Are you a direct debit fan?
You probably have direct debits for utility bills, gym subscriptions and more. You probably find direct debits incredibly convenient. But do you know what push payments are? And did you know that they might be taking over direct debits? 🤔
The payments world is rapidly evolving, and we now find ourselves differentiating between push payments (sending money) and pull payments (having money drawn from you). There’s much more of a difference than it might seem at first. The difference is in one word: trust. Who do we trust first? The system (the ones drawing the money) or the payee (actively sending the money first)? Turns out it’s safer and cheaper to trust the payee…
But before getting into the why, it’s important to understand the difference between push and pull payments.
Pull payments encompasses any payment where a card is present and you are charged on said card (e.g. in a shop). They also include direct debits; the customer and company sign an agreement that allows the company to “pull” the money from the customer’s account every week/month/x number of days.
Direct debits were a great invention – they make repeat payments smooth and easy to use. They’re also great for companies: it gives them greater control over cashflow and they don’t need to rely on customers to initiate payments. Although companies have greater control, there are regulations and customers are protected with a reimbursement guarantee and chargeback rights, aka the well known consumer protection law section 75.
We know what direct debits are, but it’s important to understand how exactly the process works. Direct debits are processed separately: first the beneficiary account (i.e. the company) is credited (receives the money) and then the sending account (me/you) is debited (sends the money). The numbers on the company account change before they actually receive the money. Obviously, this causes a problem when the sending account doesn’t have enough money in their account. The company needs to do a “reversal” which causes a processing problem for the company, as well as credit risk (the sender is essentially “borrowing” money that they can’t repay!).
As Fiserv director Trevor LaFleche notes:
“We don’t really see many use cases for real-time pull payments. Pull payments fill a different role.”
There’s definitely a place for direct debits, but surely there’s a safer and better way for payments between customers and companies to go through? May I present you with…
Push payments happen in real time and funds arrive instantly using systems such as Faster Payments, Bacs and Chaps. They rely on the customer actively sending (“pushing”) money to the company. The company must request the payment and relies on customers sending what they owe. Examples of push payments are cash, cheques, transfers and invoice payments. The customer has more control on what they send, and this is usually used for larger amounts of money such as paying your accountant or a tradesperson.
Push payments appeared around 2008, and were deemed a big step forward in payment technology. With push payments there is no protection and no pre-signed agreement because the trust is made before the payment. Whereas direct debits can be challenged by the payee, push payments are totally irreversible.
In terms of the mechanics behind how push payments work, it is safer: first the debit happens on the sending account (push), and then the credit happens on the beneficiary account, and only if the debit genuinely happens. This makes the process simpler and removes the dreaded credit risk.
You probably make push payments regularly and don’t think much of it. You use it to send your friend money for dinner, pay that cleaning invoice and do any kind of online transfer. When it comes to choosing between push or pull payments, not much changes from the customer’s point of view. Whether you use a card to make a purchase (pull payment) or approve a merchant to make a payment (push payment), at the end of the day your bank account is still debited. But behind the scenes… a lot changes.
Which one? Push or pull? They both have their pros and cons for different parties. However, with the introduction of Open Banking and PSD2, push payments are safer, cheaper and much more convenient.
Push payments are less risky than pull payments in the payment system. When pushing the payment, the transaction is initiated by the party who wants to send it, and the payment cannot even get started if there are not sufficient funds in the account. When a push transaction goes through, the beneficiary is very certain to get their money; push payments don’t bounce. Push payments are also cheaper to use – accepting push payments is less expensive and requires less compliance.
Pull payments are generally more risky because of the credit risk the merchant has to deal with. They’re also more expensive, and the consumer has less control over their funds. It’s pretty clear that push payments are better, and the change is already happening.
At the moment we’re seeing real-time payment systems gaining traction. Examples are the UK’s Faster Payments Service that only enable push payments. Employers are also doing more push payments allowing employers to send money straight to debit cards so workers can immediately access them (Uber is an example of a company that does this). We’re gradually moving towards a world where a company replaces direct debits with a “request for you to push your payment to the company”. The payment is driven by the payers, not the company, which gives consumers greater power over their money.
The main problem with push payments? Fraud – which we’ll discuss in the section below.
Push payments and fraud
When it comes to fraud, there is less protection with push payments. Between 2017 and 2018, push payment fraud rose by 50% – fraudsters are taking advantage of these technological developments by targeting consumer behaviour. On top of that, real-time payment schemes such as the FP in the UK, make it easier for criminals since they can quickly receive the money and run.
The main victims in this type of crime are people who send the money to the wrong person. Some examples:
- An account takeover where a criminal takes over the account and sends money to other accounts
- Sending payment to a contractor that turns out to be a fraudster (instead of paying your cleaner or builder, for example)
- Paying an invoice to a company that looks exactly like the real company – could be a child’s school, tutor, gym, etc.
Big banks have the advantage here in that they can easily close down the fraudster account. For Fintech startups, this means higher costs since they’ll need to employ another compliance person and make sure to keep everything in check.
Push payments are not perfect for this reason. But the belief is that Open Banking could also strengthen direct debits for the organisations that use it. Maybe we can imagine a scenario where direct debits and push payments come together as a pair. With the continuous innovation of the payments system, we’re likely to see more security, speedy systems and greater control. 💪
Written by Araminta Robertson