In the United Arab Emirates, direct debit is becoming one of the preferred methods for regular, automated payment transactions. This system allows billers (corporates) to collect payments directly from the consumer’s bank accounts based on agreed schedules. It is particularly beneficial for regular and predictable payment collection, reducing the overhead of manual payment follow-ups and enhancing cash flow management.
Adoption has been slow thus far in part due to the established and widespread practice in the Middle East of using post-dated cheques. The development of an enhanced version of direct debit incorporating an end-to-end digital experience and faster settlement times is currently being developed by the Central Bank of UAE and several financial institutions, including Mashreq. This should result in increased usage by both consumers and businesses.
But a few of the largest corporates in the UAE market are not waiting however for the updated version to be released, already realising the benefits that direct debits provide both for their customers and their own cash flow management.
Case for DD over post-dated cheques
Direct debits streamline payment collection in a way that post-dated cheques cannot match, offering more predictable cash flow management and lower overall risk. The automation in direct debits reduces the scope for human error and the modern banking infrastructure supports efficient resolution of any issues that arise.
In contrast, post-dated cheques, despite their legal weight, pose operational challenges and potential reputational risks because of the harsh penalties if cheques bounce.
Direct debits: superior efficiency and lower risk
Advantages:
- Automation and consistency: Direct debits offer unparalleled automation, significantly reducing manual intervention and administrative overhead. This automation ensures a more consistent cash flow and less time spent on transaction management.
- Cost-effectiveness: Generally, direct debits are associated with lower transaction costs than handling cheques, cash, and even card-based payments. The reduction in processing fees and operational costs can accumulate to substantial savings for a large corporation.
- Customer convenience: Direct debits provide convenience for customers, promoting timely payments without requiring them to remember due dates, thus fostering better customer relations and retention.
Challenges:
- Failed transactions: While direct debits can fail due to insufficient funds, proactive communication strategies and modern banking tools (like low balance alerts) can effectively reduce these occurrences.
- Consumer protections: The ability for customers to dispute transactions can be seen as an advantage, ensuring transparency and trust in the billing process.
Post-dated cheques: a less favourable option
Advantages:
- Legal enforcement: Although the legal weight behind post-dated cheques, including criminal implications for bouncing cheques, is strong, this can strain customer relationships and potentially deter business with the stringent consequences imposed.
Challenges:
- Resource-intensive management: The manual processes involved in handling cheques — such as depositing, tracking, and dealing with bounced cheques — are significantly more labour-intensive and costly.
- Delayed funds and risks: Cheques require time to clear, delaying fund access. The risk of bounced cheques remains high, often necessitating legal action which can be time-consuming and costly.
Impact of failed direct debits
Failed direct debits occur when there are insufficient funds in a consumer's account, the account has been closed, or there are holds that prevent withdrawal. Such failures impact corporate billers by disrupting their cash flows, complicating revenue projections, and increasing administrative costs due to additional follow-up and recovery processes.
The immediacy of knowing about a failed transaction can also be delayed, which further complicates financial planning.
Legal avenues for unpaid amounts
In cases of non-payment due to failed direct debits, corporate clients have several legal avenues:
- Contractual penalties: As per UAE law, contracts can include clauses that impose penalties or late fees on missed payments, provided these penalties are reasonable and enforceable.
- Civil claims: Corporates can file a civil lawsuit for recovery of unpaid amounts. This is usually the course of action when the amount is significant and other recovery efforts have failed.
- Negotiation and settlement: Often, corporates opt for direct negotiation with the consumer to settle unpaid dues amicably. This may include restructuring the payment terms or offering payment plans.
Managing default risk
To mitigate the risk of default and manage the impact of failed direct debits effectively, corporations can adopt several strategies:
- Pre-transaction verification: Regularly updating and verifying consumer account details can reduce the risk of transaction failures.
- Buffer policies: Encouraging consumers to maintain a buffer amount in their account or setting up alerts for low balances can help in minimising failed transactions.
- Communication strategies: Effective communication about upcoming debits and consequences of failures can encourage consumers to ensure funds are available.
- Alternative payment options: Providing multiple payment methods can help in reducing reliance on direct debits alone, thereby spreading the risk.
- Insolvency protection: Credit insurance or similar financial products can provide protection against consumer default, particularly in sectors where transaction amounts are high.
The way ahead
Direct debits in the UAE offer a streamlined approach for managing recurring payments and by implementing robust verification processes, effective communication strategies, and considering legal avenues for debt recovery, corporate clients can enhance the reliability of their revenue streams and manage consumer relationships effectively.
Educating customers about the benefits of direct debits can also help in smoothing the transition and minimising payment failures.
It is crucial however for businesses to stay informed about their legal rights and available mechanisms to address the complexities associated with direct debit failures.
About the author
Fernando Pacheco is senior vice president and head of cash management products in global transaction banking, Mashreq
