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John Gaffney: Greetings, and welcome to the Payments Podcast. My name is John Gaffney. I'll be your host for this episode that will feature exclusive data on the state of consumer payments in the UK, as well as what that data says about the general state of that country's economy.
Although our data here is UK specific, I think listeners, regardless of where they are, will be interested to hear what happens when price spikes push consumers to their limits. They'll also learn a little bit about what looking beyond the usual KPIs can gain for finance leaders who choose to look for them.
Before getting to that data, I'd like to introduce our guest. Vinay Khosla is the Head of Product, Data Analytics and Insights, at Bottomline. Throughout Vinay's career, he has advised many companies on how data analytics and its intersection with machine learning can make business decisions more accurate and profitable. We're happy to have him here today, grabbing him out of vacation. Welcome, Vinay.
Vinay Khosla: Thank you, John. Great to be here and be able to talk about some of the great insights our numbers are showing us, so, fantastic.
John Gaffney: Yes. For our listeners, Vinay is all about numbers, which is a good thing because I don't get numbers. I do words, (laughter) but that's okay. He has identified a couple of KPIs here that have been overlooked by most banks and economists.
The data comes from Bottomline’s business transaction platform, PTX. Among the data he’s been tracking are direct debit payments and direct debit failures. Now, why is that important? We're going to leave that to Vinay, but first let's set the stage a little bit.
We'll start in the UK, where the cost of living, in the UK Consumer Prices Index, rose 9.3% in the 12 months leading up to November 2022. Where did that increase stem from? Right in the breadbasket: according to the Office for National Statistics, that 9.3% came from housing, household services like electricity and gas, food and non-alcoholic beverages, and transport.
According to the BBC, increases in these areas have already affected lower-income populations, who have turned their heating off to save on skyrocketing energy bills. Over half of UK adults say it has already been difficult for them to pay household essential costs in the last six months. So, Vinay, tell us a little bit about what direct debit fails are and how you came to identify them as a KPI that we should be watching.
Vinay Khosla: Yes, thank you, John. Bottomline operates globally and, here in the UK, is one of the most common ways for a consumer to pay regular, recurring payments, called ‘direct debits’, under the Bacs scheme. It’s worth just drilling into that for a minute.
John Gaffney: Yes, great.
Vinay Khosla: Just so all our listeners can understand what that means… For example, it's how most people in the UK pay their essential bills, like mortgages, insurance, home energy costs, and also luxury items, like magazine subscriptions, charity donations, which are essential, of course, and gym memberships, things like that: anything regular and recurring that happens.
But direct debits have been around a long time in the UK, since 1964. They're trusted, but there is new technology, open banking technology, that's catching up and offers businesses more ways to efficiently collect from customers in a simple, online way that we expect today.
Today, I'm focusing on direct debits because that's the bulk of how businesses collect their reoccurring payments in the UK. Most businesses rely on that regular, recurring payment and will offer a direct debit as a payment method because it's the most cost-effective, but it also comes with rules and guarantees that protect the consumer. Really, really important, that part of it, as well.
Most people in the UK have at least two direct debits, taking money from their bank account each month. Then, by setting up that direct debit with a business, the consumer is giving permission for that business to take money off their bank account on a regular basis, so, nice, easy, clean and understood. The permission comes with protection for the consumer, as I mentioned, and provides the businesses with an easy way to collect those funds, vital for their cash flow.
John Gaffney: You've identified that these direct debit fails have increased. Why is that a big deal, and how big is the problem?
Vinay Khosla: Yes, thank you. Normally, a direct debit payment comes out of a consumer’s bank account and flows into the business, with no problems. However, they can fail, as we're here to talk about, and the money is not deducted from the consumer’s bank account and never reaches the business. This obviously has impacts on that business. It immediately impacts their cash flow, and they need to find ways to re-collect those funds.
Direct debits can fail for a variety of reasons. I'm going to talk a little bit more detail about some of those as we go through this today, but it's things like the bank account details could be incorrect, or the consumer may have changed them when they open a new bank account. Or, sadly, the payer may be deceased.
All of these reasons can cause a direct debit to fail, but in our analysis, we see all of these direct debit failures. Now, just to be really clear, we don't see any personal details around that. We don't see any information about whose direct debit it is. We only see the aggregate, anonymous information.
About a year and a half ago the Data Analysis team started looking into this anonymous direct debit data. We did it because it's difficult. It's a challenge. It's hard to do this stuff, because at Bottomline we see millions and millions of direct debits, the anonymous transactions that go through. We need to take that huge data, transform it in a way that we can make sense of it.
During this process, the team, and an absolutely amazing bunch of people, noticed a trend in these failures that we're bringing you today. It was the number and the trend that no-one appeared to be aware of or measure, either. We even spoke to a number of customers to go, “Did you know about this?” of various different industries and different sizes, and very few were able to tell us their failure rate. It appeared to us it was almost like they consider it a cost of doing business.
In my view, I go, “Whoa, no, that's not right. You've got a KPI here you can measure, and it can tell you some great stuff.” I was astonished, actually. Also, the number of direct debit failures is a small percentage of the total direct debit value.
John Gaffney: Okay.
Vinay Khosla: I’m going to go through it there, but the value is significant, and there are trends to be seen there as well.
John Gaffney: So, give us some of those numbers. Give us some of the bad news.
Vinay Khosla: Thank you, John. I thought you’d never ask! In the year – in the last year – to November ‘22, we saw almost 20 million direct debit failures: massive number of direct debit failures. Again, that's looking anonymously and in aggregate at our Bottomline customers, but we see that rising about 1 million failures a month, so this is going up.
Bottomline, of course, don't handle every direct debit in the UK, so the true number across the whole economy is far higher, but the value of those failed direct debits that we can see is the big thing. That's edging towards £3bn. I emphasise the billion there because people look at that and go, “What?” Yes, £3bn.
So, this is a real KPI that we should be measuring and assessing the macro-economic impact of this on the economy. It tells us something about the impact of this cost-of-living crisis that we're all experiencing now: inflation, higher energy costs, etc., all adding financial pressure to consumers.
We then went away and thought, “That's not good enough just to know the numbers. I need to know, drill into this, and find out what's going on here.” So, we looked into the reasons for those failures and saw the top failure reason, because we can see that reason – again, we don't see who or what, but we see the failure reasons – was a code called ‘Refer to Payer’. Refer to Payer is a failure that happens when a consumer has insufficient funds in their bank account at the time the direct debit is taken.
Businesses who do direct debits will be very familiar with this, but they may not be tracking that amount, and they should because this is likely to be a bit of an ‘oops’ moment for the consumer. It’s quickly rectified, but not always.
This failure type accounts for about half of the value of direct debits, so half of that £3bn is accountable for people not having enough money in their bank account at the time their direct debit is taken. We're seeing that increase, year on year, and month on month.
Interesting, though, what we’re also seeing when we looked into data is it's not only regular people who direct debits fail for. There are a number of first-time failures. This is unique, and this is starting to happen more and more, more recently, certainly since COVID up to now.
This is where consumers such as myself, and yourself, and everyone else listening to this, it’s the first time their direct debit, or a direct debit they have, has failed. That's the first time that ‘oops’ moment happens.
Now, that could be an indication of cost-of-living impacting people directly in that cohort who are normally able to keep on top of their finances, but again that's purely speculation on my part. But the answers are there in the data, to go and find that.
John Gaffney: To prepare for this, I looked to see if we track this in the US, if anybody, any company or trade group, was tracking direct debit volume and fails. I didn't find any. The Federal Reserve does not do it, but there are some specific verticals that report these kinds of numbers, and they tell a story.
3.5% of all Americans are 60 days late or more on their car payments, which is up substantially from 2021. You combine this with record prices for new and used cars, higher interest rates: all spells trouble. So, from a business standpoint, Vinay, why are these numbers important?
Vinay Khosla: They're really important numbers, John, because, for businesses, a failed direct debit has an immediate impact on their cash flow. They don't get that money in – obvious – but they’ve also got to consider the cost of that.
Talking to customers, we very quickly realised that every time a direct debit fails, it costs that business at least £50 in an operational cost to go and recover that. That's on top of that cash-flow hit that I've just talked about. So, in our view, you can't just consider this a cost of business anymore. It's a cost that the businesses do not need in this economic climate.
What we're also seeing around this time of year – seasonal – is that consumers start cancelling their direct debits as they take stock of their finances. This year, we can actually expect that number to go up as consumers tighten their financial belts.
We also expect to see a rising number in the failures where it's the first time, that first-time cohort of people who have not got enough money in their bank account to cover the direct debit. All of that means reduced cash flow and increased operating costs to their businesses, so something we need to measure and do something about.
John Gaffney: The really cool stuff – for me, anyway – about the work that you've done is that it's not the normal KPI. It's not the usual-suspect KPI that you would look at. So, I have to ask you to put on your career hat here and think of all the companies that you've worked with. Is there too much of an obsession with obvious KPIs when we evaluate the economy, or should we be looking for things like direct debit fails, that can give us a more micro look, maybe?
Vinay Khosla: Absolutely, we should be looking at KPIs like this. I'm a data person, and this is a KPI that must be considered. I would say that. But, if we combine that with some of those traditional metrics you mentioned, it gives a unique view into the state of the economy and the impact of macro-economic decisions on consumers and businesses, because it actually gives that lens onto it, in a way that people can understand. The business can understand that impact straightaway. Now, we've done that heavy lifting to see the trends. They must be used and should be used.
John Gaffney: I don't think anybody jumped up on the desk and said, “Hey, this is great”… but what was the reaction to your work so far? Do you have any anecdotes from people that have looked at this and been moved?
Vinay Khosla: No, absolutely, I certainly jumped up, John, when I saw this! The reaction to the analysis has been phenomenal, actually. We now talk about failed direct debits with our customers, and we've opened their eyes to this important KPI.
We're working with a number of customers, in a variety of industries, to provide trends and benchmarks. For example, some customers in the utility sector are actually unable to get this level of granularity on those failure reasons.
John Gaffney: Through their own internal data?
Vinay Khosla: Through their own internal… No, absolutely, they can't do it.
John Gaffney: Oh, okay.
Vinay Khosla: So, we're able to give them that information. They're now using that to implement cost-effective collection programmes and really get a deep understanding into the behaviours of their consumers: vital stuff for them, but also for us, for Bottomline. The data and insights of this nature are influencing the strategy, and our product strategy, and decisions that we're making.
We, as data people in the data team, are finding that, these insights, are incredibly powerful to be able to delight our customers and help Bottomline achieve its strategic goals. Personally, I'm immensely proud that the team has done this hard work and enabled me to sit here and talk to you about it today.
John Gaffney: Yes, great stuff. This is the final question. Put your consultant hat on here. How would you advise businesses to proceed in this environment and with this information?
Vinay Khosla: I would suggest businesses do actively measure and report on this failed direct debit KPI. Drill into your data if you're able. If you're not, come and talk to us, but understand why direct debits are failing, and understand the cost to your business of that. Do not just write this off as a cost of doing business.
If it gets measured, you can do something about it. Businesses can be more flexible. Provide your customers with different payment channels, once you understand their lifestyle and behaviour, through looking at why they're failing. That's a unique insight that you've got into your customers.
Doing this is going to increase the likelihood that customers will be able to pay, and when, and in ways that will suit them. Think about your customers and look at the data that you've got there. Look at all your payment processes. Use this as your steppingstone to get into that view of those processes.
For example, for refunds, if you're making refunds, instead of refunding to their card, send them an email, with a link to deposit that money into their bank account, because that's where they want it. Start using this information around failed direct debits and consumer behaviour, to really use it to your advantage.
John Gaffney: So, this data can actually help strengthen customer relationships.
Vinay Khosla: Absolutely. I've said it a few times here, around those ‘oops’ moments.
John Gaffney: Yes.
Vinay Khosla: You want to be sensitive to those and then be able to react to it when, or if, it does happen. You can look at your data and see trends, and you can almost predict when it's going to happen, or the type of cohort where it will happen, where it’s more likely to happen to, and then predictably do something about it early.
John Gaffney: Wow, that's great. Hey, that's a wrap for this episode of the Payments Podcast, which we're titling ‘Direct Debit creates a new economic data point.’ Vinay Khosla, Head of Product, Data Analytics and Insights at Bottomline, thank you. That was really insightful, one of the best podcasts we've done, so thank you very much for your time!
Vinay Khosla: You're very welcome, John. Hope to talk to you again soon.
John Gaffney: Yes, I think you will. Hopefully, that's on a near-to-the-future Payment Podcast, which is available on Apple, SoundCloud, and Spotify. I hope you tune in again. See you next time.
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