European Direct Debits

There are two possible arrangements for direct debits:

Debit Order – The account holder gives his bank a written authorization for a particular payee to deduct funds from his account.  This method is practically never used, because it leaves the payor virtually no recourse in event of abuse.

Collection Authorization – The account holder gives a chosen recipient a written authorization to withdraw funds for a specific purpose from his account.  The banks involved may demand to see this authorization, though in practice this hardly ever happens.

In practice and particularly in internet business only collection authorizations are relevant and are simply referred to as "direct debits".

The customer provides the merchant with

• his name

• the Clearing ID of his bank, and

• his account number

These details are forwarded to Pay4 with the amount to be debited.  Pay4 checks the data for plausibility and forwards them to the banking system.

The amount to be debited is provisionally deposited by Pay4 in a subaccount reserved for the merchant, but funds first become available to the merchant when the funds are cleared.

After provisionally crediting the merchant's subaccount, the acting bank sends the transaction data to the final customer's bank, which debits the customer's account and credits the acting bank.

Only at the end of this process does the final customer's bank check that

• · the account name is correct, and

• · the customer has sufficient funds

Should either condition be untrue, the debited bank then reverses the transaction.

Besides "insufficient funds" or "invalid account" conditions, a direct debit can be reversed due to customer rejection.  An account holder has a right to reject (and thus reverse) direct debits for up to 6 weeks after the transaction, with no justification required.

During this 6-week period, the funds are still only provisionally credited to the merchant's subaccount.  Only after this period can he dispose of the funds.

In the event of a reversal, both the final customer's bank and the acting bank impose a fee which is debited to the merchant.

While reversals on account of insufficient funds or invalid account occur within three to four business days, a reversal on account of customer rejection can naturally take up to 6 weeks.

At 64%, direct debits make up the lion's share of total internet payments in Germany.

Any German with his own bank account can pay by collection.  There are currently 70 million German accounts qualified for collections.  Since almost every German has an account, collection authorizations are the most generally available means of internet payment.

Collection authorizations are not so common in Austria as in Germany.  There, about 28% of internet payments are direct debits, although they are increasing rapidly.  42% of Dutch internet payments are direct debits—where, in contrast to the 6-week rejection period common elsewhere, the customer must reject a debit within 35 days.

With 62%, Spain follows Germany closely in the use of direct debits.  There the customer's national ID number is also required to authorize such payments.  Payment by direct debit is also gaining market share in the UK, where it has only become available in the last few years.  There the customer must explicitly authorize his bank to allow direct debits to his account, but this is standard procedure for new accounts, and old accounts can be authorized at any time.

Collection  authorizations are not offered in Norway or Switzerland.  Instead, they have a booking process where the customer completes and signs a form for the customer's bank.  The bank then checks for an appropriate authorization before executing any incoming debits.  This procedure is cumbersome and only practical for constant payments to the same merchant.  Internet payments are effectively restricted to memberships, or loading a virtual account with a casino or bookmaker.

The advantage for the merchant lies in the certainty of credits received.  Rejection of the debit is almost impossible, and this is reflected in the minuscule percentage of reversals.  In Norway, for example, the customer receives a statement of direct debits to his account around the middle of the month and then has two weeks to ensure covering funds are available, or to reject the debit as unauthorized.  No rejection is possible thereafter.

Some payment provider offers a customers automated processing of direct debits by collection authorization, and reversals.

Merchants are notified of collection reversals daily, enabling them to close members' accounts immediately.

In addition to simple notification of reversals, Payment Provider offers (in cooperation with leading collection agencies) support in the dunning process.

In the event of a reversal, an email is sent to the final customer encouraging him to pay the reversed debit plus the reversal charge to a specified bank account.  Two further letters in the name of an attorney follow, as well as telephone calls.

If you are interested at European Direct Debit solution Pay4

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