Where is the real value in payments innovation?

How money moves via software-enabled payments across multiple rails

Written by
John Claude

Editor’s note

In all the hype and excitement around the payments space today, one thing that often gets forgotten is that the fundamental rails that power all payments have not changed substantially in the last 30 years or so. In fact, payments themselves remain very much a commodity.

Today, the value of payments goes far beyond the transaction itself, with innovation coming in large part from the solutions built around and on top of existing rails, which enhances their capabilities, enables better user experiences and creates new possibilities. One way fintech businesses are able to add significant value on top of existing payment rails is through software wrapping.

In this tech deep dive, John Claude and Taariq Tayob from Stitch explored how GoCardless, a global bank payment company whose inception predates the establishment of open banking standards, leveraged this approach to overcome challenges found in existing bank payments, and build a world-class service to move money from one bank account to another.

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Challenges with existing payments rails

One challenge that characterises a lot of the innovation in payments today is that the constraints of existing payment systems often clash with the need for speed, security, convenience and user-centric experiences. Traditional platforms, often characterized by outdated technology and slow response times, frequently hinder the creation of modern and efficient solutions.

An example of some of these challenges and attempts to address them can also be found in South Africa, where the South African Reserve Bank recently moved from conventional paper-based debit orders (also known as direct debit payments) to a more advanced and secure authenticated debit order system called DebiCheck. The key difference is that the latter requires a signed digital mandate from the user to be considered valid. South Africa's move to DebiCheck was driven by a desire to enhance the efficiency, security and user experience of its payment systems. This move reflects a global trend driven by the need to enhance payment ecosystems as a whole.

Unfortunately, for fintech players building products in regions where these transformative shifts have not taken place just yet, the only recourse is to disrupt or innovate. One of the ways that this innovation can occur is through the process of wrapping new functionalities or services around existing payment rails to extract more value from them and amplify the benefits of traditional systems.

The value in software-enabled innovation

We spoke with Matt Robinson, Co-founder of GoCardless, and Stephen Binns, Engineer at GoCardless, to learn how their team built solutions across traditional rails and continues to find new ways to innovate on top of them to better meet the needs of their clients.   

Matt agreed that “payments fundamentally are a commodity in terms of getting the money from A to B. But there's a ton of value that can happen around that.” A pioneer in this domain, GoCardless recognized the potential for software-enabled payments in their early days. 

“Prior to [GoCardless], everything was paper-based. You couldn't do things online,” Matt said. In their early days, one of the things the team focused on was enabling a better digital experience for recurring payments and reducing the admin around it. “As an online business, you used to collect orders online, then have to go offline and submit them via paper, get them back via paper, get the answers, and then resubmit online. What GoCardless did was to take those first rails we integrated with and put them online. We made it a fully online process.”

Source: GoCardless

The team built a rest API wrapper around those rails to enable businesses to better interact with them and connect the rails to their systems. “We were one of the only API-first businesses. Nobody had done that. [The need] was obvious to us because we started out building an application, and we soon realized that every person's use case was different. So we realized that we just wanted to manage the payments piece, and then enable integrations with other third parties as a partner.”

The potential value here becomes even more apparent when examining the additional services and experiences that can be developed on top of payment rails. “There's a ton of value in terms of increasing your success rate on [recurring] payments or increasing the success rate on retries, on building fraud around that, on integrating that into your accounting package or your CRM, or a variety of other things,” Matt said.

The ability to automate pieces of the experience reduces administrative burden, increases success rates and minimizes the risk of fraud. This principle extends to adapting payments for various platforms, such as social media networks like Instagram and TikTok. The creation of seamless payment solutions within these platforms, for example, can lead to more and more innovative customer experiences and open up new avenues for commerce.

Abstracting the way consumers interact with payments is a crucial aspect of innovation. By building software interfaces that allow customers to interact with payment rails in new ways - to initiate and process payments more seamlessly - companies can cater to a broader audience. Today new technologies like natural language processing also present a new layer of interaction, offering a more user-friendly and intuitive payment experience. This trend mirrors the ongoing evolution of commerce platforms, where integrating payment methods seamlessly becomes a crucial differentiator, and even social media, where the innovators who can create seamless payment solutions tailored to these platforms stand to gain a competitive edge.

Source: GoCardless

Tech deep dive: enabling recurring payments before open banking 

Before the implementation of open banking standards in the UK, companies had to rely on more traditional methods to build and manage recurring or repeat payments, such as Direct Debits or Standing Orders. Although these methods, like many other traditional ones, were time-tested, they posed significant challenges for businesses hoping to use them, including: 


The direct debit scheme required companies to navigate complex authorisation processes, including obtaining customers' mandates, giving them advanced notices, and dealing with varying bank policies. This process could be time-consuming and prone to errors, potentially delaying payment processing.

For the banks or payment processors that offered APIs, integrating with them was often complex and required custom development work and expertise to understand payment files and the underlying proprietary systems. This posed challenges for smaller companies with limited resources.

Regulatory compliance and security

Businesses had to ensure compliance with various financial regulations, data protection laws and direct debit scheme rules. Handling sensitive customer data and financial information also required robust security measures to prevent data breaches and fraud.

Error handling

Managing payment failures due to insufficient funds, account closures, or other issues required effective error-handling mechanisms and customer communication.

Significant resource requirements

Setting up and managing the entire direct debit process required significant resources in terms of personnel and technology.

Payment reconciliation

Reconciling payment statuses and managing exceptions or discrepancies between internal records and bank reports required meticulous attention.

Dependency on banks

Businesses relied heavily on the capabilities and reliability of their partner banks for the success of their direct debit operations.

These challenges highlighted the need for efficient and streamlined solutions, and this gap paved the way for fintech companies like GoCardless to offer specialized services that addressed these hurdles.

How GoCardless overcame hurdles posed by traditional methods

The concept of software wrapping involves creating new functionalities or services around established software infrastructure, amplifying the benefits of traditional systems.

GoCardless built deep expertise in direct debit and the various schemes around the world and leveraged this expertise to build, streamline and automate a user-centric recurring payment process. They collaborated with banks to establish connections and infrastructure that enabled direct debits to be initiated seamlessly. This bypassed the need for third-party intermediaries, reducing costs and enhancing control.

Source: GoCardless

Processing direct debit payments with GoCardless, step by step

Step 1: Merchant setup

A business integrates with the GoCardless API, setting up the necessary flows to initiate payment requests and receive payment status notifications. Businesses can also integrate GoCardless into the software they use everyday to run their business, such as CRMs or accounting platforms.

Step 2: Customer authorisation

The business sets up direct debit payments for its customers.

GoCardless creates and stores a mandate and sends it to the customer for authorization. The customer provides authorisation by signing a direct debit mandate or authorising the business to collect payments from their bank account.

Step 3: Payment initiation

The business sets up the payment schedule, including the payment amount and frequency, in their GoCardless dashboard or through API calls. When a payment is due, a payment request is created.

Step 4: Payment submission

Then a payment status notifies the client about successful or failed payments either via the dashboard or through webhooks.

Step 5: Customer notification

If the payment is successful, GoCardless notifies the business, which can then trigger a payment confirmation notification to the customer. If a payment fails (e.g., due to insufficient funds), GoCardless sends a failure notification to the business, allowing them to take appropriate actions, such as retrying the payment or notifying the customer.

Step 6: Settlement and reporting

GoCardless processes successful payments and initiates the settlement process to transfer funds from the customer's bank account to the business's account. GoCardless provides businesses with reporting and reconciliation tools to track payment statuses, monitor cash flow and reconcile payments.

Source: GoCardless

Challenges with direct debit rails leads to further innovation

While building on top of direct debit rails enabled the GoCardless team to solve some of the major challenges in online payments, the process wasn’t perfect. They still faced a number of challenges, including:

Failed payments

If payment failed for a reason such as insufficient funds, it would be inconvenient to collect it again without using other payment methods such as card or bank transfer. Catering for these methods added a lot of complexity to the reconciliation process. Failure to collect these payments also negatively affected customers because it could often lead to service disruptions.

Bank-specific variability

Different banks had varying policies, procedures, and technical requirements for direct debit processing. Ensuring compatibility and smooth operations across multiple banks posed complexities.

Variable recurring payments

The ability to handle variable recurring payments (VRPs) was particularly valuable for businesses with subscription models, service-based offerings, or any scenario where payment amounts might change from one billing cycle to another. However, the process was cumbersome and less user-friendly.

One of the challenges is that Third Party Payment Providers (TPPPs) must initiate each individual payment for collection, and the customers have to authenticate each payment separately. For a scenario with even hundreds of thousands of payments, this can be cumbersome. For customers, it is inconvenient to amend or cancel mandates because they have to contact the bank or service provider with at least one day’s notice. Another challenge is that direct debit transactions don’t clear for a number of days, which is not ideal for certain products where time is a huge factor. VRPs via open banking rails introduced solutions to address these challenges.

Expanding horizons: the advent of open banking

In 2018, Payment Services Directive 2 (PSD2) went into effect in the UK, requiring banks to expose open banking API access to authorised third parties. The goal was to make it easier for new market entrants and third-party providers to gain access to the market and improve their product, and to increase competition. 

The introduction of open banking further enhanced the potential for innovation, unlocking capabilities that were previously unattainable or cumbersome. For example, instant bank transfers combined with recurring payment setups can provide customers with a more seamless and versatile experience. Think of a gym that needs to collect payments from a new member that signed up to pay monthly with direct debit, but also wants to use the facilities that day. This is a perfect use case for an instant open banking payment that could be combined with a regular monthly fee, paid for by direct debit. Innovators who understand the potential of these new rails and adapt their software offerings to utilize them effectively can tap into a wide range of opportunities.

According to Matt, “What we’ll see over the coming years is these rails have different advantages. For example, open banking itself is free and instant, and there's effectively zero chargeback, so it changes the fraud risk.”

Open banking standards aimed to address some of the challenges in the market by providing standardized APIs and data-sharing practices, enabling more seamless payment initiation and management. Companies like GoCardless still had to figure out how to integrate these services with their existing products to offer additional value or come up with brand-new service offerings.

However, what access to open banking provided was opportunities to offer more bespoke payment experiences by plugging their existing software into this new technology and combining its benefits with existing offerings. 

“Open banking unlocks some things that were really tough to do with other rails that we’ve integrated. For example, we have clients who take largely recurring payments. But, they might want to take the occasional one-off. Or, they might like the first payment to be instant, and then take recurring payments over time where they can bill a few days in advance. They've been slightly compromised using, for example, direct debit or SEPA direct debit. By plugging open banking with those rails, we can now do, for example, an instant bank transfer for the first payment and simultaneously set up a direct debit for the recurring payments moving forward, and it's a better solution for everyone,” Matt said.

Here are some of the ways GoCardless wrapped new features around existing products:

Failed payments could be retried using instant once-off bank-to-bank payments

With Instant Bank Pay, businesses can take instant, once-off bank-to-bank payments from new and existing customers while still reaping the benefits of bank debit for recurring payments.

This could also include:

Bank account verifications were simplified

Open banking data APIs provide alternative ways of performing bank account verifications and viewing additional information such as the direct debits or standing orders on an account. Businesses can also view details such as the scheduled payments on a specific account. All this could be done with authorisation from the user, and it would allow them to provide granular access to their account data. These advances opened up new types of experiences that could be offered to customers.

“For example, there is an endpoint you can call before you initiate a debit to query whether a user has sufficient funds available to make a certain payment. This is a slightly less intrusive way of doing the same sort of thing via the traditional data APIs because instead of a customer revealing their entire account balance, you can ask, ‘Do you have enough money for this payment?'” said Stephen.

Bank-specific variability was solved by introducing standard APIs

Open banking addressed the problem of bank-specific API variability by introducing standardized APIs, promoting interoperability, and ensuring access to core banking data. These standardized APIs follow common technical specifications and protocols, allowing third-party developers to create applications that work consistently across multiple banks. Regulatory oversight and secure consent mechanisms further ensure data privacy and security in open banking ecosystems.

Variable recurring payments were simplified without compromising on security

Some of the issues with VRPs were addressed via open banking APIs. For example, users only have to agree to the payment conditions once with their payment service provider and bank, and the process will then continue automatically on an ongoing basis. Users can cancel or amend mandates online or via their banking app right up to the point of irrevocable payment.

Another advantage is that payments are instant, and since they settle immediately, they allow the value to be assigned to the user’s account/profile immediately.

However, VRPs come with a distinction between "sweeping" and "non-sweeping" payments. Sweeping payments, mandated by the Competition and Markets Authority (CMA), allow the transfer of funds between a customer's own accounts (me-to-me payments), while non-sweeping payments involve transactions between customers and businesses and are not currently mandated by the UK government (although there have been significant progress made in the trial of non-sweeping VRPs). An example of a scenario in which sweeping payments can be beneficial is when a current account is set up to move surplus money into a savings account, or to automatically pay off an overdraft somewhere else.

GoCardless was able to wrap variable recurring payments via the direct debit rail by allowing businesses to collect subscription funds efficiently, while also introducing the benefits of VRPs via open banking, such as enabling streamlined payment authorisation and flexible amendments for users. They have also been key players in the trials to offer “non-sweeping” VRPs, which will enable a host of other use cases and move VRPs beyond just ‘me-to-me’ payments.

What’s next in software-enabled payments innovation

Payments innovators recognise that payments themselves are a commodity, and that the true value arises from the software and services built around payment rails. By creating software-enabled payments, businesses can optimize processes, introduce novel experiences and abstract consumer interactions, thereby shaping the future of commerce. The key to success lies in striking a balance between embracing new technologies, understanding the regulatory landscape and constantly evolving to meet customer needs. As the payments landscape continues to grow, those who leverage software-enabled payments may be the ones that lead the way in transforming the industry and redefining what's possible.

Source: GoCardless

“For me, there are two flavors of what’s exciting in the future,” Matt said. “Where new rails unlock things that people want to do that they couldn’t do before, you'll see amazing adoption. We saw that with things like PIX and other international networks. People couldn't do something, and it was really painful. But suddenly [they have] this new way of doing it. It’s a bit like mobile banking in Africa. You couldn’t do something, and then either a rail is developed or the software around it is developed that can be an enabler. I don't know to what degree each of those things will be powerful, but that will dictate how much we see a shift away from things like ACH and card payments over to open banking. And that will dictate how much we see the evolution of the software around those rails.”

About the author

John Claude

John is a Full Stack Engineer at Stitch, where he channels his passion for creating cutting-edge solutions that streamline money movement. He is also an integral part of the team shaping the future of collections at Stitch. With a bachelor's in computer science from the University of Western Cape in South Africa, John honed his expertise while working on payments and collections solutions at Paysoft.

Taariq Tayob

Taariq is a passionate student of the way money moves. This passion became a career when he joined Stitch, where he is currently working to bring Stitch's latest brand, WigWag, to market. WigWag helps small businesses easily accept payments via payment links. You can join WigWag's mission at https://wigwag.me/.