The payments landscape has changed dramatically over the past few years, with consumers demanding a choice of quick and easy payment methods that fit the way they live their lives today. Consumers – and businesses – want convenience and control.

The use of account transfers, cards, e-wallets, and online and mobile banking has increased significantly. Today, more than six in 10 adults in the UK have some form of online or mobile banking.

Direct Debits (DDs) accounted for about 10% of the total 48.1 billion payments made in the UK in 2023 and 70% of all regular bill payments, according to the UK Payment Markets 2024 report. Faster payments – which powers Open Banking – also made up 10% of all payments, but its adoption is increasing much quicker, at 15% year-on-year growth compared to 2% for DDs.

The values collected are huge – more than £1 trillion in value per year – and expected to continue growing. But behind this vast number lies the hidden costs of payment failures.

With the failure rate across all payment types estimated to be between 1% and 2%, companies need to consider how much this is costing their business and look at ways to efficiently reduce the number of failed transactions.

 

Analysing the True Cost

Using DDs, we can illustrate how collection failures directly impact a company’s cash flow. The Office for National Statistics’ latest figures show that DD failures currently average about 2.21% per month. But for some businesses in discretional spend sectors it may be more than double this.

As an example, consider a business collecting 50 million direct debit payments a year, with an average transaction value of £50, adding up to around £2.5 billion a year. If 2% of payments aren’t collected, then the lost or delayed cash flow impact is £50 million.

Other hidden costs beyond cash flow include revenue and operational efficiency. For example, the same scenario as described above would result in one million failed payments. The cost of recovering a failed payment is estimated to be between £50 to £100, including administration costs, banking charges and late payment fees, which totals £100 million at the top end of the scale.

Clearly, reducing those costs even by 10% to 20% will have a significant impact on a company’s bottom line.

 

Improving Direct Debit Success Rates

One way to mitigate DD failure is to ensure that the information gathered initially is correct. Validating details up front will lower the chance of rejection when the DD sign-up instruction is submitted, as well as minimise the delay in collecting the first payment and reduce fraud risk, which potentially could lead to indemnity claims and other penalties.

If a business is accepting digital or paperless direct debit sign-up forms, it should embed account holder validation in the process so the payer can correct details in-flight. Where collections are infrequent, it is important to revalidate the payer’s account details before attempting a collection and thereby reducing the risk of payment failure and the associated costs.

In a straw poll during our recent webinar entitled, “The hidden cost of payment failures and how to solve them”, the most popular ways to deal with failed payments once they have occurred are:

  • Automatically re-presenting them, in line with Bacs guidance.
  • Manually re-presenting the failed collection.
  • Contacting the payer for collection via email.
  • Contacting the payer over the phone.

Manual dunning through contacting the payer can be very costly as volumes increase. There are three simple ways to improve the success of collecting against a failed payment: streamline customer experiences, a choice of payment options and automated processes.

The speed of retrying an initial failed collection matters. The sooner the customer is communicated with the better the chance of successful completion at the first attempt. Even if a business is doing a small amount manually, it should be done quickly. But as the volumes scale up, a business’s ability to respond quickly becomes more important and automation becomes crucial.

Being able to tailor communication and recovery strategies to individual customer needs will increase and enhance their satisfaction, as well as ensure a better business relationship and improve the likelihood of recovery. A business should communicate in a timely and clear manner, as well as offer flexible payment options.

Streamlining and automating the processes is critical. Whilst many businesses already rely on resubmitting via Bacs, there are ways to improve the retry logic with notifications, faster follow-ups and personalised recovery efforts. Businesses should analyse payment data to identify trends and behaviour patterns within their customer base.

 

Payment Links

Businesses are increasingly addressing failed collections via payment links. This is a method of sending a ‘request for payment’ message – via email, SMS, PDF or printed invoice – accompanied by a link or QR code leading to a settlement method.

Sending the request and settlement option, potentially with a variety of payment methods, makes the payer’s experience more convenient, thereby increasing both the timeliness and the success of the payment.

Communication with the customer when using payment links is critical, due to rightful sensitivity around fraud. The business needs to establish trust with its customer base through awareness and education.

More than one in five of the webinar participants already use payment links – some for collecting one-off payments and others for sending out paperless Direct Debit sign-up forms.  Almost a quarter have plans to implement payment links as a collection method in the future.

 

Modern Account Transfers

Account transfers as a method of payment have been modernised under Open Banking and are growing in popularity. With settlement made via UK Faster Payments, the business receives funds more quickly than cards and direct debits, and pricing can be considerably cheaper when compared to high-value card payments under the ad-valorum charging model. The pre-population of banking details in modern Account Transfers also overcomes the fragmented, error-prone manual process of the past, making for a better, simpler and easier payer experience, and effortless reconciliation from the business perspective.

Not having to share sensitive information is an additional benefit of Open Banking payments, as neither the business nor the payment service provider, such as Bottomline, receive or store sensitive bank data.

From the payer’s perspective, it’s about control, transparency and ease of use. Open Banking payments is increasingly being seen as a way to improve cash management, increase efficiency and deliver higher completion rates.  

According to Open Banking Limited, there were 12 million active users of Open Banking payment services in December 2024 , making over 25 million payments. In 2024, a total of 223.9 million payments were made using Open Banking – an increase of 72% compared with 2023.

While only a third of the webinar participants reported using account transfers today, almost half signalled they are open to understanding more about them.

Overall, reducing the challenges and occurrence of failed payments requires a multifaceted approach. Adopting as many techniques and solutions as possible will help a business reduce costs and deliver a better customer experience.

Payment failures present a significant financial and operational challenge for businesses, impacting cash flow, revenue, and efficiency. As digital payments grow, companies must adopt smarter strategies to minimise failed transactions and their associated costs. Key solutions include upfront validation of payer details, automated retry processes, and personalised recovery efforts. Payment links and Open Banking offer more efficient, customer-friendly alternatives that enhance success rates while reducing administrative overhead. By streamlining and automating payment processes, businesses can proactively address payment failures, improving financial stability and customer experience.