The process of electronic bill payment has its own set of challenges even though it seems to increase operational efficiencies compared to earlier methods of billing and payment. The key challenges are: payment schedule slippage by consumers who miss alerts and reminders, resulting in late fees and possibly even service disruptions. Electronic mandate (e-mandate) payment is built to solve these issues.
There are different types of e-mandates:
Direct Debit: Payer (Consumer) instructs the bank to transfer a fixed amount at a fixed frequency to a beneficiary; the control remains with the consumer. This is good for recurring payments where the request for payment is outside the loop.
Compulsory Automated Payment Arrangement (CAPA): An arrangement is made between the Debtor (Consumer) and the Creditor (Merchant) where the Debtor instructs its bank to honor payment requests from the Creditor and transfer a fixed amount at a fixed frequency to the Creditor, without the Debtor having to accepting the request explicitly. This is good for recurring payment.
Voluntary Automated Payment Arrangement (VAPA): Under this arrangement, the Debtor (Consumer) may choose to either explicitly accept each payment request from each Creditor (Merchant) or choose to automate the acceptance for some of the Creditors. Here Debtor may change the amount or the payment frequency or both. This is also good for recurring payment and composes of a request for payment followed by the payment, but needs a reconciliation process to close the payment loop.
Manual Payment Arrangement (MPA): This is typically a one-off adhoc payment that is non-recurring in nature. The Debtor initiates the payment in response to a request-to-pay (R2P) sent from the Creditor.
While all of these offer flexible options, the challenge lies in changing or editing the configuration.
How do banks deal with providing such a varied mandate service?
Typically banks subscribe to services from third parties (like NETS, SlimPay, and others in the Nordic region) who do the back-office processing behind the scenes to implement the various e-mandates.
What are the challenges for banks?
The association between banks and their third party service providers gets so deeply entrenched over time that banks find it difficult to change even if new service providers with similar services compete in the same market at competitive rates.
Among other challenges of system integration, there is a set of complex steps involving data migration. This includes migration of processes, data, history and profiles. Migrating all of these may not be possible in certain cases.
A single mistake could result in unhappy customers – be they consumers or merchants. Hence, system integration becomes a business critical step.
A challenging use case
Suppose a consumer has purchased a product and has got it financed at the point of sale from a Creditor, and has set up VAPA with her bank at a certain interest rate. After a few months another Creditor offers to refinance the remaining loan and meanwhile the consumer wants to shift her bank from which to repay the loan. This will need significant changes in the payment set up that are extremely difficult to implement as there are a number of barriers and obstacles to negotiate.
What are the challenges for consumers?
Consumers have relationships with banks, who would not like to lose the business or the customer. Hence, it is understandable that banks would not have a friction-free service to transfer e-mandate from their bank platform to some other bank. A consumer would possibly have to go through loops to get it done especially if the credit is extended by that same bank.
Thus, consumers face a lock-in by the bank.
What are the challenges for merchants?
Merchants typically have relationships and integration with many banks to enable consumers to choose e-mandate options from the bank of her preference. However, the administrative overhead in shifting a mandate from one bank to another is not trivial. Until the time the earlier mandated payment is not requested and the first mandated payment from the new bank is realized, the merchant is not so sure. Then, if the merchant does not have integration with the bank that consumer prefers, it is a higher level of challenge altogether.
How can the challenges of banks, consumers and merchants be eased?
One of the approaches to solve this is by building a central platform across the region or across the nation with facilities to handle different types of mandates. Today, the e-mandates are handled within the bank. If the e-mandate is done in such a way that the instruction is managed at the central platform after debtor (consumer) and creditor (merchant) agrees and the central platform confirms the accounts and related KYC by referring to the corresponding banks.
Unified Payments Interface (UPI), the faster payment rails in India, has built a UPI-led mandate servicei for recurring payments and on January 10, 2020 the Reserve Bank of India announced that consumers can make recurring payments up to INR 2000 on UPIii. Incidentally, RS Software has engineered and implemented both UPIiv and BBPSv for the nation.