Johannesburg, 01 Feb 2021
While businesses want to ensure they don’t miss a payment from a customer, customers equally want to be certain that fraudulent debit orders aren’t coming off their bank accounts – think the R99 scam that’s been prevalent for the past few years.
Debit order abuse goes way beyond rejected payments – and while technology has a role to play in ensuring that debit orders are honoured, so does consumer education, says Vaugh Hechter, Client Services Head at NuPay.
Debit order failure is caused by a variety of factors.
First and foremost, says Hechter, there are debit orders that are processed through consumers’ bank accounts without the explicit consent of the accountholder. This is where the so-called R99 debit orders come into play, initiated by unscrupulous transaction processors. However, this is also the domain of debt collectors, who submit debit orders with permission from the accountholder.
A key takeaway here, says Hechter, is that the accountholder needs to be given the ability to authenticate transactions against his or her account before they can be processed, reducing the likelihood of fraudulent debit orders.
Keith Wrede, Deputy Managing Director of Altron Fintech/NuPay, outlines the main players in any debit order process: “There’s the debtor, the creditor, the bank and sometimes a system operator. The debtor is the person whose account is debited. The creditor is the person who receives the funds and who initiates the debit order into the system. The bank is the consumer’s financial institution. System operators are responsible for processing transactions on behalf of creditors to debtors to the various banks.”
Creditors push transactions into the system, usually via a system operator, although sometimes they go directly through the bank. “The R99 and other debit order scams are unscrupulous fraud,” says Wrede. “There’s no other way to describe these actions.”
However, the same can’t be said of debt collectors, even though the transaction hasn’t always been agreed to by the debtor. “In this instance, the accountholder owes them money, and the debt collector implements a debit order for that debt, usually with a telephonic mandate and authority in place.”
The fact that the debtor took on a debt that he or she couldn’t afford might also be regarded as fraud, says Wrede. “Debit order abuse also takes into account abuse from the debtor’s side. All too often when accountholders realise they might not have sufficient funds to last the month, they log onto their banking application and reverse some of their debit orders.”
This is referred to as ‘cash management’. “The debit order was successful, the business has been paid and all seems well, but then the customer reverses the transaction and becomes a defaulter.”
Hechter says: “DOA (debit order abuse) isn’t a simple thing to quantify. Initially it was thought that the majority of abuse came from scamsters implementing fraudulent debit orders, but it has since emerged that the majority of debit order abuse comes from debtors who reverse transactions.”
The local banking industry realised it required systems to combat debit order abuse as early as 2017, when dispute volumes increased by 200 000 transactions a month. “South Africa faces the additional challenges of consumers who lack financial literacy and who apply cash management just to be able to eat, which results in different behaviour to consumers in the rest of the world,” says Hechter.
“Another factor is the affordability of that credit, where credit providers, retailers and other debiting institutions upload debit orders to someone’s account without checking if the consumer can afford the transaction, such as credit for clothing, for instance, then there’s a risk that the consumer won’t be able to afford to pay it.”
During the COVID-19 pandemic, the volume of transactions being processed through the EDO (early debit order) stream in SA took a dip of about 35%, resulting in all of the bodies that provide credit (such as retailers, banks and small lenders) all pushing to increase their figures. February 2020 was a high point, with 15.3 million transactions being processed, while in August 2020, this dropped to 11.9 million transactions. There are two reasons for this, according to Hechter. “One was the debit order abuse guidelines and rules being applied and monitored as set out by PASA (Payments Association of SA) on checking for challenges with creditors (such as R99). There was also a drive to check that creditors were complying with legislation and had the right mandates in place.”
The second reason could potentially directly be attributed to the lockdown. “People started working from home, the interest rates improved on outstanding credit, they weren’t eating out, shopping or travelling, and as a result, their credit positions seems to have improved. In addition, interest rates have come down.”
In addition to fewer transactions being processed, the debit order failure rate has dropped to 18%, where previously it was at 22% and even 24%.
While the industry has benefited from this drop in debit order abuse, it still requires measures to redress it further – and beyond COVID-19, says Wrede. “Europe has the Single European Payment Area (SEPA), where every debit order within the area is sent to the consumer to authorise. Locally, we have a similar system, which requires the consumer to authenticate debit orders, but the system is not yet mature or available to all consumers.
“There are a few challenges faced in getting this technology off the ground. Firstly, consumers haven’t been educated about how it works. In simple terms, consumers are notified that they need to log onto their phone app, Internet banking or an ATM to authorise a transaction. The primary way of notifying a debtor that they have to authenticate a transaction is via SMS, but in SA, people change their numbers frequently, and all too often, the number on records is no longer in use by that person. Over and above that, there’s the challenge of lack of access to technology and connectivity by consumers, making it difficult for them to authenticate transactions via a phone or Web app.”
In summary, consumers need to be educated around their obligations and rights when it comes to debit order payments, but they also require education on the technologies that they can use to prevent debit order abuse on their accounts. At the same time, technology has a role to play in reducing risk and giving consumers more power over rogue transactions on their bank accounts.
Share