According to Bacs Payment Schemes estimates every DD failure costs up to £50 to repair; while the potential bank charge for failed transactions across the single euro payment area (SEPA) from February 2014 is uncapped. Furthermore, neither cost takes into account the loss of the failed transaction value or the impact on the customer relationship: 14% of consumers actually admit to having cancelled a policy or subscription due to complicated DD or DC set up processes.
So how can a business simplify the creation of these vital DD and DC payments whilst also imposing far greater control to minimise human error and avoid fraud? The following outlines the importance of sort code and bank account validation and verification at source to drive down costs and maximise the value of a flexible payment model.
Direct debits (DD) and direct credits (DC) have fast become an essential component of the payments landscape both domestically and – post-SEPA – across Europe. Organisations gain the benefits of improved control over cash flow, credit visibility and fewer bad debts. But how many organisations actively track the cost of DD or DC failure? How many understand the implications on customer and employee relationships, supplier negotiation or even business loss when a payment cannot be processed as expected?
While Bacs estimates each DD failure costs up to £50 to repair, up to 60% of UK businesses admit incurring a cost of £50 or more for every failed DD transaction according to research undertaken by Redshift Research on behalf of Bottomline Technologies. Seventy-eight per cent admit the finance team spends more than 10 minutes rectifying each failed DD; with 14% taking more than 30 minutes per transaction. As a result, 43% of finance teams spend over four hours each month fixing problems with DD transactions and 11% take more than 10 hours per month. If the activity is fraudulent, it takes even longer to resolve, with 28% of organisations citing fraudulent DD/DC transaction failure as the most time-consuming to correct.
In addition to these measurable costs, there are the on-going business implications of payment failure. Almost three quarters (71%) of businesses admit failed DD transactions damage customer and employee relations; 36% said they result in a higher business cost to secure revenue and 35% of businesses admit to losing revenue as customers move to a competitor.
Despite this awareness, 23% of consumers still experienced trouble setting up or amending a DD or DC in the last 12 months. As a result 14% of consumers will cancel a policy if there is a problem setting up a payment; while a further 18% will actively look for a competitive alternative.
It is perhaps unsurprising that human error is the cause of the vast majority of payments failures, with bank account and/or sort code error accounting for 71% of failed DD/DC transactions.
Verify and Validate
There is a clear need to impose control over this process; to not only streamline the creation and amendment of DD/DC mandates but also prevent the accidental or intentional use of incorrect bank account or sort code numbers.
Opting to verify and validate at point of entry transforms the process. The key is not only to check that a bank account and sort code are valid – that a specific bank account number fits the rules that associate it with a specific sort code – but also to check the validity of each account. With this approach, companies are protected from fraudulent activity that uses genuine bank details but associated with a different nominated individual or company.
By flagging issues with account number or sort code in real time, the customer services team can immediately check the information from customer, employee or supplier – avoiding both natural mistakes and fraudulent intent. With this real time verification and validation, organisations minimise DD failures and significantly reduce fraud. This reduces the time spent repairing and resubmitting transactions, relieving the pressure on finance, but also improves customer relationships and minimises the risk of customers cancelling a service or subscription. Certainly there is a growing recognition that real-time verification and validation software offers tangible benefits. According to the research, this approach reduces cost of managing customer queries (51%); delivers better cash management visibility (42%) and provides a better acquisition and sign up process (40%).
Effective verification and validation will also have an important role to play following the introduction of SEPA in February 2014. While SEPA’s provision of cross-eurozone payments at the same cost as a domestic transaction is compelling, payment failure will be expensive. There is no cap on the charge that banks can make to repair failed SEPA payments, and it is widely anticipated that repair fees could reach up to €50 per transaction.
Furthermore, any significant failure in the employee, pension or supplier payment run could have significant ramifications in terms of overall market confidence in the business.
With organisations needing to convert not only supplier payment master files but also employee and pension lists from domestic to the SEPA model, the cost of payment failure could be significant.
The process of moving all eurozone bulk payments across to SEPA is more complex than merely converting domestic bank account and sort code details into the required bank identifier code (BIC) and international bank account number (IBAN). Simply relying on the basic conversion rules available online typically achieves no more than a 75% success rate. Indeed in some countries, such as the Netherlands and Italy, it is not possible to make the conversion from domestic details to IBAN and BIC without attaining specific raw data from the bank.
Basic IBAN checking, which some simple services use, will not be validated at a domestic data level and increases the risk of error. Conversion needs to include dedicated SEPA BICs used by each bank to route SEPA payments.
A fast, effective conversion of domestic account information into the required international format requires automated validation of domestic bank account and sort codes and conversion into the correct BIC and IBAN – and back again. Embedded validation within the ERP system via an application programming interface (API) is also required to ensure new supplier or employee information is accurate.
With the right model in place, organisations can rapidly extend beyond the eurozone by exploiting the ISO 20022 messaging standard and trusted verification to confidently achieve faster, secure international payments.
Organisations are spending huge amounts of money on winning new customers. So why jeopardise that spend through inadequate payment processes? DD and DC are compelling payment instruments that can offer excellent cash flow control. But the current failure to validate and verify account information in real time is clearly undermining the experience and disenfranchising hard-won customers. Human error is unavoidable; it is only by imposing real time control that organisations can flag and address mistakes up front to reduce DD and DC failure and truly realise the benefits of more predictable cash flow.
China's bad debt markets are such a hot commodity that distressed assets are being sold on Alibaba’s Taobao ecommerce platform alongside household products. But the IMF warns the situation is unsustainable.
The implementation date of Europe's revised Markets in Financial Instruments Directive, aka MiFID II, is fast approaching. Yet evidence suggests that awareness about the impact of Brexit on MiFID II is, at best, only patchy and there are some alarming misconceptions.
Despite all the automation and improvements that digital banking has the potential to achieve, customers and their needs still form the very core of the banking sector.
Banks might feel justified in victim blaming when fraud occurs, but it does little for customer confidence.