The rise and rise of direct debit

The ease of use and flexibility of direct debit means its popularity both with bill payers and energy and water suppliers is continuing to rise, says Graham Callaghan.

If you work in a finance, customer retention, or billing team, then you will no doubt be well versed in the many benefits of direct debit. But far from simply being merely an efficient method of collecting funds, it can often be the most regular and visible interaction between biller and consumer.

The latest figures from Bacs – the organisation behind direct debit and Bacs direct credit in the UK – highlight the continued and growing popularity of the payment method, with almost nine out of ten British adults having at least one direct debit commitment and 73 per cent of household bills paid this way (up from 71 per cent in 2014).

Further, 62 per cent of Brits prefer to pay most bills this way, and the number of people who feel positively towards direct debit stands at 77 per cent. Last year alone, 3.9 billion direct debits were processed, the highest number ever and a year-on-year increase of 239 million payments.

In fact, over the past five years the use of direct debit has increased by around 680 million, or 20 per cent, while, since 2006, use of the payment method has grown by more than one billion (37 per cent).

While take-up of direct debit has never been higher among consumers, it is no surprise that it is also a favoured method of collection for billing organisations, because it makes the process more efficient, manageable, and cost effective. Importantly, it can eliminate time-consuming reconciliation and is cheaper than the likes of cheque and cash.

This preference to pay and collect by direct debit is further borne out in our latest processing data – that is, transactions processed by Bacs. More than 252 million direct debits were collected for domestic fuel bills in 2015, a year-on-year increase of more than 3.3 million, or 1.3 per cent.

Interestingly, despite a rise in the number of direct debit payments for these bills, the overall value decreased by 3.4 per cent (£23.9 billion versus £23.1 billion), with the average individual payment amount falling from £96 in 2014 to £92 last year.

When it comes to water bills, there were in excess of 136.5 million direct debit payments collected in 2015, compared to 132.5 million during the previous 12 months, equating to an increase of 4 million, or around 3 per cent. In terms of total value, the year-on-growth stands at £87 million, or 1.7 per cent (£5.1 billion versus £5 billion), but the average individual transaction level remains flat at £38.

As ever, the devil will be in the detail and billers will no doubt have their own story to tell, but the increasing popularity of direct debit is clear. It may also be the case that a decrease, or stagnation, in individual transaction values is evidence that consumers are becoming more savvy when it comes to searching out the best deal and ultimately even switching suppliers.

This picture becomes even more interesting when compared to data Bacs compiles on the pressures faced by bill payers in the UK, which shows that the cost of regular monthly outgoings has continued to increase over the past five years. These latest figures reveal that by the end of 2015 the cost of essential bills had grown to £672 per month, up by £87, or 15 per cent, since December 2010.

The data is drawn from 100 million actual anonymised monthly transactions processed by Bacs as householders use direct debits to pay for their essential bills – it does not include elective personal bills such as gym memberships or mobile phone payments. And the comparison is clear: the transaction values for water and domestic fuel bills are generally bucking this upward trend.

So, while the use of direct debit is already widespread among consumers and billing organisations, is there anything more that can be done to increase conversion rates yet further?

Offering flexible payment dates has proved particularly successful in other areas, including the housing rent sector, providing increased control and choice for bill payers who can then time their outgoings with greater certainty. Not only does this ensure that consumers can manage their cashflow with added ease, it can also reduce the level of unpaid rates for billers and the associated time and costs.

We have also seen how incentivised marketing campaigns can have an impact on increasing the number of customers switching to direct debit. This year’s national Freedom Guaranteed campaign, run by Bacs, is offering two £10,000 prizes along with free marketing materials to help billers encourage customers to switch. With very little effort required on behalf of participating organisations, it can be an ideal way to run a direct debit focused campaign, without the cost.

Graham Callaghan, senior market sector manager, Bacs Payment Schemes