Why use Direct Debit when you can use your debit card?

[Hakan Aldrin]

I am a Spotify fan, u know the service where you have access to 15 million songs free of charge (with commercials) or against a monthly fee (no commercials). It is an excellent service that was created by some Swedish guys a couple of years ago. I just had a look at my account there and realized that I am having a direct debit set up, but it is my debit card that is debited each month instead of my account.

Started to wonder why am I not having the same service for all of my utility bills, u know like the electricity bill and so on? The infra structure for card transactions are very impressive. I mean why bother with cross border direct debits in SEPA when you could have the same function by using your card instead?

Comments?

[Måns Grünberger]

I agree Hakan. Just found an interesting app on the subject. iZettle lets you charge a creditcard with your iPhone. You can registrer both as a private individual or as a company. The money will be transfered directly to your account. For a charge ofcourse, 2,50%. Nevertheless an easy way to charge your friends when they say that they are out of cash! Check it out!

iZettle

[Hakan Aldrin]

iZettle is quite interesting indeed. Found this little video about iZettle on Vimeo.

[Mats Bergstedt]

Hi Håkan and Måns,
I totally agree with you. I used to be a product manager for SEPA DD in a large Swedish bank and when we saw the cost for the investment to be compliant, the case was closed. The current infrastructure for cards is working exellent. Improve it if necessery instead of building a new one.
//Mats

[Mr. Smith]

I do not know what the position is in other countries but my understanding is that in the UK a bank account holder can cancel a standing order or direct debit authoirty for that account unilaterally (i.e. without anyone else's agreement) whereas they cannot cancel the equivalent for a credit card without the agreement of the 'beneficiary' as well, which may result in amounts being debited with which the card holder disagrees. Thus, a standing order or direct debit for a bank account is safer for the account holder.

[Hakan Aldrin]

I do not know what the position is in other countries but my understanding is that in the UK a bank account holder can cancel a standing order or direct debit authoirty for that account unilaterally (i.e. without anyone else's agreement) whereas they cannot cancel the equivalent for a credit card without the agreement of the 'beneficiary' as well, which may result in amounts being debited with which the card holder disagrees. Thus, a standing order or direct debit for a bank account is safer for the account holder.

Good point - but I guess it would be possible to develop the card with a similar type of service.

[Mats Bergstedt]

Mr Smith, you are quite right about the security in the rules i SDD and this is of course a hypothetical discussion but with the same rules as in the rulebook for SDD using the card infrastructure, it would be less cost for the banks and probably better pay-back time as well.

[Jacob Koch]

In USA is the payment structure very under-developed for consumers - most payments for utilities, insurance, rent etc. are done with checks (I had to look up on google how to write one of those when we came her, since it is approx. 15 years since I wrote the last check in Denmark).

Most companies who uses payment card for recurring payments in USA, send the consumer an email a few days before the debit - meaning that the consumer has time to cancel the suscribtion, which will reduce the necessary cases, where people need to make a charge-back.

This means that companies with a focus on Cash-Flow often accepts payments done with credit or debit cards, even so that the service fee charged in USA is often 2-4% which is substantial higher than in Europe.

2-4% seems high for accepting my payment seems high - on the other side, when payments come in on checks, without any other structural information, there is a lot of manual processes that can be skipped, by accepting payments via payment card - so the deal is properly not as bad as it looks.

I do think, that there is a very interesting marked for banks, if recurring payments on payment cards were better developed. It is very easy to set up, easy to cancel and works very well across borders, currencies and for the high number of people without a bank account (I read close to 30 millions in Europe and 70 millions in USA and how many in the developing economies in Asia, South America and Africa), will a pre-paid debitcard give the access to make recurring payments.

[Hakan Aldrin]

I do think, that there is a very interesting marked for banks, if recurring payments on payment cards were better developed. It is very easy to set up, easy to cancel and works very well across borders, currencies and for the high number of people without a bank account (I read close to 30 millions in Europe and 70 millions in USA and how many in the developing economies in Asia, South America and Africa), will a pre-paid debitcard give the access to make recurring payments.

So why do nonthing happen in this respect? Who/what is stopping such a development? Seems to be a slam dunk - at least from the consumers perspective.

[David]

I just saw the front page of the biggest newspaper in Poland (not that I can read it but a colleague translated) and they state that 10 Million Poles do not have a bank account. However most of these 10 Millions are elderly people and they probably do not want to jump on prepaid credit cards.

I’m however sure that credit card will be used more and more instead of for example direct debits. I also believe that there is a demand for people to transfer funds between credit cards directly instead of transfers to regular bank accounts.

[Mats Bergstedt]

This is a political decision from EU. The corporates don´t want it nore the banks and the consumers don´t have enough cross border payments to make acceptable business case for the banks. The pay-back time will not be before 2050.

[Christian Grossmann]

It's a nice hyphothetical discussion, but don't forget:

Credit Card bills are debited from bank accounts by using direct debits.
And so is even the nicest payment via cellphone.

In the end it's always a bank account with a direct debit or a credit transfer involved.
Therefore you will need the both basic payment types.

[Jacob Koch]

Christian - I do not agree - you can here in USA buy debit cards (Amex, Visa or MasterCards) in most stores - all you need is $20 and you are ready to go shopping - you do not need a bank account. If I wan't to set up a Cellphone, Internet-services (e.g. Netflix video on demand), Paper Subscribtion etc, can I do this with my pre-paid debit-card.

Mats - I also don't agree that there is not enough cross-border consumer payments. Companies as Skype, Apple's Itunes, App's and content on cell-phones, e-magazine subscribtions etc are a growing market, worth billions now - and many billions in the near future. Recurring payments on payment cards are the only truly global way of making those payments.

[Christian Grossmann]

Jacob - I think you are right about the high potential in cross-border payments within the market.

Yet, I still have to disagree with you in the field of the debit cards.
Even with a prepaid debit card, there will be a so called "shadow account" in the background where the card balance is held and calculated (similar to a bank account).
If you withdraw money from an ATM or pay at a cash desk, the basic transaction that is initiated is either a credit transfer or a (card initiated) direct debit. So you won't basically be able to come round these two payment types. ;-)

[Måns Grünberger]

Kaching! Another interesting payment app from Commenwealth Bank. Looks interesting. Guess we will se more of these types of smartphone payment soloutions going forward.
Kaching - Commonwealth Bank Group

[Kimmo]

This is quite interesting. I'd imagine that you'd have to create an account with Kaching where you deposit X amount before you can use it. Whilst iZettle uses a credit card so that's not needed. What about the security issues? In iZettle you approve purchases with your own signature and get a receipt of your purchases to your e-mail so it's actually like paying with a POS terminal. I wonder how the other mobile payment providers have solved this?

[Jan Richter]

Nice to read all your views; but I'm missing two things:
1. how does the beneficiary feel when you ask him to receive money through card payment compared
with direct debit (have a look also on cost comparison)
2. with e.g. VISA the card holder may claim in case of missusage or other missleaded payments

[Kimmo]

1. I think in these cases the beneficiary would welcome this alternative. The niche I'd imagine is companies or businesses who normally don't take credit cards, plumbers, small stores etc. If you for instance think about a rather small company selling their products without the POS terminals, the usual mindset is that they don't accept credit cards, but now they do! so this would just increase their sales. These small companies, entrepneurs, have no need or capabilities to direct debits, they need to setlle the purchase right there on the spot, like with a POS terminal.

2. I see the claims of misuse minimal, hence it is their autograph on the receipt. The misusage claims would then be the same as in any other store selling goods debited via a POS terminal.

[Hakan Aldrin]

"Nice to read all your views; but I'm missing two things:
1. how does the beneficiary feel when you ask him to receive money through card payment compared
with direct debit (have a look also on cost comparison)"

Can just say that PCCW (a telecom operator here in Hong Kong) has no problem to accept my Swedish Visa card to pay for sattelite TV, the kids mobile phone bills as well as for my broadband connection. Works like a charm!

[Mats Bergstedt]

Hi guys,
I like our discussions regarding DD and card payments. I can see that we have different traditions how we pay our bills in different countries. Most countries in Europe have a domestic infrastructure/service for DD but for SDD all banks have to build new interface to handle the service internally. For us in Sweden outside the EMU corporation, we will never have enough of cross border DD´s to make our banks happy.
Regarding my friend Måns reply about mobile payments I actually visited Common Wealth´s website last week because my work and intererest regarding how banks handle mobile payments in "real time" without a functional infrastructure. UK has "faster payments" and in Sweden we will have a similar system next year. But they still are only domestic. Most banks and telcos have solutions depending on being customer within the same bank or telco to offer a real time payment. We have seen other solutions as well. Still I like the creation of new payment solutions even if I agree with Håkan that the card service and infrastructure is workin quiet well.

[jacobkoch]

We in the Nordic Countries not used pay utilities with payment cards - properly because we have some functional direct debit systems. However at least the Danish system is not so flexible as a direct debit on a payment card:

Payment card Debit is strong:

1) Total flexibility to bill you customer whenever you want it. Are you running a service where the customer pays prepaid into an account, you can bill the customer whenever his account is under 3 EUR, not because it is a special day in the month.

2) For minor payments are debit card cheaper - a Direct Debit with "Betalingsservice" cost approx 4,5 DKK / TRX) - do the math yourself for the price if you are receiving 100 DKK/customer/month.

3) Yes customers can reject a payment on a debit card or it can be declined - but if you are selling a valid service and the customer has not canceled the subscription - there is nothing to stop you for adding interest on the bill that are send out.

4) Debit Cards are the only truly global payment scheme that reaches out to consumers - so it is the best way to receive cash if you are running a payment factory for an international company.

5) It is easy for the customer to set up a direct debit - in a physical store they just need to swipe the card - in a virtual store they can just type in the card information that they are always carrier around.

6) The system is there - just use it.

[ktpama]

Spirited by Mats' comment, I can see other angles on the subject:

- banks against credit card companies
and
- USA vs rest of the world, big credit card companies being american