A guest blog by Don Hollingum from Direct Debit 101. For more information visit: www.directdebit101.co.uk
Why use Direct Debit?
Direct Debit, the product, has been working for thousands of businesses, both large and small for over 50 years, and its usage continues to grow both in terms of the number of organisations that use it and the number of payments collected – in excess of 4.5 billion payments were collected in 2019.
One of the key reasons for the longevity of this payment product is that it works effectively for both the party owing the money (the payer) and the beneficiary of the money (the collecting organisation). There is also significant flexibility within Direct Debit that, when used to its full potential, can be made to suit the needs of payers regardless of their income profile.
Use of Direct Debit enables, with safeguards, the beneficiary to collect monies on the due date from the payers account. This ensures that the cashflow of the beneficiary is not adversely impacted by late payment and avoids the payer having to initiate payments when they fall due.
There are a number of safeguards associated with Direct Debit but this article focusses on the key one, the Guarantee.
There are a small number of variables within the Guarantee, for example the number of days advance notice before a payment is collected (i.e., the point in time when the collecting organisation will advise the payment amount and payment date), however the wording of the Guarantee itself is the same regardless of which collecting organisation is using it.
Whilst it is the collecting organisation (or ‘service user’ in Bacs terminology) that provides the wording of the Guarantee to the payer, the Guarantee itself is provided by the payers Payment Services Provider (more commonly termed bank or building society), and it is from the Payment Services Provider (PSP) that a refund will be obtained in the event of a claim under the Guarantee.
The Guarantee does not provide for refunds relating to the underlying commercial contract between the payer and the collecting organisation, it enables refunds to be sought in the event of an error in the use of the Direct Debit product, for example if the collecting organisation collects a payment which is not in accordance with the details in the advance notice.
The payers PSP will assess the validity of a claim for a refund under the Guarantee before providing any refund. Each PSP will adopt its own processes for establishing this validity but the aim is consistency, i.e., to ensure that refunds are provided in appropriate circumstances.
Having agreed to provide a refund, the PSP will decide on where the underlying error took place. Where the error is attributed to the collecting organisation the PSP will raise an indemnity claim on the collecting organisation to obtain reimbursement for the refund provided to the payer.
The are a number of predefined reasons codes available to advise why an indemnity claim has been raised and the PSP must select the appropriate one on each occasion. Valid counter claims aside, once an indemnity claim has been received it is for the collecting organisation to resolve matters directly with the payer.
In the interests of brevity, I have not, in the article, detailed the timeframes associated with the PSPs decision to provide a refund (or not), nor the timeframe and settlement process associated with indemnity claims themselves. Similarly, I have not detailed each of the reason codes for which an indemnity claim (or counter claim) can be raised.
How many indemnity claims that a collecting organisation receives and the reason codes that may be applicable, are likely to vary based on the number of Direct Debits that a collecting organisation raises, the market sector that it operates in, and perhaps in some circumstances, the types of payers themselves.
There are a number of ways in which a collecting organisation can influence the number of indemnity claims it receives, for example by analysing the claims themselves, reviewing its internal processes, and by positively engaging with payers.
This article merely provides an overview of both the Guarantee and the supporting indemnity claim process. It also no more than hints at some of the activities that a collecting organisation can undertake to mitigate its level of indemnity claims. Northey Point would welcome the opportunity to discuss these with you in more detail, please email us at DirectDebit101@northeypoint.co.uk, visit us at www.directdebit101.co.uk or call us on 07590 538 820.