Direct Debit News

Variable Recurring Payments – A Direct Debit Alternative?

Variable Recurring Payments (VRPs) allow customers to automate regular payments to companies using Open Banking technology. Unlike direct debits, which are set up to pay fixed amounts, VRPs allow for changing amounts to be debited. But, the customer is still in charge and has better control over payments. Direct debit news indicates that over ten million private individuals and businesses have switched to Variable Recurring Payments.

Comparison with direct debit

To understand why so many people are choosing VRPs, a comparison with Direct Debits illustrates the advantages that VRPs confer.

VRPs offer enhanced security

When you set up Direct Debits, your information is stored by the vendor. If a data breach occurs, your information is at risk. VRP payments are secured through customer authentication. This robust approach to security makes you less likely to fall victim to fraud.

VRPs are flexible

When you cancel a Direct Debit, your bank sends an instruction to the vendor. They have three working days to cancel. VRPs work differently. You manage your VRP setup yourself, placing you in full control of payments.

VRPs clear faster

The Bankers Automated Clearing System (BACS) clears Direct Debit payments within three working days. VRPs clear payments instantly using Faster Payments.

Lower railure rate

Direct debits can fail for several reasons including insufficient funds, even when the customer has adequate resources but they are spread over several accounts. VRPs allow clients to utilise available resources across accounts. This prevents automated payments from failing, saving penalties and protecting reputations.

Why VRPs are gaining traction as an alternative to direct debit

The flexibility of VRPs is making them a popular alternative to direct debits. Apart from being easy to manage, they offer greater transparency.

For example, customers are able to approve payments individually before they are processed. In the event of incorrect billing, they can withhold payments and negotiate with businesses. This is particularly important in managing payments where the amounts charged vary from month to month.

At the same time, they can be confident that payments will be processed, even when funds are not in a single account. This helps to build creditworthiness and allows for easier management of finances.

The technology behind open banking continues to develop and is enjoying increased adoption around the world. It is seen as a means of uplifting financial inclusion while supporting saving and investment.

The latter benefit is realised through “sweeping,” the functionality that allows funds to be moved between accounts. It’s not only possible to move funds between an individual entity’s accounts to enable payments. Surplus funds can be moved into accounts or investments bearing higher interest. This encourages saving and allows financial resources to be deployed optimally.

However, even non-sweeping VRPs offer benefits, and the . In its response to the VRP Working Group’s report, it concludes: “VRPs have the potential to deliver important benefits to payers and billers compared to existing payment methods such as Direct Debit and card on file, including greater flexibility in setting up and managing mandates and faster processing.”

The impact on businesses when direct debit fails

Direct debit news sees consumers up in arms after energy companies extracted astronomical amounts from customers’ bank accounts following incorrect billing on the part of energy providers.

Because the customers had sufficient funds in their accounts, the direct debits didn’t fail. However, by going through, they placed affected businesses and individuals in a situation in which they had to wait for weeks before refunds were released.

Immediate financial and operational impacts

The dangers of direct debits without checks and balances to detect anomalies and alert customers could present a serious business risk. The BBC reports that an energy company’s customer was billed £250,000 owing to a Smart Meter error. The funds were available, so the transaction cleared.

Now £250,000 out of pocket, business owner Patrick Langmaid says the amount represents a hundredfold increase over his usual bill. The loss of funds, albeit temporary, left his business in an awkward position since they had been earmarked for other purposes.

Adding insult to injury, his business was forced to expend people hours on contesting the amount and requesting a refund. According to some affected consumers, this process can take months.

As these stories indicate, there are multiple financial and operational impacts to incorrect Direct Debits being applied.

• Cash flow shortages mean that businesses may be unable to pay other suppliers. This affects their business reputation and results in interest being charged.
• Business improvements must be delayed and may not be ready in time to meet consumer demand, resulting in loss of income.
• Loss of income from interest that would otherwise have been earned.
• If there are insufficient funds to cover the direct debit, a charge of £50: arguably a lesser evil than an unexpected and substantial drawdown on resources.

Reputational risks

If anomalous Direct Debits are not stopped and flagged for the customer’s attention, they stand to lose in the longer term, too. While they await reinstatement of their funds, they will be out of pocket, and the lack of available financial resources may have operational impacts that harm their reputations.

Suppliers with legitimate accounts to settle may find their debit orders failing and customers may not receive the service they expect. Both scenarios reflect poorly on the business’s reputation, resulting in negative impacts that persist for years after the incorrectly billed amount is refunded.

Long-term consequences

As if the stress of finding bank accounts emptied, and facing the task of achieving a refund on an incorrect Direct Debit payment weren’t enough, long-term consequences may plague affected businesses for years to come.

For example, if an affected business were to apply for a loan, banks may notice multiple failed Direct Debits caused by the original incorrect bill. If they aren’t aware of the circumstances, they may simply assume that the affected business presents a high level of risk. The same is true of prospective investors who will be interested in the business’s money management history.

And, as we’ve noted, a resource pinch that affects how businesses can serve their customers will have a negative effect on business reputations. Even when they’re aware of the causes, customers are likely to remember disappointments they experienced. They’ll be more hesitant about trusting your business even though the cash flow crunch didn’t stem from poor management.

Solutions

There are many reasons why your company would like to hit news headlines, but experiencing the consequences of an incorrect Direct Debit of up to one hundred times more than you’d expect to pay is not among them. Consider implementing a bank integration solution that will alert you to anomalous payments before they happen.

New version of the direct debit scheme rules

June 2024 saw Direct Debt news making headlines with the release of new Direct Debit Scheme Rules. This was a departure from routine since changes are usually announced in January. Version 5.7 now replaces previous rules and has been presented in a 163-page document.

Direct Debit Scheme Rules: what has changed?

Where to get the full document

You can get a full version of the new rules from the BACS Document Library after registering and logging in. Alternatively, it can be requested from your sponsoring bank. There is also a BACS microsite devoted to the provision of a Service User’s Guide and Rules to the Direct Debit Scheme. It allows for easy navigation of the document, or it can be downloaded in full.

Compliance and best practices

BACS distinguishes between rules, which must be followed in order to achieve compliance, and guidance, which is not mandatory but represents best practice. Direct Debit Scheme Rules provide a roadmap for the use of the Direct Debit service through your sponsoring bank.

As such, compliance is crucial for the collection of payments and Service Users must check that their practices are aligned with rules and any updates that have been implemented. To ensure continued compliance, regular reviews should be conducted to determine whether business processes must be adjusted.

Updates are generally released in January, although 2024 was an exception with the changes being announced mid-year. The logical time for reviews would therefore be each January, with additional adjustments being made if Direct Debit Scheme Rules are updated at other times. Changes are always summed up on page two, so identifying changes is easier than might otherwise be expected.

BACS Submissions and Bank Holidays: What to know

Bank holidays can cause issues in collecting BACS payments. According to BACS rules, Direct Debits may not be collected earlier than the date detailed on the advance notice. If a payment date falls on a bank holiday, it will be moved to the next working day, and this will affect business’s scheduling.

Impact of bank holidays on direct debit collections

Why Early Collections are Not Permitted

Since customers may have insufficient funds in their accounts and are not expecting early payment, collections may fail. Or, with funds dwindling while they await salary payments, a successful Direct Debit could represent a serious inconvenience leading to queries and complaints.

In addition, when payments fail or accounts are overdrawn, the consumer accrues additional bank charges. Customers would be likely to make their dissatisfaction known, negatively impacting a company’s reputation.

Meanwhile, the company incurs additional costs owing to high failure rates, additional admin, and time spent dealing with unhappy customers.As a result, attempts at early collection through Direct Debits will be disallowed.

The Impact of Late Collections

Direct Debits can be collected up to three working days after the date specified in the Advance Notice. This allows Service Users a little breathing room to cover bank holidays, payment dates that fall on Sundays, and minor operational issues that may lead to delays. However, late collections can also result in negative impacts for businesses and their customers, so they should be the exception.

With the due date for payments having passed, payers may have used funds elsewhere and collections may fail. If this results in the termination or suspension of a service they rely on, they face inconvenience. Meanwhile, the collecting organisation has reduced cash flow, additional administrative tasks, and unhappy customers.

Forward Planning for Bank Holidays

Early payments are against BACS rules, and would have negative impacts on organisations and their customers. Late payments are problematic for businesses and their clients, so advance planning for Bank Holidays is key to ensuring smooth payment processing.

Practical tips for managing BACS submissions affected by bank holidays

Schedule BACS submissions using the BACS Processing Calendar as a tool. For example, it indicates that a payment scheduled for the 31st of December must be submitted by the 27th of December for processing on the 30th. BACS recommends early submission on the input day.

However, it also provides for the submission of files up to 30 days in advance of processing dates and recommends this as a means of avoiding disruptions.

To benefit scheduling, BACS notes that software should reflect non-processing days. You can also configure your software to indicate processing and collection dates, allowing you to determine whether your contingency planning (including staffing plans) address holiday periods.

Staff training on BACS timelines will help to limit the potential for error, and an approval process in which two people review and approve BACS submissions adds an additional layer of protection against errors.

Although it is not a requirement, it would be best practice for organisations to inform customers as to delayed payments owing to Bank Holidays. Reminding customers about the effect of Bank Holidays on BACS payments will help them to know what to expect and enable them to keep funds available.

UK reports most direct debit failures since 2019

The Office for National Statistics (ONS) was already reporting a rise in Direct Debit failures in 2023, citing an annual rise of 14 percent. In February 2024, Direct Debit news reports showed that failures had reached their highest number since data began to be collected in January 2019. 1.07 percent of payments failed. It is believed that a 32 percent increase in outstanding electricity and gas debits was behind the surge.

Analysis of the data

Anomalous months do occur. However, the February surge in failed Direct Debits forms part of a larger pattern. For example, in September 2024, the ONS reported a one percent increase in Direct Debit failures for August compared to the previous month and, when compared to August 2023, this represents a 12 percent rise in Direct Debit failures.

This comes at a time when consumer confidence is falling, despite stable inflation and potential cuts in the base interest rate. Along with a rise in failed Direct Debits for electricity and gas, mortgage direct debits have also been rising.

Soaring energy bills following the Russian invasion of Ukraine are still making themselves felt as is the impact of elevated mortgage interest rates which reached a 15-year high in August. Relief may be in sight, but for the time being, consumers are struggling to cover elevated costs.

Businesses are in a similar predicament, paying more for inputs and overheads while simultaneously running a greater risk of non-payment from customers.

Direct Debit Failures: impact on businesses

A rise in direct debit failures can have serious consequences for businesses. The most obvious effect is reduced cash flow, but it is only the first direct impact. When direct debits fail, administrative burdens rise adding to business costs while relationships with customers become strained. This is exacerbated by reduced capacity to serve clients when cash flow shortages occur.

Economic growth raises hopes for 2025

The UK economy seems poised to rebound in 2025 with GDP growth expected to reach 2 percent compared to 2024’s 0.7 percent. There are hopes that inflation will fall below 2 percent owing to lower wholesale energy prices and the Bank Rate is expected to fall before the end of 2024.

With a stronger economy, consumers will be better able to meet their Direct Debit obligations, and there is reason to feel optimistic about a fall in Direct Debit failures during 2025.

How to recover unpaid debits

With Direct Debits in the news following a rise in failed payments, businesses are increasingly facing the task of recovering unpaid debits. This can be particularly challenging for small businesses. However, by implementing a tried and tested process, it is often possible to recover failed debits before the next billing cycle commences.

Challenges small business face with direct debit failures

Subscription services offer a means for small businesses to enjoy steady, reasonably predictable cash flow. However, when Direct Debits fail, the reduction in available cash resources can impact service delivery. This impacts customer relationships across the board, while discontinuing services to customers whose debits have failed can give rise to controversy. Apart from this, businesses incur higher administrative burdens and costs, an additional blow to their profitability.

Why smaller businesses did not use direct debits in the past

Historically, smaller businesses were unable to implement Direct Debits due to high barriers to entry. Specifically, chargeback risk meant that smaller firms required funds to protect them from this threat to their financial well being. Privacy and security compliance posed additional challenges.

There were also technical issues to overcome. BACS transfer systems were not always compatible with cloud-based accounting systems and since debit systems are country-specific, there were hurdles to international trade.

During the last decade, Direct Debit has become more accessible to smaller businesses. Payment companies have addressed the need by creating compliant payment services and facilitating cross-border payments.

Proactive steps to minimise direct debit failures

From any business’s perspective, preventing Direct Debit failures helps to mitigate risk and reduce costs. Conduct credit checks to gauge customers’ ability to pay and ensure that payment terms are clear. Good communication is key. When customers are reminded of upcoming payments and know what to expect, they can ensure that they have sufficient funds available.

When Payments Fail: understand ARRUD codes

There are several reasons why Direct Debits can fail, and knowing what Automated Return of Direct Debit (ARUDD) codes mean informs your approach to recovering a failed Direct Debit.

There are ten codes and they range from “refer to payer,” usually because there were insufficient funds in their account, (ARUDD code 0) to account transferred (ARUDD code 3) and payer deceased (ARUDD code 2). ARRUD code 7, “amount differs,” indicates that the payer is disputing the amount you are claiming since it differs from the amount specified in your advance notice.

Best practices for recovering failed payments

Once you know why a debit has failed, you can formulate your response. In the event of insufficient funds being the cause of failure, you can set up a retired payment to be claimed within 30 days. Contact the client at least five days ahead of the scheduled payment so that they are aware of the renewed Direct Debit attempt and know when the payment will be due.

An account transferred code likely means that the customer has switched banks. They may be both willing and able to pay, and simply contacting them could set matters to rights. If the amount is in dispute, you must work to resolve the issue with the payer before attempting another Direct Debit.

With deceased accounts, you will need to exercise sensitivity. The deceased person’s estate will be responsible for settling liabilities and this process takes time. Meanwhile, family members should not be pressured for payment.