Every month the banks collectively process about 31 million debit orders, 120 000 of which are disputed. Over the five years to the end of December 2012 the number of disputed debit orders increased from 0.15 percent to 0.4 percent, according to the latest data available from the Payments Association of South Africa (Pasa). Many of these disputes are due to fraud and invalid mandates, Walter Volker, the chief executive of Pasa, says.
Wendy Knowler, a consumer columnist who writes for Personal Finance’s sister publications, has dealt with a spate of complaints from customers who have been fleeced by way of fraudulent debit orders. Moneyweb has also exposed abuses facilitated by intermediary companies such as Stratcol, which manages debit orders for companies that outsource the function. And consumer complaints website Hellopeter carries a steady stream of complaints by bank customers whose accounts have been raided.
But also among those who dispute debit orders are those who have forgotten about the agreement that they signed with a service provider or don’t recognise the name of the beneficiary. And some disputes are lodged by delinquent consumers who dispute debit orders as a way of managing their cash flow, “knowing how easy it is to reverse the funds by means of a dispute”, Volker says.
Ironically though, the victims of fraudulent debit orders usually find it almost impossible to “reverse the funds by means of a dispute”.
A Cape Town reader, Mrs C, contacted Personal Finance this week after getting no joy from First National Bank (FNB) when trying to stop unauthorised recurring debits off her credit card. The offending company is Wrymedia, a media company based in the United States that appears to allow you to “play games, music, books, movies and software directly in your browser or download on your phone, computer and tablet”. It has been deducting random amounts from her account since July. It was only in October that she picked it up.
In July, Wrymedia made two debits: one of R10.45 and one of R255.08; in August, R259.79; in September, R257.59; in October, R257.18; and in November, R262.59.
Mrs C completed a dispute form but the bank advised her it could not reverse the transactions nor block the company from making more deductions.
She was told: “Unfortunately, as the debit instruction/agreement is between you and the supplier, the agreement cannot be cancelled by anyone other than yourself directly with the supplier. If, by now, you have made contact with the supplier, kindly let us have either a copy of your letter of cancellation sent to the supplier or a letter from the supplier confirming cancellation.”
She was also told that if she was unable to cancel the agreement with the company, she would need to lodge a case of fraud with the police.
“It’s a tricky one, but our hands really are tied with an instance such as this,” an FNB staff member said.
Mrs C is incensed. “I never signed any agreement with Wrymedia. I’ve sent emails to the company, asking them to investigate a subscription agreement, but they haven’t been able to produce one, or tell me what I signed up for. How am I to lodge a case of fraud against a company in the US?” she asks.
Personal Finance asked FNB to investigate and received the following response from Delaine Patrick, the chief operating officer at FNB’s credit card division: “The bank has been able to make contact with Wrymedia and it was able to verify that Mrs C signed up on July 12, 2013 for a five-day free trial with confirmation of her email address, card details and postal address. This subscription was not cancelled and therefore the debit continued, as indicated in their terms and conditions.”
On November 25, FNB asked the merchant’s bankers to provide the bank with a copy of the debit order agreement on a good-faith basis. On November 28, the merchant cancelled the subscription.
“As advised previously, the cancelling of a subscription or debit order has to be done by the customer, as the bank is a third party and cannot act on the customer’s behalf. Following our investigation, we do not believe a fraud has occurred. The customer supplied detailed information to enable the subscription. Amounts already paid cannot be reimbursed under these conditions,” FNB says.
While FNB is apparently satisfied that Wrymedia was able to “verify” that Mrs C signed up for a service, the bank was not able to provide Personal Finance with a copy of the mandate.
“Wrymedia has advised us that, provided Mrs C contacts them directly, they are happy to provide her with the IP address of the system from which the agreement was entered into.”
Mrs C is at a loss as to how the company got her credit card details, email and postal address. A month before the debits started she travelled to Brazil and used her credit card once. She suspects her card may have been compromised there.
To protect herself, she says she is considering asking the bank to issue her with a new card.
Clive Pillay, the Ombudsman for Banking Services, says his office has not seen a substantial increase in the number of complaints relating to debit orders, but the complaints “have a particular complexion”.
“Typically, customers claim that they are not aware of the company debiting from their accounts and the amounts are very small and can easily be missed, which is why it’s important to check your statements,” he says.
“Note that an instruction to cancel a debit order remains on the bank’s system for a limited period of three to six months, depending on the bank. After this, the service provider may again attempt to debit the account and it will be processed; therefore it’s important that clients check their statements regularly for fraudulent debits.”
Asked if this is fair on the customer and if the Code of Banking Practice measures up to Treating Customers Fairly (TCF), Pillay says: “It’s going to be a big year for banks, with the Financial Services Board (FSB) becoming the authority for market conduct, and big changes are expected of institutions.”
He is referring to the so-called “twin peaks” legislative framework.
Leanne Jackson, the head of TCF at the FSB, says that until the twin peaks legislation is in place, it is premature for the FSB to give a view on how the TCF principles would apply to specific transactional banking business practices.
She says the Code of Banking Practice will be considered in the future market conduct framework, but that “the FSB does not believe that voluntary industry codes of conduct can in themselves constitute a robust enough consumer protection framework”.
More than a decade ago, the Banking Council (which became the Banking Association), representing the big banks, claimed to have established a “bad-user list” of rogue companies that instruct the banks to debit money from your account in breach of a mandate or in the absence of a mandate. The banks were to enter the names of these rogues onto the list and deny them access to the debit order system. But no such list was ever set up.
Volker says it was never implemented due to legal issues. “The biggest hurdle was the legal rights that users have.” Consequently, the rights of consumers are not being protected while the rights of those who misuse the system are.
The good news, however, is that Pasa has started monitoring the debit order disputes ratio and will soon be using it to block those who abuse the system.
Volker says that when a user’s disputes ratio breaches a threshold of five percent, Pasa will trigger an investigation resulting in the user being placed on a review list. “We [will then] ask for proof of mandates for all the transactions within a certain window. If any of the transactions submitted do not have a backing mandate, the user goes onto the ‘bad-user list’ and may no longer have access to the system.”
Volker says the process began late last year, but will “probably only become effective during the first few weeks of this year.
“This is an onerous process, but it is the only way that we will be able to get to grips with beneficiary misuse,” Volker says.
The misuse by clients is more difficult to deal with, he says. But Pasa has launched a project to migrate all collections to authenticated early debit orders (AEDOs – see “The different types of recurring payment”, below) by June next year. This will remove both problems, he says.
Another good development is the introduction of unique user codes, which will make it easier for both bank customers and banks to identify the credit or service provider.
Disputing a debit order
You have the right to dispute any transaction that you believe has been incorrectly debited to your bank account.
Walter Volker from the Payments Association of South Africa says you may dispute a debit against your account for the following reasons:
* You did not authorise the debit in question – this could be regarded as constituting fraud and should be reported to the police;
* The debit is a contravention of the mandate (to the user) – for example, the amount, date or duration is incorrect;
* You already instructed the user to cancel the mandate; or
* The authorisation has been cancelled by you.
Volker says your first recourse is to the party with whom the debit order was signed or the party that has submitted the debit order for collection to your bank. Only if this course of action has proved to be unsuccessful may you approach your bank. You must sign a dispute form at the bank, in which you declare the reason for the dispute. You will need the following documents:
* A South African bar-coded identity document;
* Your account number;
* Your bank statement (if the disputed debit order appears on it); and
* A copy of your debit order mandate (if available).
You can cancel a debit order. To do so, you must first contact the user (the beneficiary) with whom you have contracted the agreement and give them notice of cancellation. If the user continues submitting the debit order after the notice of cancellation, you should take proof of your attempts to cancel the debit order, lodge a complaint with your bank and register a “stop payment” instruction. To do this you will need to give your bank the following information:
* The beneficiary name;
* The reference number;
* The exact amount;
* The collection date;
* The frequency and term of the debit order.
Try to give your bank as much of this information as possible. If you aren’t able to, it may hinder the stop-payment process.
Clive Pillay, the Ombudsman for Banking Services, says that, as a bank customer, you enjoy the following rights:.
* You can instruct your bank to reverse a disputed debit order. If you report a disputed debit order to your bank within 40 days of it appearing on your account, your bank will reverse it immediately.
* If you query a debit after more than 40 days, you can still apply to the bank to reverse it. Your bank will query the validity of the transaction with the service provider’s bank.
* The service provider’s bank will be given 30 days’ written notice to prove the authenticity or validity of the transaction. If invalid, it will be cancelled and the funds will be manually returned to your account.
* If the service provider’s bank can produce a valid, authentic mandate authorising the debit, the transaction will not be reversed.
* The banks are required to check for an apparent authorisation. This will normally be your signature on the authorisation to debit form. Any disputes regarding the authenticity of the signature is a matter between you and the service provider.
The different types of recurring payment
When you enter into an agreement with a credit or service provider, one of the terms of the agreement may be that you have to pay via a debit order on your bank account. If you want the credit or service, you have little option but to agree.
A debit order is a facility whereby a third party collects money from your bank account on the strength of a written or verbal mandate given by you to the third party (known as the beneficiary or user).
There are, however, other ways of paying. So it’s useful to understand these methods, the terms used by the banks and the features of each transaction type.
In his book Essential Guide to Payments, Walter Volker, the chief executive of the Payments Association of South Africa, explains the various ways to make recurring payments.
The five systems available for recurring payments are:
* EFT debits, better known as debit orders;
* EFT credits, better known as stop orders (an instruction that you give your bank to pay another party);
* Authenticated early debit orders (AEDOs);
* Non-authenticated early debit orders (NAEDOs); and
* Recurring credit card transactions.
“The assumption underpinning each recurring transaction is that it is preceded by a binding and valid legal agreement for goods supplied or services rendered between a payer and payee (the beneficiary or ‘user’). In most cases, the payer is an individual owing money to a service provider, such as an insurance company, security company, holiday club or whatever,” Volker writes.
Examples of beneficiaries that use recurring transactions include:
* Insurance and security companies, which use debit orders;
* Micro-lenders, which use AEDOs or NAEDOs;
* Gyms and health clubs, which use recurring credit card transactions.
With an AEDO, authentication is done using your debit card: you are required to swipe or insert it into the beneficiary’s card terminal. By means of this authentication, the beneficiary is assured that the account exists and that the card holder is the account holder (because you know the PIN), and the contract agreement is electronically authorised and captured.
AEDOs are typically used for the collection of micro-loan repayments, hire-purchase repayments and for insurance and funeral policy premiums, Volker writes.
The validity of AEDOs may not be disputed by you, unless you suspect fraud. The amount remains fixed for the term of the agreement. AEDO fees are similar to or the same as debit card transaction fees, and there are generally no penalty fees for declined transactions.
Volker says the costs associated with participating in AEDOs for the beneficiary (the credit or service provider) are generally higher than for both debit orders and NAEDOs, mainly due to terminal infrastructure costs.
Benefits for the account holder and the beneficiary include the absence of disputes and reversals.
NAEDOs allow “qualifying” service providers and consumers transacting with such service providers the same benefit as AEDOs, but without the PIN authentication requirement. A NAEDO mandate may be authenticated by means of a signature or a voice recording, with specific requirements.