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Why every organisation taking Direct Debit payments should pay attention to the Bacs rules

Darryl WarnerDirect Debits transformed the way companies took recurrent payments from their customers, making life simpler for all involved. As a payment method, it has efficiency at its core.

As paperless sign-ups become the norm, organisations need new strategies for fraud prevention. The Bacs updated guidelines make for essential reading.

Direct Debits have been running successfully for almost half a century and now process over four billion payments each year. Yet, in the face of rapid technology changes, Bacs acknowledges that what’s worked for the last 50 years may not work for the next 10.

The Direct Debit Guarantee means customers are entitled to refunds when payments are taken in error, or fraudulently. While its primary aim is to safeguard customers, it’s also intended to work in the interests of service users and banks.

Bacs released its updated Service User’s Guide and Rules to the Direct Debit Scheme in February 2017. The guide includes clearer rules and support to enable organisations to challenge invalid indemnity claims, quickly. It prescribes the method for paperless sign ups, stressing that organisations need to validate:

  • the identity and address of the payer
  • their account details
  • that the account details relate to / are owned by the payer

The guide makes it clear that failing to verify these details may result in an increased risk of fraud.

The impact on customers includes indemnity claims, loss of goods and services, reputational damage and an erosion of trust in the Direct Debit scheme.

But if the consequences are disruptive, the solution is anything but. Adding in account ownership verification is simple – an automated check can be quickly integrated into your existing payments system or accessed online.

Doing this at the point of sign up means you detect errors or fraudulent activity before payments are taken, not after.

Direct Debits: the one simple check that creates a seamless, hassle-free sign up

Direct Debits have vastly improved the payments process for businesses and consumers alike. But for many companies, current methods of signing new customers up rely heavily on manual processes, meaning there’s room for error. And, as has been reported, paperless sign-ups make it easier for fraudsters to arrange payments from someone else’s account.

When you set up a new Direct Debit, the sort code and account number are given a ‘modulus check’ to make sure they’re a valid combination. This tells you the sort code and account number could belong to a genuine account, but doesn’t tell you the account exists or who that account belongs to.

Not making the step to check ownership of the account could result in payments being taken from the wrong account, whether in error or due to fraud. It also means you don’t comply with the latest Bacs Direct Debit Scheme rules and could even be prevented from offering Direct Debits as a payment solution – therefore hampering your versatility for payments.

Let’s look at a current process:

  • Your customer or agent enters their account name, account number and sort code.
  • You take the customer’s name and address and send the Direct Debit instruction to the bank via Bacs.
  • The bank checks the account number and sort code.
  • If the account number and sort code are valid, the bank processes the instruction whether it belongs to the right person or not.
  • If the details are incorrect, either through error or fraud, you must refund the money subsequently debited under the Direct Debit Guarantee. By which point you will also have lost the goods or services sold.

In this scenario, you risk giving genuine customers a poor experience and damaging their confidence in your brand. In addition not only do you have the hassle and expense of dealing with errors, refunds and possible negative publicity, you’ll likely lose money – as well as any goods or services obtained by the fraudster before they were detected.

There is another way. If you verify the customer’s identity, address and – crucially – bank account ownership at the point of sign up, the whole process becomes much smoother:

  • You verify the customer’s identity, address and bank account ownership at the time of sign up
  • If the details match, you send the Direct Debit instruction via Bacs
  • The bank validates the account number and sort code and processes the instruction
  • The subsequent Direct Debit is taken from the right person and your organisation is protected from errors and fraud

This way, if the details don’t match, you can check them with the customer and correct errors on the spot. And if they’re fraudulent, you can refer the customer to the fraud investigations team before a payment is taken, as opposed to after.

This simple step can save you time, reduce human error and let you deal with errors or fraud on the spot, and prevent payment delays. As well as making the experience a lot smoother and more reassuring for the customer.

The revised Bacs rules for Direct Debits reiterates the need to confirm the ownership and identity of the account owner

This article is about: BACS, Bacs Direct Debit Scheme rules, payments