Why payments aren't instant and how money transfers work at Plum.
Speed of payments is something that affects all our users. Some of you love the delay as it prevents impulse buying, whilst others just wish it was instant to guarantee getting the money in a flash if needed.
We wanted to take the time to explain why we built our payment system the way it is, shed light on the pros, cons and tradeoffs, as well as changes that are likely to come into effect as a result of the payments landscape changing.
Our current options as a business
There are two types of money transfers that enable companies to take variable, recurring payments from customers: the first is card payments (‘Continuous Payment Authority’) and the second is Direct Debits. Plum uses Direct Debits.
With Direct Debits, the customer authorises a business to take payments directly from their bank account, and the payments follow a 5 day cycle. With card payments, the customer authorises a business to take payments from a credit or debit card - these payments usually settle the next day.
For those who are particularly interested in the mechanics of Card Payments versus Direct Debits, there is a breakdown of the main distinctions in an appendix below.
Why do we use Direct Debits instead of card payments?
With Direct Debits, customers benefit from the highest grade of customer protection thanks to the Direct Debit Guarantee; with card payments this protection doesn’t exist. Customer protection is at the heart of our service and so it’s really important to us.
Failure rates of card payments sit at 5%, whilst Plum processes over 99% of payments successfully with GoCardless. We make up to 6 savings per month per customer, so the low failure rate of Direct Debit payments means we can pull funds reliably.
Card payments are also very costly. If Plum transfers £25 for you, this transaction will typically cost 95p as a card payment, compared to 40p with Direct Debit. At scale, when you’re transferring tens of thousands of pounds a day, this adds up to a pretty large amount. See more about cost in the appendix.
Paying lower costs on Direct Debits means that we can keep Plum’s lights on, and free for our users to save.
Swapping to another system would require a lot of development as we would have to rebuild a lot of Plum. As a small team, this would mean shifting our focus away from new features and integrations such as goals, boosts, natural language processing, and Open Banking integrations. These are all hugely requested features.
Ultimately, switching to a different system in the mid-term will be redundant as Open Banking and Payment Initiation come to the fore and open up new opportunities.
The future of payments: Open Banking and Payment Initiation
Open Banking has paved the way for a new category of third party provider: ‘Payment Initiation Service Provider’ (‘PISP). These are companies that are authorised by customers to initiate payments on their behalf.
This means that Plum could initiate recurring payments: when you sign up to Plum, you would authorise us to pull varying sums from your linked bank account, recurrently. To do this you would be redirected to your bank to authenticate yourself and give Plum consent to initiate payments on your behalf. The icing on top of the cake is that in this scenario, unlike Direct Debits, payments would be fast.
As it stands however, Open Banking is a far cry from completion. One aggregator has very recently attempted the very first payment initiation with a bank. To give context, this was one single payment. The banks are yet to build the tech or infrastructure to support variable, recurring payments. It’s a work in progress, and we’re keeping our finger on the pulse to see what we can do next!
In the meantime we’re cleaning up our own infrastructure, working hard with partners to close the gaps where we can, alongside building a Plum that works as best as possible for you in many different ways.
Continuous Payment Authority (CPA) versus Direct Debits
There are two methods that enable companies to take regular, variable payments from customers. A Continuous Payment Authority (CPA) is an authorisation given by a customer to take payments from them by credit or debit card. A Direct Debit is an authorisation from the customer that enables a company to take payments straight from their bank account. Plum uses Direct Debits.
The distinctions between Direct Debits and Card Payments
Taking payments: CPA payments are taken by card. Customers must provide their 16 digit card number, which is the linked to their bank account by card networks and settlement banks. Direct Debit payments are taken directly from the customer’s bank account. For this customers provide their account number and sort code.
Failure rates: With CPA, failure rates of payments hover around 5% due to credit card expiry and cancellations. Direct Debit failures with GoCardless are very low, less than 1% in fact.
Cost per payment: For CPA, the cost is typically 3% + 20p per payment, plus a monthly fee for a merchant account. With Direct Debits, you can expect to pay 20 - 40p or 1% per transaction. Direct Debits are much more cost-efficient. Fellow Monzo users, you may have actually seen Monzo’s recent pop-up detailing why they’re moving away from card payments - hint hint, they’re expensive.
Speed of payment: CPA payments are faster and can vary by provider, but are generally next-day. Direct Debit payments take longer to clear, clearing within a 5-day cycle.
Customer protection: With CPA you can apply for refunds, but there are some limitations. With Direct Debits, the UK Direct Debit Guarantee means that customer protection is at its highest.