Welcome to part 2 in our Preventing Debit Order Fraud mini-series. If you haven’t read part 1, preventing debit order fraud for consumers, you can read it here.
Debit order fraud is something that affects both consumers and businesses alike. From a business perspective, it happens when customers illegally dispute their debits with their bank, reversing the payment that has already been taken. But what makes this fraud, and how does it affect business?
How consumer-initiated fraud happens
When a customer signs a debit order with a service provider, it is understood that the provider will take an agreed-upon payment at regular intervals. In many cases, these are a fixed amount, but it can vary, depending on the type of service they are paying for.
Consumers have the right to dispute any payment that is taken from their account without their explicit authorisation. In these cases, the bank reverses payment while investigations are ongoing. If they find that the debit order is fraudulent, the provider is reported. However, consumers frequently dispute debit orders for other, illegal reasons.
For example, if a customer’s cash flow is unexpectedly low, they may dispute the debit order to give themselves time to get the funds together. In another scenario, a contract holder might wish to cancel a contract that still has several months or years to go, but that they no longer want. Both of these scenarios are illegal, and constitute fraud.
The effects of fraud on business
The first, most obvious effect is on your business’ cash flow. When customers cancel their debit orders, you don’t receive payment for goods or services that have been provided, which can negatively affect your revenue.
This type of fraud places a significant unnecessary investigative burden on PASA. Every single disputed debit order has to be investigated, and fraudulent disputes can result in a company being investigated unnecessarily. This can negatively impact the company’s reputation, as well as causing problems throughout the system. In some cases, if the flood of disputes is too heavy, it can take longer for legitimate disputes to be handled.
Unfortunately, in South Africa, a whopping 90% of debit order disputes are on legitimate, legal debit orders. In recent months, many of the major banks have also introduced the ability to easily dispute debit orders via their apps, making it even easier for unscrupulous customers to commit this type of fraud.
How business can reduce disputes
The fewer disputes your company has to handle, the less time and money is wasted. Here are our top tips for reducing, and even preventing, fraudulent debit order disputes.
1 – Keep your customers in the loop
Regular reminders that a debit order is due can help customers plan better, and make arrangements if they have a cash flow issue. Make sure you send your monthly invoices ahead of time, and, if appropriate, send SMS reminders.
2 – Be flexible
Sometimes, customers simply need a little leeway. Be flexible enough to discuss options, such as deferring payment for a certain number of days or weeks. This will help encourage customers to come to an arrangement before they choose to simply dispute the debit order.
3 – Have robust, but not punitive, contracts
Often, customers will dispute a debit order on a contract they no longer want – for example, if someone signs a two-year gym contract, but can’t visit often enough or loses interest, they may struggle to cancel the contract, and instead simply “stop” the debit order. While it is acceptable to have contract cancellation penalties, making them excessively punitive – such as expecting a client to pay the full value of the contract as a penalty – can also cause people to prefer to simply dispute.
4 – Use a debit order management company
Handling the complexities of debit order collection can be challenging. Disputed debit orders can negatively affect your company’s reputation, cash flow and revenue. Handing over your debit order management to a company like Three Peaks removes these stressors and makes collection and dispute resolution considerably simpler.
For professional advice on preventing debit order fraud, or to move your company’s debit collection to a trusted provider, get in touch with Three Peaks today.