In the current economic climate, banks are tightening up on risk meaning that it has become more difficult to get access to the Direct Debit Scheme. Verne Halom explores how to overcome this problem.
The Direct Debit scheme has been around since 1970 and over the last fifteen to twenty years has grown in popularity to become the preferred method of payment for regular bills,
subscriptions and even business to business invoices.
Getting access to the Direct Debit scheme is a challenge, particularly for small to medium enterprises with low to moderate turnover and new start-ups where there is only a short trading history. Generally businesses in this position find that when approaching their bank to obtain a Service User Number to use the Direct Debit scheme, they are met with a flat refusal, or onerous conditions such as holding a significant deposit on account as collateral.
The reason for the difficulty in obtaining sponsorship from a bank to use the scheme is because of the risk that the Direct Debit Guarantee. People and organisations who use Direct Debits to make payments are protected by the Guarantee which puts a great deal of power into the payer - If an error occurs with a Direct Debit, either with respect to the amount or date, an immediate full refund can be claimed back from the bank.
This is great in terms of consumer confidence in the system, and this confidence helps bolster consumer take-up, however the Guarantee adds uncertainty to the organisations and sponsoring banks collecting payments. Indeed, there is no time-limit or monetary limit built into the Direct Debit rules, so a payer could quite easily ask the bank to reclaim a single payment or a sequence of payments spanning many years.
The ability to reclaim many thousands of pounds means that a sponsoring bank could be left with a significant bill on its hands if a Direct Debit Service User were to fail with hundreds of payers reclaiming their Direct Debit payments.
In the current economic climate banks have tightened risk controls hence more and more businesses are turning to payment service providers who specialise in the provision of Direct Debits. These providers effectively act as a third party who process Direct Debits on behalf of their client. Furthermore, as they apply for the Service User Numbers with their sponsoring bank, they take on much of the risk that the Direct Debit Guarantee brings to the table.
Naturally it is not possible for these companies to take an unlimited or unacceptable level of risk, so this has to be managed, and usually in a very different way to a bank:
Firstly, these companies will grade types of business according to the risk they bring; services may be declined for those who are in the highest category of risk, or extra terms may be imposed as a result.
Next, it is usual for maximum transaction limits to apply: for example, an individual Direct Debit cannot exceed a certain amount and a maximum aggregate amount for collections may apply over a period of time – usually a month.
Where limits are likely to be exceeded, most payment service providers will show some degree of flexibility by allowing them in return for a reasonably sized deposit being placed on account, or a percentage of the collections being withheld over a period of time until a deposit or buffer fund commensurate with the risk is built up. These funds are reviewable throughout the relationship between the client and the Direct Debit provider.
It is clear by its popularity that Direct Debit has become the preferred payment method by consumers and businesses alike. While obtaining direct access to the scheme via a bank and BACS Payment Services is neither easy nor a certainty, there are many payment service providers that specialise in Direct Debit services that can help gain access to this valuable payment method.
