts of paper around the country. This could best be achieved by reusing some of the world-class infrastructure already in place: there is a highly effective message exchange system underpinning the new Current Account Switch Service, and Faster Payments could provide the payment rails. For a declining payment method it makes little sense to build something from scratch.

However at the retail point of sale, shopping online, paying bills online or sending money to a family member we expect payment to happen immediately. Debit cards are perceived as immediate payment but the reality for the merchant is that they receive the money some considerable time after the event – many days for smaller retailers. Immediate payments from the consumer’s bank account to the merchant’s account are the future, and this is where services such as Zapp will meet the market demand.

This move towards immediacy does have a downside. When you can access your current account online via your mobile, it is readily apparent when your bank is suffering from a technical issue. With the same device you can then tell your friends (and your bank) immediately via social media. The CEO of Fidor Bank remarked recently that Twitter users were the fastest way they had of getting notification about a problem with their systems. Banks need to be able to handle this level of scrutiny adroitly to avoid a short term service issue becoming a major market perception issue.

So this is the challenge for the next few years: be always available, do everything faster, and cope with a customer base that is watching and commenting on you in real time.

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