DIRECT DEBITS

Set-up and forget. Direct Debits let you automate recurring payments from your clients.
direct debits
IMPROVE YOUR CASH FLOWS WITH DIRECT DEBITS

Are you being bothered by late payments? Do you spend hours and hours chasing them? Well, Flo2Cash direct debits bureau service is here to help. We will setup a direct debits service for you so that your customers can sign direct debits on phone, online, email or on paper, after which you can send an invoice and debit their bank account on payment due date. Moreover, the set-up requires no help from either your IT team or the bank. Its smart analytics and dashboard lets you see the status of transactions in real time and built-in dishonor management system follows up on dishonor payments. Also, all transactions are secure and approved by the payment authority.

BENEFITS FOR BUSINESSES

Increasingly more and more businesses and charities are adopting direct debit mode of payment, owing to their manifold benefits, some of which are:

  1. Low Processing Costs - Taking into account all cost elements involved in processing a recurring payment through conventional means, direct debits service costs much cheaper.
  1. Short Processing times - Automating the payment process, significantly reduces the time it takes a business/non-profit to receive the payment.
  1. Simplicity - Once set up, direct debits recurring payments do not require any management either by the business or its customer.
  1. Security -Direct debits are more secure form of payment compared to payments made through cash or cheques
  1. Low Customer Administration time

It significantly reduces both the time and energy spent in calling, arranging and chasing late payments and the greatest benefit of all is the improvement in cash flows. Because you get paid on time you can better manage the expenses of your business.

direct debit benefits

 
 
BENEFITS FOR CHARITIES

Direct Debits benefits charities in the following ways:

  1. Donors that opt for Direct Debits as a payment method support Charities for a longer period as compared to those who opt for Credit Card payment.
  2. Direct Debits transactions have a much lower failure rate, less than 1% compared to 7% for credit card transactions. This translates to more funds for charities.
  3. In the long run, the transaction fees for direct debits is much lower than credit card transactions resulting in savings for charities.
  4. Given a choice, four out five donors choose direct debits as a gifting option owing to the convenience it offers.
  5. It allows charities to get more out of their advertising budget by focusing on acquiring new donors as recurring donors don’t need to be targeted.
  6. By giving donors the option to gift small value regular donations charities not only reach out to a new segment of donors but also increase the fund value per donor per year.
  7. Direct Debits recurring payments ensure regular, predictable cash flows enabling charities to better manage fixed and variable expenses.
KEY PARTICIPANTS
  1. Originator: The business that provides goods/services or a not-for-profit organization that appeals for gifts.
  2. Sponsoring Bank: The bank where the originator maintains its account.
  3. Payer: The customer who agrees to pay the bills using direct debit or the donor who pledges a gift to the not-for-profit.
  4. Paying Bank: The bank holding the payer's account which is to be debited.
THE WORKFLOW
  1. The originator sends an invitation to the payer, requesting him to make future payments using direct debit.
  2. The payer accepts invitation and responds by filling in a DD mandate form for direct debit authorization and it sends it to his bank, the payer's bank.
  3. The Payer's bank, validates the DD mandate from and sends it to the Sponsoring or the Originator's bank. This completes the set-up, an intimation of which is sent to the Originator.
  4. The originator starts submitting direct debits to its bank, the sponsoring bank.
  5. The sponsor bank forwards DD instruction to the payer's bank
  6. The bill amount is debited from the payer's account and credited to the originator's account
INTERNATIONAL USAGE & TRENDS

Direct Debit Payments are processed through a network of financial institutions - the ACH in the US, Bacs in the UK, SEPA in Europe, Australian Payments Network in Australia.

According to statistics released by Bank of International Settlements for 23 participating countries, Germany at 50.6% has the highest usage of direct debits as percentage of total number of transactions for 2015.For the same year this percentage for some other countries are 20.6% for South Africa, 19.5% for France, 19.3% for Netherlands and 18.7% for Brazil. The countries with the lowest direct debits usage are Saudi Arabia at 0.1% and Russia at 0.6%. [Source: CPMI - Red Book Statistical update, December 2016, page 457] 

World's Payment Report 2016 released by Capegemini and BNP Paribas, says that payments made via direct debits witnessed accelerated growth of 6.6% in 2014 compared with the rate of 5.3% in 2013. A major contributor of this growth is the increased usage of direct debits in Europe and North America, mainly driven by utilities, government and corporate treasury sectors. Also, contributing to the growth is Latin America where provisions of direct debit payment facilities by many e-commerce websites and banks is the contributing factor. The report further says that innovative solutions from non-banks from e-commerce are expected to accelerate growth of direct debit transaction volumes, assuming they will not be replaced in some regions by requests for transfer. [Source : World Payments Report 2016, Capegemini and BNP Paribas. Page 10]  

For NZ, some interesting statistics on direct debits usage can be found on the Payments NZ website here.

HISTORY & ORIGINS

Although Direct Debits in some form were first used in Germany in early 1960s, the name widely associated with idea of Direct Debits is Alastair Hanton of UK, who independently thought of it in 1964. It was born out of the need for Unilever to collect payments from thousands of its small ice-cream retailers. The idea was to automate and speed-up collection of regular payments. It replaced the prevailing 'standing order arrangement' which was rigid and therefore not widely used and it took around four years for the idea to be accepted by the banks back then,  after several meetings. Originally named 'Automatic Debit Transfer' the name was later changed to 'Direct Debit' which implies fast and not complex. [Source: How Direct Debit began in the UK, a film by Claudia Nye]

TYPES OF DIRECT DEBITS

Direct Debits can be broadly classified on the basis of authorization. i.e. the party to which the payer has granted the authorization. This classification system comes from Germany and has two categories as follows:
1. Collection Authorization
The payer authorizes the payee to debit his/her account for a fixed amount of any future invoices. This type is common in consumer to business transactions like paying utility or phone bills.
2. Debiting Order
The payer authorizes his or her bank to honor direct debit requests from a name payee. This type is more common in business to business customers.

DIRECT DEBITS GUARANTEE

Every country has its own rules and regulations governing direct debits so as to protect the consumers. Some of the basic guarantees provided are as follows
1. Change notice - Any changes to the amount, date or frequency of payment needs to be communicated to the customers in advance, 10 days is the most commonly used time frame.
2. Refunds - The customer gets a full refund from the bank for payment taken in error.
3. Cancellations - The customer can cancel direct debit payment at any time before the due date. He/She is entitled to a full refund in case payment is withdrawn after cancellation.

DIRECT DEBITS VS STANDING ORDERS

A standing order is an instruction to your bank to make regular payments of a fixed amount, either to someone else or to another account in your name. These days, it is more often used in non-commercial setting where one needs to send regular money to his/her child. The payment amounts and dates are fixed and cannot be changed without obtaining a signature. On the other hand direct debits, are more often used in commercial transactions wherein you give an organization the authority to withdraw funds from your account. Examples include utility bills, recurring gifts to charities etc. In this type of arrangement an organization can change the dates and the amounts, without seeking your authority again. Also, direct debits are covered under the direct debit guarantee program where the consumer can claim a refund for a wrongly withdrawn amount from his bank account, whereas there is no such protection in a standing order.

DIRECT DEBITS MANAGEMENT

A Direct Debit Bureau provides its users with an online dashboard or console where they can login to access management and reporting tools. Some of the basic features offered are.
1. Searching Mandates - A direct debit mandate is an authorization from your customer to collect future payments. From time to time you may need to check the mandate or revoke it , this requires searching it first. With this feature you can easily search the mandates database by using mandate ID, the customer name, email, the payment reference or the customer's bank account details.
2. Updating Payment Plans - It allows one to change the direct debit amount, frequency or period of direct debits payment schedule of a particular client.
3. Manage Failed Payments - One can group together failed transactions and then re-attempt the payments using this feature.
4. Batch Payments Processing - Used for carrying out batch operations e.g. mandate imports so as to process grouped payments.
5. Reporting - One can see all historical direct debit transactions within a particular date range and can apply filters to narrow down results. Some of the filters include transaction status and dishonor reasons.
6. Transaction Search - Historical transactions can be searched using date range, plan ID or account name.
7. Manage Profiles and Users - The admin can update his profile, create or delete users, assign roles and can make selective features available for different users.

GUIDELINES FOR ORGANIZATIONS

Every country has a set of guidelines laid down by its Payments Control and Regulatory Authority that protects organizations using direct debits from possible customer frauds. Some of the key points of these guidelines are as follows:
1. An organization should obtain clear instructions authorizing a direct debit transaction from the customer.
2. Terms and conditions of the service agreement should be made available to the customer when a Direct Debit Request is given to them. Also, this agreement should clearly explain the procedure for cancelling the DDR.
3. Details of the DDR should be kept for 7 years after the date of the last processed debit.
4. An appropriate proof should be kept that verifies that the person providing a DDR is actually an organization's customer.
5. Only organizations that come under the low risk category should be allowed to accept DDRs. A high risk category of business services are one-off with no long term relationship with the customer.
6. The organization should have an appropriate refund policy that leaves no scope for a refund fraud, in which a customer asks the organization to refund money to an account other than from which the payment was originally made.

ISO 20022

A multiple part international standard to compose direct debit requests, performed by ISO Technical Committee TC68 Financial Services. It defines a modelling methodology to capture in a syntax independent way financial business areas, business transactions and associated messages flow. It sets a central dictionary of business items used in financial communications and fixes a set of XML and ASN.1 design rules to convert the message models into XML or ASN.1 schemas whenever the use of ISO 20022 XML or ASN.1 based syntax is preferred.

DIRECT DEBIT SERVICE PROVIDERS

If you are looking for a direct debit service for your business, there are two options to chose a service provider for a direct debit facility

  1. Banks
  2. Third Party Service Providers like Flo2Cash

Usually setting up a service with bank is time consuming and limited in capability. Also the setup costs could be high. On the plus side the transaction rate is lower when using a bank directly.

On the other hand, using a third party provider, merchant can be setup quickly and at a very low cost. The transaction fee is usually higher than a bank which is reflection of functionality and cost savings in administration tasks.

Going direct to banks might be suitable for larger organisations with very high transaction volumes, but still the cost of integration, testing and continuous compliance is a huge overhead.

DIRECT DEBIT AUTHORITY CODE OR USER ID

An Authority Code (or an User Id) is a unique identifier for organisations collecting payment by Direct Debit. This code is unique among all banks, and all communications in-between banks use this Authority Code.

Banks use the Authority Code to look up the name to display on the payer’s bank statement, and to find other details about the originator. If the payment is later disputed by the customer, the Authority Code on the payment is used to identify the originator who is liable for the disputed amount.

To submit a direct debit to a bank, merchant needs their own unique authority code, or they can still submit indirectly using a third party provider like Flo2Cash.

Authority Codes are issued by all major banks and they all have slightly different application process for issuing of the authority code. In some cases Flo2Cash can help merchant get a unique authority code from the bank.

 

STANDARD TERMS & CONDITIONS USED BY SERVICE PROVIDERS
  1. The Initiator needs to give an advance notice, in writing of the net amount of each Direct Debit and the due date of debiting at least 10 calendar days (but not more than 2 calendar months) before the date when the Direct Debit will be initiated.
  2. The Service provider is not responsible for, or under any liability in respect of the Initiator’s failure to give this advance notice nor for the non-receipt or late receipt of notice by customer for any reason whatsoever. In any such situation, the dispute lies between the Customer and the Initiator.
  3. After receiving the advance notice, the customer can request an amendment to Direct Debits at a date which is at least 2 days prior to Direct Debit initiating date.
  4. Any dispute as to the correctness or validity of an amount debited to customer’s account shall not be the concern of the DD Service provider except in so far the DD has not been paid in accordance with this authority.
  5. The DD Authority remains in full force and effect in respect of all DD passed to the customer account in good faith notwithstanding customer’s death, bankruptcy or other revocation of this authority until actual notice of such event is received by the bank.
  6. The Customer can, at any time, terminate the DD Authority as to future payments by giving a written notice of the termination to the DD Service provider and to the initiator.
  7. The Service Provider can, at anytime, terminate the authority as to future payments by notice in writing to the customer.

 

FLO2CASH DIRECT DEBIT SETTLEMENT PROCESS

At Flo2Cash Direct Debits is a simple four step process

  1. Obtaining the Direct Debit Authority: The customer provides authority for direct debit by filling in a direct debit form or giving information via phone, online, email or fax to Flo2Cash.
  2. Written Communication to Customers: On receipt of the Information (or direct debit form) Flo2Cash sends a confirmation email or letter to the customer.
  3. Debit Transaction Processing: When the information has been processed in the Flo2Cash Direct Debit system, the payment is scheduled and processed on the scheduled due date.
  4. Reporting Services & Fund Settlement: On clearance of the funds it is credited into the merchant bank by Flo2Cash. Reports are simultaneously generated for this transaction and are emailed to the merchant email.
DIRECT DEBIT PAYMENT PLANS

A Payment Plan is a set of instructions given by the merchant to the Flo2Cash Payment Platform that decides the period, frequency, amount, start date, etc for executing Direct Debits of a specific customer. Flo2Cash classifies payment plans into three categories

  1. Variable or per-invoice payment plans.Enables merchants to schedule payments as they wish; there is no set payment amount or frequency on these plans.This type is most useful for merchant where the amount to pay each month depends on an invoice value or where customers are billed on demand with no set amount or frequency.  It also works well for merchant who wish to control the scheduling payments from their own software as opposed to having Flo2Cash mange the recurrence.
  2. On-going or Recurring Payment PlansProvides a fixed amount and frequency whereby payments will be processed in-definitely until stopped by the merchant.This type is most useful for merchants who provide a subscription to a service where the amount and frequency of charging are fixed or organisations who receive donations or membership fees.
  3. Instalment Payment Plans -This plan type allows merchants to set a fixed payment amount and total amount to be paid.  Using this combination, a payment schedule is created that has a ‘balance’ to pay and a definitive end date.This type is most useful for merchants who sell goods or services where the customer can pay it off over time, some examples include products on layby, loan payments etc.
ABOUT FLO2CASH

Flo2Cash Direct Debits Service Bureau, established in 2003, has been providing the service to all kinds of organizations in New Zealand. From small businesses to educational institutions, membership associations, charity organizations, finance companies have seen considerable increase in cash flows with low payment processing costs.