What are debit orders and how are they processed?
Debit orders are payment instructions provided by a third party (service provider) to the bank account of a paying customer in terms with the authority (debit mandate) granted by the customer of the third party.
In simple terms, this is the permission granted by a customer to a service provider to collect money from their bank accounts/credit cards without the customer having to initiate the payment, it is an automated process.
Debit orders are commonly used to collect monthly premiums on insurance products, magazine subscriptions, bond repayments, medical aid premiums etc. Wherever there is a subscription service, there will always be a need for an effective means of receiving payment.
Debit orders are particularly useful in the subscription service industry as it protects both the customer from i.e perhaps forgetting to make payment which could render a suspension on their service and also protects the service provider from having to deal with non-payment.
The most crucial component of running debit orders, is having proof of authorisation — debit order mandates.
Service providers are required to obtain either a signed or voice recorded debit mandate from it’s customers. These mandates generally authorises a payment collection on a specific date (or repeatedly on a fixed date) for a specific amount or variable amount with an upper limit if for example there is a 10% increase in fees each year.
Once debit orders are processed on a customers account, the information of the transaction will then be reflected on the customers bank statement with a reference to the source of the debit. Some payment gateways that collect funds on service providers behalf, do not provide the service provider as the source of the collection and instead reference their name.
You may want to confirm how your payment gateway sources it’s reference to avoid customers becoming confused and resulting in the disputing of payments which in turn raises your dispute and unpaid rates.
If the payment reference is of significant importance to you, we would suggest that you make use of a 1st-tier payment gateway.
1st-tier payment gateways provide you with an account that ties in directly to Bankserv, collecting funds directly into your account, whereas other gateways act as a third party collector who collects on your behalf via their own account at Bankserv.
At SnapBill, we are integrate with Direct Debit, a leading 1st-tier payment gateway. Direct Debit provides the only debit order collection facility in South Africa which allows for obtaining authorisation via signed electronic debit order mandates.
NAEDO – Non Aunthenticated Early Debit Order
Non-Authenticated Early Debit Order (NAEDO) aims to level the electronic debit order collection playing field by creating an equal opportunity for creditors to collect funds from their debtors. The NAEDO system is a National Credit Act initiative launched in September 2006, which allows bank accounts to be “tracked” for funds after “bulk credits” (e.g. salaries) had been posted to the account.
A collective demand was established by various role players within the payment collection industry for a more comprehensive solution for payment collection that benefited both the creditor and debtor.
According to the Payments Association of South Africa (PASA) – here are some of the issues that gave rise to the demand:
- Unsuccessful collections – some customers withdraw cash from their bank accounts as soon as it becomes available, assuming that their debit order obligations have already been deducted. This leads to unsuccessful collections and unpaid transactions.
- Illegal practices – Some lenders pursued various avenues to overcome the above in order to protect their capital. These included card and PIN storage, preferential payment collection systems and sort at source arrangements. Access to preferential payments mechanisms was not available to all lenders due to varied risk profiles, with the result that certain classes of beneficiaries always had access to account holder funds before others.