Debit order disputes result in legitimate transactions being cancelled

The ease at which direct debits are being disputed are increasingly resulting in people contesting legitimate debits such as debt counselling obligations, mortgage repayments and other forms of debt repayments. This form of abuse is setting customers back on their debt obligations and causing further headaches for many financial services firms, particularly those in the debt counselling and  the loans industry.

Stijn Laenen, client experience head for value banking services at FNB, admitted to Justmoney that debit orders were being disputed: “Debit orders of all types are being disputed, but more so, debit orders for smaller shorter-term facilities like loans, credit cards and insurance. In many cases customers are disputing these intentionally for short term cash flow purposes.”

“We have seen an increase [in debit order disputes] of 30% a month on clients’ monthly debt repayment instalments since May 2016. Admittedly this is off a low base, but considering none of these disputes are valid (the clients have signed a debit order mandate, as well as all the additional debt counselling documentation including a power of attorney) is a very worrying trend. The propose Authenticated Debit Order process will hopefully be in early next year, but the issue is what happens before then?” said Ian Wason, CEO of DebtBusters, South Africa’s largest debt counselling business.

Wason said that customers are mistakenly rejecting the transactions but feels that the vast majority are doing it deliberately. “That being said, it may be due to circumstances beyond their control, that cancelled debit orders for debt repayments with the credit providers have continued to go off their accounts. This is why we strongly recommend that consumers open a new bank account when they apply for debt counselling.” 

Banks such as First National Bank and Capitec, in particular, have made it easier for clients to dispute debit orders. This year, FNB introduced an alerts system, which is delivered to a customer’s cell phone, for all new debit orders whereby customers can dispute and reverse the order by responding to the notification. Disputes can also be made online and through the FNB App. With Capitec it’s also easy to dispute the order by simply signing in through the Capitec App and rejecting the transaction.

A growing problem

However, Wason warned that disputing legitimate debit orders can lead to further problems. “By disputing a debit order for your monthly restructure debt repayment means that none of your credit providers are paid, and that consumers are in violation of their debt counselling agreements and court orders. Thus credit providers terminate the debt counselling process and these consumers debts revert back to the original contractual instalments and interest rates. They lose all the hard won and negotiated concessions that their credit providers have given them.”

Banks – no changes, for now

It appears that for now, banks are not going to curb the ease at which customers can dispute payments.

“We are monitoring dispute levels, but plan to continue with the convenient solution of debit order disputes via electronic channels (FNB App, Cellphone Banking and Online Banking),” said Laenen.

Meanwhile Capitec’s Charl Nel, who’s head of communications for the bank, said: “We do not intend changing our process until the new PASA Authenticated Debit Order process, is rolled out across all banks in South Africa.”

But this is all set to change. Back in March this year the Payments Association of South Africa (PASA) said it was aware that the industry has been experiencing a noticeable increase in debit order abuse and that its new initiative, Authenticated Collections Project, is set to address this issue.

Once Authenticated Collections is launched, you will have to electronically confirm to their bank that you are in the process of doing business with a company/user and that you agree to the details of the specific debit order. Your bank should then check the debit order payment instruction from the company/user against your authenticated mandate to ensure that the debit is within the parameters you agreed to, prior to processing

According to PASA, currently 33 million “normal” debit orders to the value of R61 billion are processed each month in South Africa. Additionally, 14 million Non-Authenticated Early Debit Orders (NAEDO) and 1 million Authenticated Early Debit Order (AEDO) transactions are processed in the Early Processing Window. Current disputes for Debit Orders are reported at 0.5% while that of NAEDO is at a more alarming 7% - 8%. In addition, 18% of NAEDO transactions are unpaid due to a lack of funds.

PASA added that figures are way above the thresholds set by the industry to monitor the efficiency in the system. The current thresholds are 0.5% for disputes and 10% for unpaids, respectively – indicative of the need for action to curb the number of debit orders disputed.

“It’s important to note that customers have a right to dispute all debit orders and as per industry regulations, banks (as facilitators of the payment process) need to honour these disputing instructions. However, customers need to contact their service providers to make alternate payment arrangements otherwise they risk breaching the terms of their agreement with their service provider and hence face potential termination of service and/or a negative impact on their credit records,” added Laenen.