After a significant spike in the number of illegal debit orders, banks say action has been taken to clean the industry of rouge players.

Despite much fanfare around the introduction of DebiCheck which puts customers in control of approving debit orders before they are allowed to be processed, the truth is it will take a long time before it has an impact on the number of illegal debit orders.

It has taken longer than expected to implement and currently DebiCheck focuses on new debit order mandates which does not help in detecting existing fraudulent debit orders. The main issue, though, is that not all debit orders have to go through the DebiCheck process, which means rogue debit orders can still be introduced into the system.

What was needed to address the problem was a far more aggressive stance by banks against the non-bank payment platforms (sub-users) that allowed these illegal debit orders onto the system, specifically third-party payment providers (TPPPs).

In its recently released report entitled Combatting Debit Order Abuse, the Payments Association of South Africa (PASA) admitted that there had been a significant spike in illegal debit orders over the last two years.

Until then, the usual ratio between rogue collections and individual debit order reversal was 10:90. In other words, for every 100 reversed debit orders, only 10 were illegal. The remaining nine could be attributed to contractual disputes with the supplier of the service or individuals reversing due to lack of funds.

“Typically, debit orders were either disputed by certain payers for cash management purposes or users and sub-users collected funds via debit orders for which they had no legal mandates,” says the report.

In the third quarter of 2018 a more formal analysis was conducted over 14 weeks. Described by PASA as a “debit order abuse proof of concept period” it confirmed what many bank customers already knew: that this ratio had changed dramatically.

“It revealed that the ratio between the two abuse types was closer to 40:60 – a significant increase in the size of user-perpetuated illegal debit orders,” states the report which adds that the entire base of debit order collectors is in the region of 20 000 users, as opposed to an individual consumer base of roughly 50 million South Africans.

Syndicated behaviour

“An increased focus on debit order collection trends by users and sub-users accessing the National Payment System (NPS), revealed the presence of syndicated behaviour,” with disputes in the non-authenticated debit order (NAEDO) system increasing by around 200 000 every month since the beginning of 2017.

Christoph Nieuwoudt, CEO of FNB Consumer, said that the industry “has taken material steps to eradicate rogue debit orders,” and that it was clear more action had to be taken against what was clearly a syndicated attack on the debit order system which especially impacted more vulnerable, lower-income customers.

Most of the illegal activity came from third-party non-bank payment providers, as they did not have strict requirements about who they allowed onto the system.

According to Nieuwoudt, FNB took the position earlier this year that if they discovered unauthorised debit orders on their customers’ accounts, they investigated the users submitting the orders as well as the validity of their mandates.  If fraud was proven, the entire debit order run from that rogue user was reversed to all impacted customers.  This then became the problem of the acquiring bank who, faced with a potentially large liability, significantly tightened acceptance processes for the users they accept into the payment system.  Especially the third-party providers realised they had to tighten their processes.

If you want to change behaviour, the best way is to hurt the pocket.

PASA has taken the steps to ban the directors of any companies behind rogue debit orders from ever accessing the debit order system again. Previously, if the company was removed from the system, the fraudsters would simply register new businesses on the debit order system. With more onerous acceptance criteria, this is now significantly harder to do.

According to PASA, they have exited 233 users from the NPS since February 2019. The total rand value of debits collected by these users was R1.1bn over the six months up to February. The total debit order disputes for these users over the same period amounted to R185 million which suggests that many customers were not even aware of the illegal debit orders.

PASA says it has seen a consistent reduction of disputes per month. In August 2019, there were 802 117 fewer disputes than in December 2018 ‒ 1 044 567 fewer than in December 2017. In contrast, successful debits had an upward trend since the low point of only 63.5% in December 2018: successful debits in August 2019 were at 75%.

This article first appeared in City Press.