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Direct Debit Blog

Information for companies considering using Direct Debit and Paperless Online Direct Debits as a payment option for their customers.

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What’s involved in taking payments by Direct Debit?

For many organisations, the first port of call for advice on how to take payments by Direct Debit is their bank so that they can sponsor them as a Service User to obtain a Service User Number (SUN) which gives them access to BACS Services.  It often comes as a surprise to both small & large organisations that the process of obtaining a SUN from their bank can be significantly more difficult than first thought.

The reason for this is usually indemnity risk. 

What is indemnity risk?


The Direct Debit Scheme gives Service Users the ability to debit their customers’ bank accounts, so in order to maintain the overall integrity of the Scheme, a guarantee is made by all of the participating banks and building societies; here’s a copy of the Guarantee:

 

The Direct Debit
Guarantee

Direct Debit Logo
  • This Guarantee is offered by all banks and building societies that accept instructions to pay Direct Debits.
  • If there are any changes to the amount, date or frequency of your Direct Debit Eazy Collect Services Ltd will notify you 10 working days in advance of your account being debited or as otherwise agreed. If you request Eazy Collect Services Ltd to collect a payment, confirmation of the amount and date will be given to you at the time of the request.
  • If an error is made in the payment of your Direct Debit, by Eazy Collect Services Ltd or your bank or building society, you are entitled to a full and immediate refund of the amount paid from your bank or building society.
    • If you receive a refund you are not entitled to, you must pay it back when Eazy Collect Services Ltd asks you to.
  • You can cancel a Direct Debit at any time by simply contacting your bank or building society. Written confirmation may be required. Please also notify us.

 

Indemnity risk revolves around the third point in the guarantee where, if an error is made in the payment of a Direct Debit, the bank will make a full and immediate refund of the amount debited. In essence, the bank account holder has been put in a very strong position – they are able to approach their bank at any time, and to some extent for any reason, to request that a single Direct Debit or sequence of Direct Debits be refunded. The customer's bank is more often than not, unlikely to check that the reasons for a reclaim are valid so fourteen days following the refund request being made, the total amount of Direct Debit(s) in question are automatically debited from the Service User's account.

For this reason, a sponsoring bank needs to limit its liability and will either need to see that the business or organisation applying for a SUN has been in existence for a good length of time, has a significant annual turnover, or alternatively puts a hefty deposit down to fund the potential indemnity claims if the organisation were to fail financially.

This is the point where many organisations give up on Direct Debit as a method of payment.

So how can a Direct Debit Management Company help?

A Direct Debit Management Company, most often an accredited BACS Approved Bureau, can usually offer two different solutions where an organisation hasn't been able to obtain a SUN; these are:

  • A simple collection service where the Direct Debit Management company utilises one of its own SUNs to collect payments. In these instances, the name of the Direct Debit Management company appears on the customer's bank statement and the Direct Debit forms etc. are also in the name of the Management company. In these circumstances, the amounts and collection days will normally be restricted for ease of reconciliation and to mitigate indemnity risk.
  • A "Facilities Managed" (FM) service, where the Direct Debit Management Company applies for a dedicated SUN in joint names on behalf of the organisation, so for example "DD Management Co Ltd Re My Company Ltd". The key differences are (a) The name on the customer's bank statement will be in the organisation's name (e.g. "My Company Ltd") and (b) the Direct Debit forms etc. can be branded in the organisation's name. Collection dates are likely to be more flexible, but it is it is normal to find that the individual Direct Debit values and overall amounts collected will be restricted. The organisation should understand that the higher the Direct Debit value, then the higher the risk to the Direct Debit Management Company.

 

Why can a Direct Debit Management Company provide a service and not my Bank?

Your Direct Debit Management company has already been through the rigorous process of being allocated SUNs in the past and has a proven relationship with their bank. They will already have provided the bank with a significant amount of financial security in the form of bond or personal guarantee secured on an asset. By collecting on their own SUN or by applying for a Facilities Managed SUN on your behalf, the management company is accepting ALL of the indemnity risk that you purportedly pose to the bank. Of course, your provider may still need to mitigate some element of risk, whether this be by taking a deposit, restricting the value of collections either by total value or on a per transaction basis, or by holding a proportion of collections made over a period of months on account.

As you can see, if you are unable to obtain a SUN from your own bank, you may still be able to take Direct Debit as a payment method via a third party Direct Debit Management company or BACS Approved Bureau using one of the two methods described above.