The emergence of off-the-shelf Direct Debit solution providers in the early 2010s saw many organisations outsource Direct Debit collections.
Considered a convenient alternative to the traditional method of getting bank sponsorship and managing Direct Debits in-house, outsourced solutions seemed an obvious choice, not least because they could be integrated with existing customer relationship management (CRM) systems.
Now, the trend appears to be turning full circle, with many businesses reconsidering in-house Direct Debit management due to concerns over rising costs and lack of control.
In our recent webinar, Switching to In-House Direct Debits, AccessPay’s Director of Banking and Alliances, Jim Conning, spoke with Gavin Lawrence, Director of Movimo, a consultancy and training organisation specialising in BACS and Direct Debit payments.
They discussed the shift back to in-house management, its advantages and challenges, and the future of Direct Debits. This article summarises the key discussion points.
Collecting Direct Debits
Over the last ten years, there was a trend for organisations to take these off-the-shelf solutions, because they were seen as an easy option.
The vast majority of inquiries we’re getting at the moment are about people looking to try and bring that back in-house or to look at whether it might be cost-effective to bring it in-house, says Lawrence.
For organisations considering this transition, there are three components of Direct Debit collection to be aware of:
- Sponsorship: Organisations must be sponsored by a bank or payment provider that takes on the associated risk. The major high street banks, such as Barclays, HSBC, Lloyds Bank and NatWest, are the largest players in the space. Once sponsored, the organisation receives a six-digit service user number (SUN) to process Direct Debits.
- Data management: Organisations must manage and maintain customer data, including who they are collecting from, the payment details, collection dates, and amounts. This data needs to be formatted correctly for processing.
- Secure data transfer to BACS: The collected data must be securely transmitted to BACS, which handles payments between banks.
Organisations can manage these three elements through a single off-the-shelf solution or manage the process in-house.
Advantages of in-house management
Off-the-shelf solutions can prove a useful vehicle for new companies or those that have no experience of Direct Debit collection.
However, as organisations grow, they often find that bringing Direct Debits in-house offers significant advantages.
Businesses can centralise all their Direct Debit data by using core systems such as CRMs, Enterprise Resource Planning (ERP) or billing systems.
This centralised approach helps to improve customer service. Staff can easily access up-to-date transaction history and respond to queries efficiently without switching between systems or relying on outdated reports, which can be the case with outsourced Direct Debits, where data may lag behind by a day or more.
By bringing Direct Debits in-house, organisations also gain control over the entire process, including the ability to brand the sign-up and collections process as their own, which can enhance customer trust.
These things are important to organisations; they want their customer to feel that they are doing business with them and not paying a third party, says Lawrence.
Larger and increasingly even smaller organisations also see in-house management as more cost-effective than outsourcing.
Very large organisations almost certainly would be running this in-house anyway, says Lawrence, It wouldn’t be cost-effective to outsource it.
In addition, rising costs for outsourced solutions have accelerated the shift toward in-house management for smaller firms.
Many organisations that had previously considered moving to in-house management are now acting on it, driven by the growing need to manage costs and improve operational efficiency.
Challenges and considerations
While there are many advantages to bringing Direct Debits in-house, there are also challenges and considerations that organisations should address.
One of the main hurdles is the initial lack of expertise, because outsourcing everything to a third-party provider removes the need for specialist knowledge.
Transitioning to an in-house system often requires upskilling or training staff to manage the process.
Companies often seek guidance and support during the transition phase, but Lawrence explains, once they’re up and running, it’s fairly straightforward, and companies tend to like running it in-house.
I can’t think of any organisation that has brought Direct Debits back in-house and then decided to return to using a third-party provider. Often, the feedback from organisations is that they wished they’d returned to in-house management sooner.
Key risks in switching to in-house management involve single-person reliance, where only one or two people understand the Direct Debit process.
This can create problems if those staff are on annual leave or absent. Lawrence advises:
It is important to make sure that you’ve got at least two if not three or four people in the organisation that understand how the process works just for cover.
Another critical consideration is testing the system thoroughly before going live.
Organisations should not assume that existing systems, such as CRMs, will handle Direct Debits seamlessly.
They need to be properly integrated with BACS and all processes tested to make sure they work smoothly to avoid future issues.
For example, if the organisation wants to do paperless Direct Debit, which is the option that most organisations collecting Directs choose, have they got the right level of authority from their bank?
Finally, there is also the question of managing failed Direct Debits. Outsourced solutions have some advantages in removing the burden of managing failed transactions.
However, in-house management means the organisation has greater control and flexibility in managing future collection attempts. If you have the right connectivity to BACS, you can download reports daily and get better visibility on cancellations and changes to bank details.
You can also manage how you repeat the collection attempt on a customer-by-customer basis; you don’t have this option with outsourced solutions so much, explains Lawrence.
Looking ahead: The future of Direct Debits
Looking to the future, open banking and variable recurring payments (VRP) are garnering increasing attention and some query the future of Direct Debits.
However, Direct Debits are deeply embedded in the UK’s payment ecosystem and look set to remain so.
Data from UK Finance shows that Direct Debits currently account for 10% of all payments, and around 40% of the total value debited comes from consumers’ bank accounts, says Lawrence.
Unless I was a very large organisation that needed to go and look for alternative payment rails, I’ve got pretty good coverage with cards and Direct Debits right now. I’d have to have a really good reason to look at being an early adopter [of a new payment solution].
As open banking continues to develop, options like VRP could provide a useful alternative for specific transactions or for consumers unable to use Direct Debits.
But with UK Finance predicting five billion Direct Debit transactions by 2033, they are not likely to be replaced any time soon.
Considering your next steps
In-house Direct Debit management can offer several advantages over the seeming simplicity of third-party Direct Debit solutions, including cost savings, greater control of processes and improved ability to serve customers.
With costs of outsourced solutions rising, now is the ideal time to revaluate current Direct Debit processes and consider the potential benefits of bringing them in-house.
Contact AccessPay to find out more.
