Trust and Tipping Point

Processing 4.5 billion transactions a year the UK’s Direct Debit system is firmly established as a key part of our payments system. In this blog we find out that the UK’s Direct Debit system has inspired innovative thinking in the UAE.

This is a guest blog written by Ummair Butt and published by the Emirates Institute for Banking and Financial Studies.

Story (so far) of Direct Debit in UAE

Direct Debit is an automated payment facility most suited to recurring & monthly payments, used by millions of people all around the world. Introduced to UAE by the Central Bank in 2013, it can facilitate the payments of utility bills, school fees, rents, loan repayments, and much more.

In order for us to understand the evolution (little over five years) of Direct Debit in UAE, it is important to understand it as a concept before considering its merits as a recurring payment method.

The idea of Direct Debit came into existence in 1964 when a young bright executive at Unilever consumer division in London by the name of Alastair Hanton got fed up with collections from merchants around London. He thought of getting a one time signed instruction to then automatically collect due to invoices amounts from the merchant’s bank account. However, he realized it was easier to think up than do it. Nevertheless, he dedicated himself to the task and despite only a handful of banks at that time, it took him four years to bring all banks round to his solution. 1968 was the first year when Direct Debit transactions began. At that time in the UK, Giro was considered the most efficient and advanced mechanism of collecting cash payments. However, Direct Debit offered way more efficiency than Giro and the adoption curve just kept going up, never to taper off to this day. 

Today around 88% of the UK population makes regular payments by Direct Debit. When Alastair was asked the reason for such an amazing success of Direct Debit, he replied that two things made it happen, first was TRUST and second was TIPPING POINT. 

Let’s understand these two in the UAE context.

Trust & Tipping Point

The UAE Central Bank, regulates UAE Direct Debit, allows participating banks (all banks in the UAE) and merchants to offer consumers a convenient way to manage payments. It has given the UAE a solution to the problem posed by post-dated cheques. Not only that, if you accept payments on Credit Cards you will pay a percentage of the transaction which ranges from .60% to 3%, this is quite a hit on the bottom line. Direct Debit on Credit cards does not attract a percentage but a fixed fee which could range from AED1 to AED5. And there you have it, Trust & Tipping Point. Who can be more trustworthy in a country and banking system than its central bank? Direct Debit has the potential to be a perfect alternative to existing payment mechanisms in the UAE today.

Cheques VS Direct Debit

In the UAE, issuing post-dated cheques is a common practice. The reason a payer is forced to write out cheques is not only because the merchant wants to be paid but cheques are also perceived to be a security instrument. At a policy level, we are hearing news about initiatives being taken to discourage the use of this paper-based system. For example, UAE Central Bank has recently announced that each checkbook will be issued subject to credit checks by the issuing bank and that only 10 leaves would be supplied at a time. Another example is Smart Dubai, aggressively pursuing a paperless strategy, UAEPASS across UAE. All these are testaments of the paperless environment to come.

Both examples show that there are measures being taken at the highest level to remove cheques from the system but replacing it with what? Certainly, cash or bank transfers are not the answer, which leaves us with one viable alternative and that is Direct Debit. Direct Debit has the potential of reducing the cost of administration in other words cost of doing business

VAT & Direct Debit

The introduction of VAT in the UAE is also highlighting the benefits of this payment mechanism. Before VAT introduction the usual practice was to raise an Invoice for the full amount for the year or project at commencement and then payment will be covered by PDCs. However VAT has posed a challenge on this practice, this is because the business must pay VAT on invoices raised not when payment is collected. Service charges on properties is an example, where most if not all owners associations will raise one invoice at the beginning of the year and then wait for settlement during the remainder of the year. VAT however cannot wait and must be paid when it’s due. Direct Debit is the perfect solution for monthly invoicing and monthly payment collections, it addresses and resolves the matter of VAT payment.

Direct Debit for Rent (Dubai Only, for now)

The first and most important point to note for a Dubai landlord is that criminal case is not a pre-requisite for filing an eviction case with the RDC(Rental Disputes Centre). Even when strict liability was attached to a bounced cheque of any amount (prior to December 2017), a bounced cheque was considered insufficient grounds for immediate eviction. One still had to follow provisions of Law No. (33) of 2008 Amending Law No.(26) Regulating the Relationship Between Landlords and Tenants in the Emirate of Dubai and file an eviction case with the Rental Disputes Centre (“RDC”) to have the tenant evicted.

Of course, it is strong leverage to have the ability to approach the Public Prosecution for a bounced cheque but as it stands now, only the cheques above AED200,000 may be punishable by detention. The lesser amount is subject to fines in proportion to the amount of the bounced cheque. Eventually, the case for uncollected rent will have to go to the civil court, and that’s where a Judge will decide after hearing both sides. In this scenario cheques and Direct Debit are effectively equal in their weight. It is well known and established fact that if you give payers a monthly payment scheme, dispute cases will be down & may even become non-existent. Given the fact over 95%, UAE population is salaried bringing in monthly Direct Debits for rent payments makes absolute sense. However, there are small operational issues with the current system and infrastructure.

A Bank providing Direct Debit product today is effectively an IT system which does not talk to either your Financial/CRM system or your Payers. This is where fills in the gap by providing fully integrated solutions. What this means is, front line staff do not operate two separate programs, as we provide API solutions, and thus staff still work on their own system with just a few buttons added for Direct Debit. Our client ASTECO Property Management LLC, manages approximately 20,000 units of property. Units. Our Direct Debit System is fully integrated with their property management software. ASTECO staff still see the same screen but with the added payment option of Direct Debit. The rest is all taken care of behind the scenes i.e. information exchange between sponsoring banks and merchants as well as tenants/residents. File formats are engineered (& reversed engineered) to exact the formats of their property management system. Reconciliations that used to take days are now done in minutes.

For a bank also there are many benefits of implementing our system. The DDS system is built on UAE Central Bank’s vocabulary, making it easier for any corporate client in UAE to operate the UAE Direct Debit system with efficiency & scale its use without any hassle. Banks can simply push files to UAECB and push return files back to the client without having to worry about adding any layers. We look forward to integrating with all banks in UAE in 2019 so the use of Direct Debit could be scaled in UAE.

This “story (so far) of Direct Debit in the UAE” guest blog was written by Ummair Butt and originally published by the Emirates Institute for Banking and Financial Studies.

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