05.04.09

Avoiding the pitfalls of direct debit (Part 1)

Posted in Business Tips, Direct Debit at 2:59 am by matt

While it may seem strange for a payment company to spell out the risks of direct debit, we believe it important to provide a balanced view of some of the difficulties that can arise.  By understanding some of these issues, your business will be able to better navigate the traps of what is otherwise an excellent method for collecting your regular payments.

The first and most obvious issue with direct debit is that the account you are attempting to debit may have insufficient funds.  This is logical given direct debit is a biller initiated transaction; it is not possible to know whether sufficient funds exist prior to debiting the account.  Not only does a default require some action from you, it can also mean your customer has incurred a fee from their financial institution.

As a business there are several things you can do to reduce this risk, but they all essentially relate to communicating with your client:

1. Ensure it is clear in the contract when payments will be debited and then provide a copy of that agreement to your client for their future reference,
2. Send reminder messages to your client when a payment is about to be debited,
3. Provide adequate notification of any changes to your direct debit clients, especially around public holidays when funds may not have been debited on the normal day the customer would have expected, and
4. Align the payment date with your customers’ paydays.

Now, there are several businesses that will manage customer defaults on your behalf by sending letters and calling your customer, but the easiest (and most inexpensive option) to avoid defaults is to keep the communication channels between you and your clients open.  Remember, your customer relationship is the most important commodity to your business, manage that relationship well and you will not only reduce your defaults, you can avoid employing a 3rd party to manage your customer relationship.

One of the other drawbacks of direct debit is the payment or payments are contestable.  A customer can contact their bank and contest a payment on the grounds that (a) there is no authority to debit the account or (b) the transactions were not authorised (this could be the amount was not correct or there was a payment double up).   When this occurs the bank will request a copy of the signed direct debit authority, as well as any other supporting.  The most common issues experienced by our customers are:

1. The customer has used their spouse’s account to make the payments without obtaining the spouse’s signature on the form.  Remember, it is the account holder’s signature that is required authorise a direct debit,
2. The account details have changed and the business has not obtained a new authority for the new account details. By re-issuing the direct debit request form with the new account details, you are protecting business from having funds reversed from your account
3. The biller is posting a reference to the customer’s bank statement that does not make sense to the customer.  Remember, your customer identifies money withdrawn from their account by reference on their statement, not the amount.  Keep the reference on the statement simple and relevant to your trading name or industry.

In the upcoming weeks, we will look at some other pitfalls to direct debit.

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