All you need to know about debit order scams

Unauthorised debit orders, sometimes referred to as “R99 debit order scams” (although amounts vary), have once again received close press attention recently.

The South African Reserve Bank, the Payments Association of South Africa (PASA), the banks and a number of user associations are aware of the problem; they have been actively focused on the matter and on a number of steps to address it.

Customers are understandably frustrated by the issue, but there is also some confusion and misinformation around the issue which deserves some clarification – which we hope to achieve by responding to a few frequently asked questions.

Why do banks allow debit orders to go through?

Banks act as facilitators of payments and are bound by law to honour debit orders submitted into the payment system by other banks on behalf of their clients.

Each debit order transaction involves an entity (called a “user”) as well as the banks, and if all parties do not collaborate in an organised manner, the debit order system, through which 55 million payments to the value of over R80 billion are processed every month, would cease to function.

Accordingly, when banks submit transactions on behalf of users, they do so on the basis that such a user has included only valid debit orders backed by a paper or voice mandate. These mandates are, however, held by the user, and not by the sponsoring bank – the bank simply facilitates the transaction on behalf of their client.

Why don’t banks refuse debit orders that customers regularly reverse?

The vast majority of disputed debit orders are in fact legitimate ones agreed to by customers, but which are reversed for “cash management” reasons – so that the money can be used for something else.

To put the numbers in perspective, on average about 1.5 million of the 55 million monthly debit orders are disputed – less than 3%. Based on PASA and bank estimates, however, of the 1.5 million only about 10% of the debit orders disputed by customers are actually unauthorised.

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This is a major problem for the industry. First, customers need to be aware that it is illegal, not to mention unethical, to reverse a debit order they have authorised as payment for a legitimate legal contract or service.

Second, the millions of monthly reversed legitimate debit orders make it extremely difficult to identify those debit orders initiated by fraudsters. For example, a corporate user that is completely compliant with the rules in every respect and only submits debit orders with valid mandates may still face high levels of disputes through no fault of their own.

Are the banks profiting from this?

PASA CEO Walter Volker explained: “Banks are certainly not profiting from debit orders being reversed. On the contrary, by virtue of their sponsorship of the transactions and the associated legal obligations, they are exposed to the full value of the debit orders being disputed. “If a bank reverses a debit order on instruction from a customer, and it turns out there was a valid

date, the bank risks losing that entire amount if they cannot get it back from the consumer.

“On the other hand, in the event that an illegal debit order is disputed, the sponsoring bank would be liable to reimburse the full amount, even after the so-called rogue user has been exited from the system.”

There are therefore many hidden costs and risks consumers are not always aware of.

Why are some banks charging consumers for debit order disputes?

Reversing disputed debit orders takes time and work. As explained above, banks take on the risk the company submitting a debit order has either been excluded from the system or is no longer in business, so the cost of managing and upholding disputes is high.

At the same time, as explained above, 90% of disputes are ultimately found to be illegal. Some banks, therefore, have introduced fees in the hopes of limiting such illegal disputes. Even for banks who do charge, however, a consumer would be within their rights to request a refund if it is found there was no valid mandate and the debit order is in effect unauthorised or fraudulent.

Which banks have been hit by the so-called “R99 scam”?

No bank is immune to unauthorised debit orders. Volker said: “This is not just a problem involving one bank, one company or one scam. It is an industry-wide problem and PASA is working with all the banks to improve the safety of the system, both for consumers and for companies.”

What is being done about the problem?

PASA has been working with the banking industry since 2013 to implement a wide-reaching and complex system called DebiCheck, the first of its kind anywhere in the world. The initial phase went live on 1 August 2018, by which time all 11 participating banks had implemented DebiCheck operationally.

Right now, user companies are implementing the systems and introducing the new business processes that are necessary to fully utilise DebiCheck.

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Volker explained: “Thousands of user companies, from large corporates to small businesses, will be using the system, so we need to ensure it remains stable and that consumers are not adversely affected.”

With DebiCheck, banks will require customers to electronically confirm debit order information with them directly at the start of a new contract with a user before any collection can take place, ensuring both consumers and their banks know precisely what should be debited from their bank account.

Once the consumer has authorised the electronic mandate, it will be stored on their bank’s mandates database and can be verified or monitored at any time.

What can customers do to protect themselves?

Check your bank statements regularly for transactions you do not recognise. Query unauthorised debit orders with your bank immediately and report the details to the PASA at doa@pasa.org.za Ensure your bank has your correct cellphone number so you receive SMS alerts when money is deducted from your account and also to receive DebiCheck confirmation requests. Be wary when entering into contracts verbally, electronically or in writing.

Do not share or confirm your banking details, including your account number and branch code, if you are not certain exactly what they will be used for. Do not dispute debit orders you have authorised.

For more information about debit order abuse, DebiCheck and what the public can do to protect their accounts, please visit www.pasa.org.za For regular updates, follow the Payments Association of South Africa on Twitter @PASA__ZA and Facebook.