Returned Direct Debit: We Explain How to Avoid It | FastPay Ltd (2024)

Managing your finances using Direct Debit to collect regular customer payments is efficient, secure and fast. However, occasionally problems occur and a Direct Debit isn’t processed.

Known as a returned or bounced Direct Debit, this can occur for a few reasons, but predominantly when a customer doesn’t have sufficient funds in their bank or building account to cover the payment.

Here we explain the reasons why Direct Debits fail, the impact that a failed payment can have on your business, ways to avoid it as well as the benefits of optimising your financial integration.

When a Direct Debit fails, you’ll receive an Automated Return of Unpaid Direct Debits Service (ARUDD) notification from Bacs which includes a reason code.

An ARUDD message is triggered by an automated system that banks use when Direct Debits bounce.

There are 12 reason codes noted on an ARUDD message to help you take the most appropriate action with your customer to resolve the issue:

The two most common reason codes are ‘Refer to payer’ and ‘Instruction cancelled’.

The Impact on Your Business

Returned Direct Debit: We Explain How to Avoid It | FastPay Ltd (1)Returned Direct Debits can have a negative impact on your business. Potential issues can include:

  • Disrupting cashflow

Taking customer payments by Direct Debit ensures a more efficient cashflow as you know precisely when money will be available in your account and the exact amount. This enables you to forecast, balance outgoings with incomings, maintain a contingency fund as well as plan for business growth and investments.

The uncertainty of failed Direct Debit payments disrupts cashflow. It could mean that you’re unable to pay your overheads on time or need to cancel a planned business growth activity to ensure you’ve enough funds to cover staff salaries and wages.

  • Increasing financial administration time

A failed Direct Debit has a knock-on effect on your finance team’s time.

They’ll need to review the ARUDD notifications to understand why a payment hasn’t been collected. Next, they’ll need to coordinate with the customers whose Direct Debits have been returned, and contact them either by email, phone, or letter and wait for their reply.

After, they’ll need to retry, or ‘re-present’, the Direct Debit collection. This can only be progressed if certain criteria are met, including:

  • the second attempt to collect the Direct Debit must be one month from original processing day
  • the customer is notified of this new date at least five working days in advance of the re-presentation
  • the reason why the first Direct Debit failed is established and the likelihood that this second payment will be successful is gauged as high

And if the Direct Debit collection fails a second time? Then this time-consuming process needs to be repeated.

  • Damaging relationships with customers

A Direct Debit that bounces has an impact on your finances but can also damage your relationship with your customers.

When payment fails, you’ll need to contact your customer to understand why, to reorganise a collection date and to chase up to ensure outstanding payment is made.

The services or products that you provide might be immediately stopped if payment isn’t made when agreed or is missed after a set timeframe. Cutting customer’s services, such as broadband or nursery school admission, although necessary, can be stressful for a customer. It can cause hostility between a customer and your business, and damage brand loyalty.

Customers might also be charged a fee for a failed Direct Debit or incur a charge if they inadvertently go into an unauthorised overdraft, which can add to the stress.

How to Avoid a Returned Direct Debit

Returned Direct Debit: We Explain How to Avoid It | FastPay Ltd (2)There are a few ways to avoid failed payment collections:

  • Offering flexible payment dates

An accommodating approach to customer payment dates can help avoid ‘Refer to payer’ notifications.

Allowing your customers a degree of flexibility to pick their preferred date, for example the day after their salary payment is credited, will maximise chances that sufficient funds are in their account come Direct Debit collection day.

  • Correctly giving advance notice

Notifying customers in advance of when a payment will be collected and highlighting if the amount has changed can help to alleviate failed Direct Debits.

Customers know in plenty of time when a future payment will be collected and can plan for the money to be available in their account to cover it.

  • Regularly checking Bacs reports

If a customer cancels their Direct Debit instruction with their bank and fails to notify you, you’ll receive an Automated Direct Debit Amendment and Cancellation Service (ADDACS). If you attempt to collect payment after an instruction is cancelled then it’ll fail.

There are various reasons that a customer might’ve cancelled a Direct Debit instruction, and if they’re still utilising your services or products then you’ll need to contact them to set up a new Direct Debit instruction.

Closely monitoring Bacs reports, identifying cancelled instructions and acting promptly will help avoid failed payments.

  • Devising a failed payment process

To improve the administration time and facilitate a quick resolution of any customer issues, it’s important to devise and implement a failed payment process that’s followed by the relevant member of the finance admin team.

This can include when and how to contact customers, as well as provide pre-approved scripts and email text to ensure that customers are approached in a professional and friendly manner. The tone of each contact can change if a payment isn’t made.

A dedicated procedure will reduce admin time and help to maintain a positive relationship with customers.

  • Addressing recurring patterns

Spend time analysing your returned Direct Debit data to pinpoint patterns or recurring problems. Isolating and then addressing these issues can help to prevent Direct Debits from bouncing.

When to Outsource to A Direct Debit Provider

Returned Direct Debit: We Explain How to Avoid It | FastPay Ltd (3)Managing Direct Debit in-house can be time-consuming for a finance team. Many organisations outsource this management to a Direct Debit provider such as FastPay.

FastPay offers Facilities Management and Commercial Bureau Direct Debit Services to suit your business’ unique needs. Both services have a one-time set-up fee and then a charge starting from 3p per transaction depending on the volume of transactions.

The team at FastPay are experts at monitoring bank reports, understanding the reason codes and keeping track of failed Direct Debits.

We’ll notify you promptly of any returned payments and advise on the most effective next steps.

We can manage the process of re-presenting failed Direct Debits as well as provide you with all the documentation you require to get customers set up with a new Direct Debit instruction in the event they’ve cancelled their existing one.

FastPay and Xero Integration

Returned Direct Debit: We Explain How to Avoid It | FastPay Ltd (4)You can fully optimise your financial data management by integrating FastPay with existing accounting software. Xero is a popular accounting and bookkeeping software that’s used by many of our customers.

Xero gives a real-time view of cashflow and financials. The mobile app offers an on-the-move ability to send invoices, log expense claims, create purchase orders and reconcile in seconds.

Our Xero integration offers reliable, time-saving and up-to-date reporting on your Direct Debit collections. The status of your Direct Debit payments, including any failed collections, is clearly communicated and flagged in the intuitive, comprehensive Xero dashboard. Learn more about our Xero automatic payment integration.

As well as reducing administration time and improving cashflow efficiency, the financial integration also enables:

  • Easy selection of the Xero invoices you want to collect by Direct Debit
  • Automatic submission of your invoices without manually double-keying information
  • Reconciliation of your invoices with Xero once the collection date has passed

We fully tested our application to ensure it’s as straightforward as possible for clients to integrate their Xero software with FastPay.

For all customers taking advantage of our Xero integration we offer phone and email support to ensure the download and integration runs smoothly.

Our New Sage Integration

Returned Direct Debit: We Explain How to Avoid It | FastPay Ltd (5)Thanks to our unique tool, it’s simple to integrate Sage with our efficient Direct Debit processing service.

With this reliable, feature-rich integration, you’ll get paid on time while enjoying all the convenience of two fully-connected systems.

Log-in to Sage and you’ll get a real-time overview of all your latest Direct Debit collections, expertly managed by the FastPay team. You can also:

  • Automatically submit your invoices without manually double-keying information
  • Reconcile your invoices with Sage once the collection date has passed
  • Select which Sage invoices you want to collect by Direct Debit
  • Choose the most convenient collection date for your business

Financial Data Management

Collecting regular customer payments by Direct Debit is predominantly hassle-free. On the rare occasion that you experience a returned Direct Debit, it’s important to understand the reasons why and ensure a standardised resolution procedure.

Efficient financial data management helps to reduce failed Direct Debits and decrease the administration that follows. Financial integration between software and service providers, such as the FastPay and Xero integration, offers seamless processing and reporting systems all in one place.

FastPay provides a wide range of direct debit solutions.

Returned Direct Debit: We Explain How to Avoid It | FastPay Ltd (2024)

FAQs

Returned Direct Debit: We Explain How to Avoid It | FastPay Ltd? ›

This happens when the bank of the customer isn't in a position to pay the direct debit. In most cases this will be because there are insufficient funds in the account to cover the amount being asked for. This happens when the customer or the bank they use has cancelled the direct debit instruction.

What causes a Direct Debit reversal? ›

This happens when the bank of the customer isn't in a position to pay the direct debit. In most cases this will be because there are insufficient funds in the account to cover the amount being asked for. This happens when the customer or the bank they use has cancelled the direct debit instruction.

What happens when a Direct Debit is rejected? ›

What happens if my direct debit fails? As a service user you'll receive a notification via an ARUDD (Automated Return of Unpaid Direct Debit) report, citing a reason for the failure. The most common reasons are insufficient funds or where a payer has cancelled their instruction.

Can a company reinstate a Direct Debit without permission? ›

The good news is that cancelled direct debits can be reinstated, allowing you to retain the same Bacs reference. However, it goes without saying that you need the payer's permission to do so.

How do you stop a Direct Debit coming out of your account? ›

You can either get in touch with your bank or building society and tell them which one you want to stop, or you can cancel online or via your banking app. To make things simple, it's also worth telling the organisation you were paying that you've stopped the Direct Debit.

What does a direct debit reversal mean? ›

Payment reversal is an umbrella term describing when transactions are returned to a cardholder's bank after making a payment. They can occur for the following reasons: Item sold out before it could be delivered. The purchase was made fraudulently. The customer changed their mind about the purchase after paying.

What happens after a direct debit reversal? ›

Making a Claim

You will be given the reason for the refund and it will be reclaimed automatically by the bank, usually 14 working days later. Customers have the right to cancel a Direct Debit at any time by contacting their bank or building society.

Can a bank refuse to refund a Direct Debit? ›

Every organisation using Direct Debit is inspected and vetted by the banks before they're allowed to collect your money. The banks are responsible for money being refunded if things were to go wrong, so you can bet they're very thorough.

Whose responsibility is it to cancel a Direct Debit? ›

If I cancel a Direct Debit, can the company still take money? No, they can't. It's your money and your bank account, so you're entitled to cancel your direct debits. As soon as you inform your bank or the company that you wish to cancel your direct debit, they should immediately take action.

Do you get charged for failed Direct Debit? ›

Most banks will contact you if a payment has failed, giving you a deadline to put enough money in – often by 2pm that same day. If they still can't make the payment, you might have to pay an unpaid transaction fee or overdraft interest if they make it anyway.

Can a company reverse a direct debit? ›

If you notice an error on the same day a payment was made, you can call your bank and reverse the payment immediately. However, if you notice it at any point afterwards, your bank will need to make an 'indemnity claim' to the collecting organisation on your behalf.

Can a company refund a direct debit? ›

It's the bank that is responsible for refunding you in the event of a mistake, even if the original error was made by the organisation collecting the payment. Remember, if you receive a refund you are not entitled to, you must pay the money back when the organisation asks you to.

Can I block a company from debiting my account? ›

Call and write the company

Call the company and tell them you are taking away your permission for the company to take automatic payments out of your bank account. The company's customer service should be able to help you, and there might be an online form you can use. Then, follow up by writing a letter or an e-mail.

Can I tell my bank to stop direct debit? ›

Ways you can cancel your direct debit

Once you have your details ready, you can request cancellation of your direct debit. You can do this online, over the phone, or by visiting a branch.

Can I block a direct debit from my bank account? ›

You can also ask your financial institution to stop direct debits from your bank account. You can't ask your financial institution to cancel a direct debit from a credit card – you can only do this directly with your telecommunications provider.

How long does a cancelled direct debit take? ›

Cancelling a direct debit online

It may take up to 24 hours for the balance of your account to be adjusted. If you cancel your direct debit at or after 8pm (UK time) on the day the payment is due future payments will have been cancelled.

Can a direct debit payment be reversed? ›

If you notice an error on the same day a payment was made, you can call your bank and reverse the payment immediately. However, if you notice it at any point afterwards, your bank will need to make an 'indemnity claim' to the collecting organisation on your behalf.

Can my bank reverse a direct debit payment? ›

In the rare event that an error is made in the payment of your Direct Debit, contact your bank or building society straightaway. It's the bank that is responsible for refunding you in the event of a mistake, even if the original error was made by the organisation collecting the payment.

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