Insights: Why Payment Methods Matter for Lenders

Lenders face a persistent dilemma when designing repayment strategies: should they prioritise borrower preferences or payment performance? Insights from our UK Consumer Lending Payment Trends Report reveals, there is often a significant disconnect between borrower payment preferences and actual repayment performance, especially in near and sub-prime lending. Understanding this gap – and how to bridge it – can unlock substantial improvements in collections and customer satisfaction. What feels most convenient to borrowers isn’t always what delivers the best outcomes, for either party.

This creates a tension between meeting expectations and managing risk. Inflexible approaches that force borrowers into a single payment method, regardless of context or behaviour, can alienate customers and increase friction. Yet, allowing complete freedom without guidance may lead to suboptimal choices that increase the likelihood of borrowers falling into arrears

The Insight

Our research highlights significant disconnect between stated payment preferences and repayment performance:

• 41% of sub-prime borrowers say they prefer to repay via Direct Debit
• Among prime borrowers, 63% prefer recurring repayments by card
• Older demographics show the strongest preference for Direct Debit
• Yet one-third of consumers don’t know whether their recurring payments are processed via card or Direct Debit

More importantly, our payment performance data shows that actual success rates often contradict these preferences. While Direct Debit is widely preferred for its “set and forget” convenience, it has important limitations that make it less suitable for borrowers with variable income or tight cash flow:

• Rigid timelines: Payments must be submitted two working days in advance and cannot be modified once initiated
• Delayed failure visibility: Failed payments aren’t confirmed until two days after the charge date, slowing intervention
• Slow retries: A failed Direct Debit triggers another three-day cycle, delaying recovery and increasing costs

For borrowers with volatile cash flow, this rigidity can cause an otherwise recoverable payment to fall into arrears, increasing the likelihood of it being reported to credit reference agencies and impacting the borrower’s future access to credit.

The Solution

The most effective repayment strategies don’t rely on a single method. Instead, they are tailored to match the borrower’s profile, repayment behaviour, and context, ensuring not just flexibility but the right option at the right moment.

Forward-thinking lenders are implementing intelligent payment strategies that combine:

1. Method matching: Using historical payment performance and financial behaviour data to guide borrowers toward methods with the highest likelihood of success
2. Contextual fallbacks: Automatically offering alternative payment methods when a primary method fails, such as instantly triggering a Pay by Bank option after a Direct Debit failure
3. Hyperpersonalisation: Leveraging Open Banking Account Information Services (AIS) to make smarter decisions about how repayments are collected based on real financial behaviour, not just stated preferences
4. Unified processing: Bringing Open Banking, card, and Direct Debit payments together in a single integration to create adaptable repayment flows that can automatically switch methods when needed

Open Banking-powered payments are especially well-suited to moments like early repayments or exiting arrears. Want to hear more about how Pay by Bank can be used in practice to improve operational efficiency and give borrowers confidence that their payment has been received?

Download the full report here