Direct Debits collected early! What now?

Over the last 10 years we have been asked – by organisations both large and small – what they should do if they have Direct Debits collected early.  It’s a tricky situation for any organisation to manage! Consideration needs to be given to how the situation has arisen and how the organisation will take steps to remedy it.

What do the Rules say about Direct Debits collected early?

The Service Users Guide and Rules to the Direct Debit Scheme were created by Bacs, the organisation that run the Direct Debit Scheme in the UK. The Rules are very clear about collection of Direct Debits and state the following:

• It is the service user’s responsibility to ensure collection is made on the due date, i.e. the date advised to the payer within the advance notice.
• Rule: Collections must not be applied to the customer’s account before the date specified in the advance notice.

Why ARE Direct Debits collected early an issue?

As well as being outside of the scheme rules, collecting Direct Debits earlier than advised can be a real issue.  Many individuals will schedule a Direct Debit to be collected from their account soon after their salary is received.  If Direct Debits are collected early, the very real possibility arises that there will not be enough funds in the account to cover the value of the transaction.  This has an impact for the customer who may incur financial difficulties if a transaction goes through – or may incur bank charges if a transaction fails.  It also has an impact for the organisation who could potentially not collect the funds that it expects to and will then have an administrative task to reconcile who has actually paid!

In addition to the potential financial impact, a big headache is the impact upon organisational reputation and customer management that collecting Direct Debits early can lead to.  It’s no fun for any employee to manage irate customers who are demanding to know why their account is overdrawn or why money has been taken early.  Managing these customers can be difficult – refunding payments can be time consuming and if the organisation also covers any charges incurred – can be costly.  The likelihood of losing some customers could of course increase and cancelled Direct Debit Instructions and Indemnity claims is a real risk – which can impact upon the ongoing income of the organisation.

Common Reasons why organisations have Direct Debits collected early

There are several reasons why Direct Debits can be collected early. They include:

• Not understanding the Bacs 3-day cycle and therefore submitting files early
• Submitting files without including a processing or payment date within the file – meaning transactions default to the Bacs 3-day cycle
• Not understanding the set-up of your CRM system / database or extracting files early / without full details / incorrect payment dates

Perhaps the most common reason that we hear about, is that the staff member in charge of running the Direct Debit process does not fully understand what is required.  Often, they are following an out-of-date, written process document, created by a departed colleague and the document is not clear in what tasks are required and when.  Although it seems obvious that staff handling the collection of funds should have adequate training in the process, many simply do not have the knowledge or experience to manage a system that can have a significant impact on the organisation and its customers.  Often, one (or more) members of staff will be trained but it is during holiday periods or unexpected staff absences (e.g. due to illness / compassionate reasons) where a secondary team member steps in, that issues can arise (and of course the covering team member often doesn’t have the experience to deal with these issues).

What should an organisation do if they have Direct Debits collected early?

As soon as the error is identified the organisation should take steps to minimise the impact of the mistake. Contacting the sponsoring bank is a good first step.  Depending on when the error is discovered it could be possible to withdraw the file, so the transactions are not processed, and the collections are not taken. This is only possible before the processing date and often an error is not discovered until the phone starts to ring and the organisation is faced with customers demanding to know why money has been taken early.  At this stage it would not be possible to withdraw the file and therefore the key thing is to manage your customers reactions.

A first task is a fact-find:

• How many customers are affected?
• How much money has been taken from each of them?
• Is this in addition to their notified charges e.g. a collection been taken twice? Or is it that a collection has been taken early? If so, how early?

The organisation will also need to decide how they would like to manage the situation.  Is it preferable to repay all the customers; to repay those that contact the organisation or to not repay any but to direct the customer to their bank to raise an indemnity claim.  If the customer raises an indemnity claim to receive the money back under the Direct Debit Guarantee, they will receive the money very quickly from their bank.

Some organisations in the past have decided to re-pay the affected customers using Direct Credit payments.  This is possible, but organisations should be aware that even if they have repaid the customer, that customer could still contact their bank and raise an indemnity claim and receive the money twice.  The organisation maybe able to challenge any Indemnities if this occurs – as long as they can show that the repayment was made electronically and matches the amount and account details contained in the Indemnity advice.  Organisations going down this route should therefore repay electronically (not by cheque etc) and ensure that the repayment can easily be matched to the Direct Debit error collection (with reference number / amount etc).

One question to consider is whether the organisation contacts all the affected customers to advise them of the error. Quick and decisive action can certainly help minimise the impact and manage negative perceptions.  Taking responsibility for the situation, explaining why it occurred, what the company is doing to prevent it happening again and explaining how the customer can be refunded can help smooth ruffled feathers.  This may of course be dependent on the number of customers affected and the contact details that the organisation holds for them.  If not possible, it might be worth considering issuing a press release to alert a wider audience in one go. At the least it would be useful to ensure that any staff who might take calls from irate customers, understand the company position and have a clear (approved) explanation they can provide.

Whatever approach is taken, it is vital to take time afterwards to reflect on the situation and consider how it could be prevented from arising again.

How should we prevent having Direct Debits collected early again?

The key thing to ensure that such a situation doesn’t happen again is to have a clear and robust process in place.  Ensure that any written processing instructions are up to date and easy to follow and clearly explain the steps required for extracting your files, along with timelines involved. Look at your DR / contingency processes.  Maybe consider having an audit of your processes and seek best practice advise from the experts.

Make sure you have staff who are trained in how to manage a Direct Debit system – and who know how to deal with any issues that could arise.  Accredited Bacs training is invaluable to ensure that staff have the knowledge and skills to effectively manage an error-free system.  This can be delivered to individuals at regional centres or onsite at the organisations office to address any specific requirements or questions.

Check your CRM / database settings and what information is contained in your Direct Debit extract files.  Do you extract a payment date for your system? If not, could you add this?  Having a payment date within your file will ensure that even if a file is submitted early, it won’t collect early and therefore it gives you some protection.

Consider working with a bureau who can advise you about your collection timeline and the impact of non-processing days and bank holidays – and help you plan your Direct Debit calendar and collections.

Ask for help

No one wants Direct Debits collected early, but remember, you aren’t the first organisation this has happened to! There are places you can turn for advice and support.  As mentioned, contacting your sponsoring bank is vital.  You can also contact our experts at Clear Direct Debit for advice and guidance in how to proceed.  We are here to help!