2010-03-16
Debit orders - their pros and cons.
Debit orders are contractual agreements that simplify the payment for services on a regular basis usually monthly. In general they are convenient to both parties as the process is automated and events are documented in the client's bank statements. They are suited for situations where regular payments are to be made over a period of time.

 

The questions are - how many people have made the effort to read the regulations that apply to debit orders? How many people have negative experiences with debit orders? 

 

It is in your own interest to understand what conditions apply when you sign authority for a debit order so please do not enter such an agreement without reading the regulations or asking for advice from preferably an attorney.

 

Subject to correction and without prejudice the rules that apply to debit orders at the time of writing quoted from the East Coast Radio ConsumerWatch blog site on 23rd July 2007  are as follows.

"By Wendy Knowler ( East Coast Radio - Consumerwatch)

What is the difference between "Stop Order and Debit Order?"

1.1    A stop order is an authorisation by a customer to his bank to deduct, at regular intervals, a fixed amount of money from his account and pay it over to someone else eg. a father may go to his bank and sign a stop order form authorising his bank to pay a certain amount into his daughter's account on the 25th day of each month.

1.2    A debit order is an authorisation given to the intended beneficiary of the payment to remit a debit entry to his account eg. a customer takes out an insurance policy and authorises the insurance company to debit his bank account each month with the premiums. A magnetic tape containing details of all debits to be passed will normally be handed by the insurance company to its bank that will arrange for all the debits to be 'pushed' through to the insurance company's customers' bank account and credit the insurance company's bank account with the total.

1.3    It must be emphasised that the bank does not check the debit orders going through to customers' accounts. For example, if a customer authorises a User to debit his account each month with R100, but the bank debits his account with R200, the bank will not be able to detect this error. It is therefore the responsibility of the customer to check his own bank statements to ensure that the amounts of the debit orders are correct.

2. Who may use the Debit Order System?
Any organisation may use the debit order system to enable it to collect payments from its customers, but it would first need to approach its own bank for approval. Their bank, known as the sponsoring bank, will only give its approval once certain laid down criteria are met. The sponsoring bank is only expected to approve financially sound organisations with good track records with the bank.

3. Who are the persons involved in the debit order system?
3.1 The User - this is the firm that pass the debits to its customers' accounts and credits its own account with the total.

3.2 The sponsoring Bank - this is the bank that approves the User's access to the debit order system and keeps an eye on its activities.

3.3 The customer - this is the person who authorises the User to debit his account.

3.4 The Homing Bank - this is the bank where the customer keeps his account.

4 How is the Debit Order System Administered?
The provisions of the Bankserv EFT (Magnetic Tape Service) User Manual govern the debit order system. Bankserv is an umbrella body which manages joint bank operations such as the Automated Clearing Bureau and Saswitch. The User Manual regulates the rights and obligations of the parties to a debit order system.

5 What are the Important Rules Governing the rights of Customers?

a)   The User must obtain a written authority from the customer before any transactions can be processed through the Magtape Service.

b)   There is also provision for Users to use voice-recorded authorities under certain circumstances. If a voice recording is used, the customer should thereafter confirm the conversation in writing.

c)   When a debit order is returned "Payment Stopped" on the instruction of a customer, the User may not process further debits under the system. The customer has to give their bank a written stop payment instruction. Once the user receives a returned debit order marked "payment stopped", the authority under which it was processed is deemed to be revoked and the user must ensure that no further transactions are processed under that authority.

d) If a debit order is unpaid for lack of funds the User may resubmit the item but may not adjust the value of the transaction. The homing bank will return the debit order marked "not provided for" to the user's nominated account at the sponsoring bank.

d)    If the client closes the account from which the debit order is paid, the debit is returned "Account closed". The User is then not permitted to process any more debits.

e)    If a debit order is unpaid on two consecutive occasions for lack of funds the User must remove it from the system.

f)     You may reverse a disputed debit order from your account within 40 days of it having been debited to your account, by instructing your bank to do so. The bank will then immediately reverse the debit.

If you only report the debit more than 40 days after it appeared on the account you may have apply to your bank to have it reversed. The bank will query the validity of the transaction with the company that debited your account. The company's bank will be given 30 days written notice to prove the validity of the transaction after which it will be cancelled if invalid, and the funds manually returned to your account. If the company's bank does produce a valid mandate for the transaction, then the debit will not be reversed. The bank is only expected to check for an apparent authorization - which will normally be the client's signature on an authorization to debit form. The bank is not generally expected to act as a court in deciding on disputed signatures, services not provided or any other dispute between the User and the client. Disputes of this nature are between the client and User to sort out by litigation or any other legitimate method.

6 How is the Debit Order System Abused?
a)   Users may pass debit orders through the bank system that have not been authorised by the customers concerned. The User may do this intentionally hoping that customers do not notice the debit orders going through their accounts.

b)   Users may also break the rules laid down by the banks in cases where customers have endeavoured to cancel their contracts with the Users. They may, for example, do this by continuing to push through debits where customers have placed stop payments on the amounts concerned.

c) An instruction to cancel a debit order only remains on the bank's system for 6 months. After this period a company may again attempt to debit the account and it will be processed. It is important that the client checks his statements regularly for fraudulent debits.

The contract between the bank and users of the system

Once you have authorised a debit order, the company concerned cannot transfer any of its rights to the debit order to a third party without your prior consent.

·        Companies must produce auditor's certificates at 12-monthly intervals confirming to the banks the existence of their authority to debit your bank account.

·        If there are not enough funds in your account to meet a debit order, the company can re-submit the debit order the next month. It cannot adjust the value of subsequent transactions to recover arrears. Separate debit orders must be submitted for the current and arrears payment.

·        If you have closed the account, the company should stop submitting debit orders with immediate effect.

As a new precaution, the banks have introduced a process to identify those companies who have not conformed to the rules of the debit order system. These companies would then be disqualified from further use of this facility."

End of Quote

 

Banks and service providers often suggest that debit orders are popular because they are convenient.  This is probably correct in most cases.  However if something does go wrong it is the consumer who has to do the donkey work in retrieving the situation. The service provider and both participating banks generate an income from the agreement. The client pays a fee for this "convenience" and it is the client who must diligently scrutinise his statements and initiate time consuming interventions when errors occur. 

 

To get some perspective as to what can go wrong and the accompanying grief that is experienced why not visit the consumer complaints website Hellopeter and search a few company names that you know. This site gives praise as well as criticism.  It is easy to identify those complaints that centre around seemingly unwarranted debit order mistakes and or deliberate excess transactions that take a lot of time and effort to correct.

 

link to hellopeter  http://www.hellopeter.com/

 

In my case the negative experience of one service provider has influenced me to cancel all debit orders. It is interesting to note how many will not consider any other form of payment because of the convenience.

 

It is important to know the facts and be street wise.  This article is not intended to suggest that readers avoid debit orders. Simply arm yourself with knowledge and be aware of the terms of engagement.

 

Submitted by: Andy Tribe