Virtual IBANs are changing the way we businesses accept and manage payments. Do they make sense for your business?
How about a barnstorming fact to kick things off. According to the European Central Bank, as of 2020 direct debits account for 22% of all non-cash payments. Another? In the UK, direct debit payments increased from 2.9 million in 2006 to 4.1 billion in 2016 - a stratospheric rise.
Direct debits clearly represent a hugely important part of the payments sector and are seemingly increasingly positive for both businesses and consumers. In terms of where they go next, do virtual IBANs have a role to play?
Absolutely. Virtual IBANs offer a way for businesses to automate their reconciliation, reduce operational overhead and eliminate human errors.
Virtual IBANs do this in a very simple way - they let businesses accept all a user’s incoming payments, through one single piece of payments infrastructure. That means it can sit behind multiple incoming payment methods.
The use case we talk about most often is a standard one-off bank transfer, because a user will have to manually enter an IBAN as the recipient for the payment (or account number and sort code in the UK). However, that same payment infrastructure can also sit behind incoming card payments and, yes, direct debit payments as well.
Onboarding: The TL;DR version of this is - no change. One of the reasons Direct Debit payments have become so popular is the customer approves a regular payment and then the receiving company sets up the direct debit. The customer doesn’t have to think about it again, which is one of the reasons direct debit has become so popular.
While assigning a virtual IBAN to every direct debit customer may seem like an extra step, everything happens in the background. So for the customer, there is no change to their experience and no impact on their onboarding experience. Behind the scenes though, there are some big benefits for…
Reconciliation: This is where the magic happens. Funds are coming in through direct debits. Without vIBANs, your business will have some sort of system to reconcile these payments manually. However, with vIBANs that’s no longer required. Money automatically passes to a user’s account, while the funds themselves can be kept in your master account.
Not only does this free up your Ops and Finance teams, but this automation gives you a clearer view on your customers and their activity. Balances can be tracked far easier which allows you to offer a better level of customer support and benefit from richer, more comprehensive customer data.
Flexibility: vIBANs can be described as ‘rails-agnostic’. What this means is that it doesn’t matter what payment method your customer wants to use, the funds are still being added to their account and reconciled on your system in the exact same way. So, why is that useful?
If your customer has a regular direct debit set up but then wants to add additional funds through a one-off payment, they can. No complications in terms of reconciliation, no difficult process for the customer. They simply choose to make a one-off card payment and that’s it - funds are reconciled, balances are updated and no input is required from your side.
We always think it’s useful to paint a picture, so let’s say your business is an investment platform. Your customers can deposit a certain amount each month which is then invested by your company's investment managers. Their funds are reflected on a portfolio.
Setting up their direct debit is simple and funds begin to flow seamlessly. Their balance is automatically updated as the payment flows through their virtual IBAN, while the money is then automatically swept up to your master account so that your business has all incoming funds in one place.
At one point, your customer gets a bonus at work, and wants to add a little more to the investment pot. They deposit an extra £2,000 via one-off bank transfer, using their vIBAN to make the payment. Again, this is reflected automatically on their account, and because it is using a different payment rail, this is able to be transferred in real-time.
In reality, there are many examples of direct debit accounts that would benefit from additional payments infrastructure that can handle all of a customer’s incoming payments. Pension managers, apps and services to assist with saving goals, remittance services, energy providers, subscription services that also offer one-off purchases - these are a handful of options but with this technology, more will definitely appear.
With vIBANs able to create substantial operational efficiencies for direct debits, there’s no reason direct debits won’t take an even larger share of non-cash payments moving forward.
Which means we might need a new adjective. ‘Barnstorming’ just won’t cut it.
Is your business sending and receiving payments in multiple currencies? We have good news for you.