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 affects the rise of illegal debit orders.
It has taken longer than expected to implement and, currently, DebiCheck only focuses on new debit order mandates and does not help detect existing fraudulent debit orders.
However, the main issue 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 is needed to address the problem is a far more aggressive stance from banks against the non-bank payment platforms (sub-users) that allowed these rogue debit orders on to the system in the first place, specifically third-party payment providers.
In its report released this week called Combatting Debit Order Abuse, the Payment Association of SA (Pasa) admitted that there had been a significant spike in illegal debit orders over the past two years.
Until then, the usual ratio between rogue collections and individual debit order reversals was 10 to 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 the transaction due to a 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 last year, 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 to 60 – a significant increase in the size of user-perpetuated fraudulent debit orders,” says 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.
“An increased focus on debit order collection trends by users and sub-users accessing the national payment system revealed the presence of syndicated behaviour”, with disputes in the non-authenticated debit order system increasing by about 200 000 every month since the beginning of 2017.
Christoph Nieuwoudt, the chief executive of FNB Consumer, told City Press that “the industry has taken material steps to eradicate rogue debit orders”. He said it was clear that more action needed to be taken against what was clearly a syndicated attack on the debit order system, which especially affected 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 on to the system.
According to Nieuwoudt, FNB earlier this year took the position that if it discovered unauthorised debit orders on customers’ accounts, it 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 affected customers. This then became the problem of the acquiring bank, which, faced with a potentially large liability, significantly tightened acceptance processes for the users they accepted into the payment system. Particularly, 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 steps to ban the directors of any companies behind rouge debit orders from accessing the debit order system again. Previously, if a company was removed from the system, the fraudsters would simply register new businesses on the debit order system, which, due to the more onerous acceptance criteria, is now significantly harder to do.
According to Pasa, it has removed 233 users from the national payment system since February. The total rand value of debits collected by these users was R1.1 billion over the six months 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 – there were 802 117 fewer disputes in August when compared with December last year. In December 2017, there were 1 044 567 disputes. In contrast, successful debits saw an upward trend since a low point of only 63.5% in December last year. Successful debits in August were at 75%.
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