It’s important for organisations to keep ahead of the developing changes in the Payments landscape. In this episode on the Payments Podcast we’re talking to Gaurav Tiwari about the benefits and changes both ‘Request to Pay’ and ‘payment direct from bank account’ will have on the landscape. As well as what we can expect to see happen to the older services, such as Direct Debit.
Rich Williams: The payment landscape is changing. We all know this but do we know how it will affect the organisations around us?
Hello. I’m Rich Williams, host of The Payments Podcast. Today I am joined by Gaurav Tiwari, Commercial Product Lead on Open Banking Initiatives and Request to Pay to discuss how these services will work and what benefits they could bring.
Gaurav Tiwari: Hello Rich. Thanks for having me here.
Rich Williams: Thanks for joining us. Now, if we briefly start on the changes to the payment landscape, we’ve all witnessed recently the rollout of open banking. Now, what have we noticed from this already specifically with respect to payments?
Gaurav Tiwari: Alright. So, open banking is going to have a certain kind of regulated entities called Payment Initiation Service Providers. These regulated entities can trigger payments from consumers’ bank accounts into a third-party account or into a business’s bank account. So, in simple terms, with the advent of open banking, businesses can use PISPs to collect payments directly from consumers’ bank accounts on a digital checkout.
Rich Williams: What else can we expect to see in the near future?
Gaurav Tiwari: So, open banking has been a really, really powerful tool. It requires more value-added services around it to become a huge success. What Pay.UK is doing in the UK, in the next two or three years, we should expect to see a gradual rollout of new payments architecture. This is going to be the biggest change the UK has seen since the 1960s.
You might ask me: why such a big change? The reason is that things are changing. We have connected devices, smart [homes 0:02:14], voice-activated payments and you name it. A three-day clearing cycle doesn’t fit these use cases. Payment has got to work with the modern technologies, such as APIs. The backbone of new payments architecture is going to be a core settlement layer, which will allow immediate push payments.
So, as part of new payments architecture, we are also going to see some overlay services. One of them, called Request to Pay, is almost here. Request to Pay overlay service works as well with the current payment infrastructure as it will with the new payments architecture, when available.
Rich Williams: Okay. So, we have a situation where the world is changing around us. These new services are geared up to help modernise the way payments are made. Now, you touched upon two specific payment collection initiatives there. Paying direct from a bank account and Request to Pay. Could you explain the difference for us please?
Gaurav Tiwari: Absolutely. So, before we look at the difference, let’s just look at the similarity between the two. So, both work on the same principle. That is request for payment from one party to another, if approved by the payer, will result in immediate push payment. That’s very different from the current day pull based payment mechanisms of cards and Direct Debits, which work on a static upfront mandate.
Open payment initiation service is the core payment service that will enable businesses to collect payments from consumers at the point of, for example, digital checkouts, without having to use cards. Whereas, Request to Pay is an overlay messaging service. It is launched by Pay.UK and it is a set of standards for messages that are linked to payments. It is completely payment method agnostic. However, it is going to leverage the open banking core payment initiation service in a very big way.
Rich Williams: Okay. Thanks for clearing that up for us, Gaurav. I know it was something confusing a lot of people in the industry.
Now, you mentioned there digital checkout as a specific use case for the open banking initiative. Could you provide an example for Request to Pay?
Gaurav Tiwari: Alright. So, Request to Pay, as I said, is an overlay service. It’s currently mainly targeted towards regular bill payments – for example, utilities – to collect payments from their consumers. The service itself is versatile. It’s generic enough to be used for other use cases in the future, for example business to business payments, invoice-based payments and many other use cases.
Rich Williams: What are the benefits for businesses from adopting these new payment collection methods?
Gaurav Tiwari: There are many benefits of new payment collection methods over existing payment mechanisms. It depends on the specific type of business and use cases. To name a few, reduced fraud, reduced chargebacks, improved reconciliation, immediacy of the funds availability and better information about the transactions. That will result in improved customer service.
Rich Williams: That leads me nicely on to the next question, which is what are the benefits for the consumers or the customers for these new collection methods?
Gaurav Tiwari: One major benefit, which I forgot to mention, is reduced cost of payments and operations for the business. That’s really important. Consumers also get benefited with these new payment collection methods. They can keep control of their finances. They can have a look at the balance in the account before they authorise the payment. They have a simple payment experience. They don’t have to type in the long card details on the checkout. The Request to Pay service also offers them flexible payment options.
Rich Williams: So how are these benefits going to be realised by businesses?
Gaurav Tiwari: Alright. So, let’s focus on each key benefit. First, the reduced cost. Currently, businesses have to pay payment card costs in the change phase. No such fees apply to open banking-based payments. Reduced fraud, because the consumer authenticates each and every transaction through secure customer authentication. Improved reconciliation, because the reference number is populated in each and every transaction. That allows 100% automatic reconciliation.
As part of this ISO 20022 messaging, rich information flows through payment messages. That allows businesses to have better customer insights. In return, that facilitates improved customer relationships. Request to Pay service also offers some additional benefits. For example, businesses can deliver electronic invoices to their consumers, saving them the cost of paper. They can efficiently chase customers for the pending bills, for late payments, therefore improving their customer service. The businesses can improve their cash flow.
Rich Williams: You did touch upon improved customer service there. What other reason should consumers or customers have to be excited about these changes?
Gaurav Tiwari: Great questions. Unless we deliver the value to the last end user in the chain, benefits won’t be realised and the services won’t be successful. With the Request to Pay service, consumers get greater control. They have got greater visibility of all the requests to pay from different billers coming to them. They can manage their finances better. They can do all of this through one app. They can possibly query a bill, pay in parts, request to pay later. All of this flexibility is given to the consumers.
Rich Williams: What’s the need for this Request to Pay overlay service? What’s driving it?
Gaurav Tiwari: Right. As I’ve said, businesses these days, particularly where margins are low, need to control the cost of payments, cost of intervention and reconciliation. If I gave you one statistic, 42% of consumers have experienced their Direct Debit bounce at least once. This is a no-win situation. Consumers may face penalty charges, bad credit. Businesses have to chase consumers for late payments and have to incur extra costs.
Now, if you look at the consumers’ side, there is more need than ever for payments that suit their lifestyle. Today, self-employment is on the rise. Millennials are hooked to their apps or digital applications to manage their finances.
Rich Williams: That’s interesting. So, the new overlay services, or these new payment initiatives will not only help to facilitate making that initial payment but there will also be a knock-on effect to the businesses of being able to chase or manage their bad debt by having increased transaction analysis and increased customer experience?
Gaurav Tiwari: Absolutely. Could you imagine that utility companies have more than £2bn of bad debt towards the consumers? Businesses need efficient ways to collect money, efficient ways to chase consumers and, at the same time, maintaining a good relationship with the consumers. So, we need new payment innovations that suit consumers’ lifestyles and can work with their irregular income pattern.
Rich Williams: So how will the payment initiation service work practically at digital checkout, for example?
Gaurav Tiwari: Right. So merchants will use regulated service providers of the likes of Bottomline to request for payment from consumers’ banks. Consumers will authenticate with their bank, authorise the payment and payment will be done at the checkout. Behind the scenes, consumers’ banks will send the payment status to the regulated service provider who, in turn, can follow that status to the business to fulfil the goods and services.
Rich Williams: Okay. What about the same example but for Request to Pay?
Gaurav Tiwari: Request to Pay, you could imagine a messaging service, such as email – so text. So, Request to Pay will mainly be delivered by two service providers. One is business-facing service providers; the other consumer-facing service providers.
Business-facing service providers will use an interface to send these requests for payments to their consumers. That interface will be provided by the Pay.UK accredited suppliers, such as Bottomline. On the other hand, consumers can receive these requests in their app of choice. This app could be provided by banks and fintechs. They just need to download any Pay.UK accredited app to receive these requests and make payments from these apps or request some flexible options from within these apps.
Rich Williams: What types of businesses will use these services, Gaurav?
Gaurav Tiwari: Absolutely, yes. Utilities and other regular service providers, telecom service providers, business-to-business invoice payments, even loan providers who need to collect the payments regularly from the consumers.
Rich Williams: Moving on to Request to Pay, it seems that these are arguably most useful for businesses making regular collections, such as utilities.
Gaurav Tiwari: I’m glad you asked this question, Rich. There has been some confusion about it in the industry. Direct Debits are very important. They are cost effective and the preferred payment collection method for many, many businesses today. Request to Pay is in no way designed to replace Direct Debits. It will rather complement Direct Debits, giving consumers more choices of making payments and giving businesses more choices to collect payments. One size doesn’t fit all. Some businesses find Direct Debits working. Some businesses will find a combination of Direct Debits and Request to Pay working for them.
We expect Direct Debits to continue, even after the full rollout of new payments architecture in three or four years’ time. The only thing that will be different will be that they will be processed differently to make them easier, faster and more secure.
Rich Williams: So, what happens to Direct Debits, which some businesses really like to use as this primary regular payment method? Do these services present a risk of replacement or do they work in parallel somehow?
Gaurav Tiwari: Right. So, in the UK, organisations are changing their product offerings to suit the needs of today’s market. For example, they are offering flexible Direct Debit schedules to their consumers. Payment initiation service providers, like Bottomline, are integrating with all the UK banks to offer the digital checkout experience to the merchants.
Rich Williams: So, it’s complementary service? It’s not in place of a threat to Direct Debits at all?
Gaurav Tiwari: Absolutely.
Rich Williams: I think that will be encouraging for a lot of the listeners we have on today. So, finally, let’s end on what’s actually being done in the space right now, in the UK and around the world, please.
Gaurav Tiwari: Fintechs, including Bottomline, banks and some billers are joining the Pay.UK pilot and Request to Pay to complete it by September this year. Then, launching their live service from that point onwards. If we look outside in Europe, the EBA has very recently decided to set up a taskforce to develop the Request to Pay-like service in Europe. That’s very encouraging. If you look out further, then, for example in India, monthly payment transactions on an open banking type of service, rose from 0 to 800 million in just three years. That’s the kind of success India has achieved in terms of open banking payments.
Australia’s BPAY is a hugely popular way of receiving electronic bills and paying them with flexible options, exactly like Request to Pay. So, we have seen lots of examples all around the world where these services have been successful.
Rich Williams: Where do you personally see the future of this going? Where is the limit for this?
Gaurav Tiwari: Alright. I think only the future can decide the limit. I strongly feel Request to Pay, along with open banking initiatives, offer a great opportunity to transform this industry. Businesses have shown tremendous interest in open banking payment services at their digital checkout.
Rich Williams: Fantastic. So there are clearly lots of benefits here, not only for the banks and the fintechs but all the way down to the consumers and end users as well.
Gaurav, once again, thank you very much for your time today. That was really insightful.
Gaurav Tiwari: Thank you very much, Rich. It was great talking to you.
Rich Williams: So that’s all we have time for in this episode. In the meantime, you can listen to more episodes and all things payment at the touch of a button using your preferred provider. We’ll see you all next time.
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