How Open Banking will kill Bacs in the UK

Somewhere just after the dawn of time and before GoCardless was founded, the UK created the Bacs payment scheme to create a low-cost method of account to account payments.

Bacs is an electronic payments system that operates on a 3-day settlement cycle and has the unique (to the UK) ability of supporting Direct Debit payments. While you may not have heard of Bacs before now it’s highly likely you have used it, being the go-to payment method for utility bills, gym memberships and salaries for the past 3 decades.

The reason for Bacs ongoing usage isn’t its charmingly archaic technical configuration (to this day I hope to never receive a follow-up question to my attempts to describe what a Bacs bureau is), or its snail-paced, meditation-prompting processing cycle. The real modern-day benefit of Bacs is its prevailing presence across multiple industries and the low cost for providers compared to other payment schemes. This creates a barrier to entry that the FPS system is only starting to overtake, let alone a new shiny incumbent (excluding the 15+ years it would take to pass regulation).

Not to mention that currently in the UK while there are several initiatives currently churning their way through working group discussions, the only way to use a direct debit is through Bacs. As a result the payments industry as a whole glumly tolerates the Bacs payment scheme with crossed fingers that once it’s set up they never have to touch it again.

So through Open Banking we’ve solved the following problems from Bacs

• Clunky — OB user journeys can be uniquely tailored to the specific payment need
• Slow — FPS allows for instant payment processing and even works on weekends (unlike Bacs)
• Confusing — By using existing accounts users and processors alike have far less of a headache

Direct debits make Bacs unique.

First off, why are direct debits so important? The easiest way to picture this is by imagining you own a subscription-based business like a gym, it’s the end of the month and you have salaries to pay and protein powder to refill so you need to collect all the memberships to pay to keep the lights on. Except you run a gym, you know as well as anyone half your members aren’t even going to show up, so you can’t force them to pay on their way in.

Enter the pull payment, the ability to get customer’s consent (called a mandate) to debit a certain amount of money from their account on a regular basis for a certain duration, guaranteeing you can collect membership fees. This payment process is possible thanks to Bacs.

Yes, it’s built on the Bacs scheme which has many flaws but it’s useful to businesses and it’s all we have… for now.

But what if the future was closer than it seems?

Open Banking is the current hot topic in payments. Why? Because banks are years behind when it comes to UX and the fact that 3rd party developers can create unique user journeys specific to a payment need is exciting. What makes the payment journey so special is that this can all be done while tapping into the user’s existing bank account and payments are made via Faster Payments so there is no risk to the business of losing days waiting for funds that arent going to arrive.

So far Open Banking has been focused on making it easier for users to make payments, but there’s a shiny new toy called Variable Recurring Payments (VRP) currently working its way through the slog of regulatory approval.

VRP will allow you as the user to give a 3rd party permission to take funds from your account for a specific purpose, just like a Bacs mandate. Ignoring the semantics of push and pull payments, VRP represents a realistic alternative to relying on Bacs for Direct Debits.

VRP: Open banking’s answer to direct debits.

So what if you could, via an open banking provider, have VRP set up for your gym membership?

• Users would have the ability to stop their payments rather than hoping someone fills in the right form on time.
• Your gym (and other small business owners) would know immediately if you hadn’t paid your membership rather than the usual 3–5 day wait
• Identify where a subscription would put you into your overdraft and immediately stop the payment and pause the subscription, preventing users from incurring charges for luxury items
• Transferring the volume of direct debit payments to Open Banking would unlock economies of scale large enough to match the cost basis of Bacs

And then ladies and gentlemen, we can finally decommission Bacs and put it alongside the Fax machine and dial-up routers. Though it served the nation well we live in a world of instant payments and the idea of waiting up to 5 days to find out if a payment has worked or not just isn’t viable for businesses trying to get by.