South African credit providers are heavily reliant on debit orders as a payment channel. According to the Payments Association of SA (PASA), around 48 million debit orders get processed monthly across all industries within the borders of this country. Of the two broad types of debit orders that we have, 33.5 million are standard debit orders, and 14.5 million are early debit orders. The early debit orders are further broken down into two types – being Non-Authenticated Early Debit Orders (NAEDO) and Authenticated Early Debit Orders (AEDO), with only around 1 million of the 14.5 million early debits being AEDO’s.
The difference between the two broad types is really when the debit order is processed during the day. Standard debit orders are processed during the late ‘window’, so sometime during the afternoon, and early debit orders are processed very early in the morning. There is the added enhancement of early debit orders being able to track the customer’s account for available funds for up to 32 days.
So as a credit provider why is it important to now care a lot more as to how these two types of debit orders perform? Well, what if you weren't allowed to use the early ‘window' anymore?
This is where we introduce DebiCheck
South Africa is soon to be the first country where the banks will ask its customers to directly verify/authenticate the financial terms of the debit order agreement electronically. The main difference naturally being that in this new world it's only the customer's bank that can obtain authorisation from the customer, where before, credit providers obtained that agreement themselves directly with the customer, with the NAEDO system making use of paper-based or voice mandates.
What are the benefits of DebiCheck?
The plus side for the customer is this means that their bank will now know the details and keep a record thereof of what the customer has agreed to with a credit provider and will not allow a DebiCheck to be processed outside the terms of that agreement, subsequently reducing fraud. By making use of DebiCheck's, the benefits to the credit provider are that they'll be allowed to continue processing their debit orders in the early ‘window’ and continue to make use of tracking functionality. They will also see fewer disputes, which was heavily abused in the old system by the customer.
But what if your customer chooses that they don’t want to press that ‘accept’ button when their bank sends them a request to authenticate your debit order? It effectively means that for that customer, processing your debit order in the early window won’t be an option, leaving your business at the genuine risk to reduced collection rates. Depending on your product, risk appetite, and target market, debit order success rates can deteriorate by up to 10% when switching between the two types. That merely equates to more accounts into collections, increased arrears, higher provisions and more write-offs. Directly impacting your bottom line.
So if you are a business that makes extensive use of the early ‘window’ to collect, then there is plenty of reason for you to start considering how your strategy needs to adapt.
Here are a few impacts that credit providers should be considering in this new world:
Risk segmentation is key
The final action to ‘approve’ or ‘reject’ that electronic DebiCheck request lies with the customer. Credit providers will soon be faced with the decision as to how, in particular, the inability to obtain an approved DebiCheck impacts their risk. Essentially then what is that optimised sweet spot in your risk segmentation strategy that will influence that decision and how are you then going to actively use and enhance your propensity to pay or to roll models in collections to prioritise calls, determine treatments, and maintain your collection yield targets?
Make sure your strike dates are accurate
It is not uncommon to observe debit order dates being miss-aligned to actual salary deposit dates by up to 60%. This can be put down to a few reasons. Quite often the financial compliance documentation is only obtained at the end of the acquisition process and not used efficiently. Or giving customers too much freedom to choose their ideal date of deduction, causing an ever-widening gap in your pay date alignment. Credit providers need to consider a strategy that reduces this variance percentage as the failure to do so will have a compounding impact on collection yields going forward if you are not in a position to make use of tracking.
Raise awareness with your customer
DebiCheck is here to protect your customer from debit order abuse. Make sure your customers are informed of this as much as possible by having a marketing strategy that leverages off all of your customer touch points. When it then comes to prioritising those customers from who you require a DebiCheck from, a contact strategy that makes use of propensity to pay or to roll, Right-Party-Connect (RPC) and Right-Time-To-Call (RTTC) models, will enhance the probability of obtaining a DebiCheck and limit the impact to collection yields.
The rollout of this new system started mid-2017 with all the major participating banks going live, and throughout 2018 businesses will be ramped up incrementally, right through to early 2019. From 1 November 2019, nobody at all will be allowed to process a debit order in the early window without the customer’s authorisation.
The collection game is about to change
Should you require any guidance or support in the development and execution of your collections strategy, please feel free to drop us a line to discuss your requirements and answer any questions you may have. You can also learn more about our Collections and Recoveries Solutions here.
About the Author, Mark Roberts
Mark has over 15 years’ experience within the credit life cycle with 10 years’ specialised in Collections and Recoveries having been gained through exposure in both B2B and B2C markets across Europe, UK, and South Africa. With both extensive operational and strategic experience, Mark has successfully delivered and lead a number of initiatives within collection strategy, operating processes, platforms, and payment solutions. He holds a B.Comm degree in Actuarial Sciences from University of Pretoria.