Swift payments are coming to banking. Here’s what you need to know
Direct debits arrived in the UK in 1964 as a paper-based system. They’ve become essential for managing household outgoings and almost 9 in 10 British adults have at least one direct debit commitment.
Now, “Open Banking” will change the way you make payments, and it could provide you with far more flexibility, including through the introduction of swift payments.
“Open Banking” is a term used to describe the process of banks and other financial institutions opening up data for other regulated providers to securely access, use and share. It effectively means your data can be shared more easily with third parties when you choose to do so.
It’s important to note that providers will only be able to access your data if you permit them to.
Currently, direct debits are commonly used to make payments.
A direct debit gives a company permission to take money from your bank account on an agreed date. The company can then collect how much money you owe them, but they need to inform you of how much it will be.
Direct debits have become an incredibly popular way to pay for recurring bills, as you don’t need to worry about remembering to settle them. Some providers will also give you a discount if you choose direct debit as your payment method.
So, why are they changing?
Open Banking will speed up the payment process
One of the criticisms of the direct debit process is the time it takes. Often, it will take three days for a payment to clear.
If you need to make a payment urgently or if a delay means there isn’t enough money in your account, it can cause issues. For example, if you realise you need to make a payment to your credit card before interest is charged today, a direct debit taking three working days could mean you pay more.
Open Banking and swift payments could change this.
Open Banking became a regulatory requirement in 2018. After some delays, the largest banks in the UK have until July to complete the testing phase.
What does Open Banking mean for you?
The nine largest banks and building societies have been told to be ready to implement smart direct debits, also known as “variable recurring payments” (VRP), by July.
Essentially, VRPs mean you can give consent in advance for money to be transferred instantly and are designed to make your life easier.
You will be able to set up payments, choose when they end, and even set a limit on the maximum amount that can be paid in advance. It can help you take better control of your finances and ensure that payments you make are cleared much quicker than they are under the current system.
In addition, you will also be able to transfer money to other accounts instantly.
This means that if you want to transfer money to a savings account or investment portfolio, you could start benefiting from interest or returns straight away. It means that if there’s a deadline, such as the end of the tax year, and you’ve yet to use your ISA allowance, you can transfer money without having to worry about delays.
It can also be useful when paying off debt. As your money will be instantly transferred, it can reduce the amount of interest payable on credit cards or loans, as well as helping you to avoid potential late fees.
As well as consumers, VRPs could also be useful for businesses as they will speed up payments, track late payments, and offer new opportunities for subscriptions.
While some banks and building societies must be ready to implement VRPs by July, it may be some time until you can make use of the new features, especially if you don’t use banking apps, but it’s something that could give you greater control in the future.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.