Choosing the best debit order solution for your business

Many businesses are not aware of the benefits of making use of a debit order service to collect funds from their debtors, let alone which debit order service would be the best for their needs.

Having dealt with many businesses payment collection methods I will try and explain why you should be using debit order as preferred payment collection method for your business as well as which debit order method would be most appropriate for your industry and type of client base.

Lets start with what a debit order is:

A debit order is an instruction that a bank account or credit card holder provides a business to collect funds directly from their bank account. The way in which a client gives this instruction is by completing a written or verbal (usually telephonic) debit order mandate. Electronically signed mandates may become an option in the future as PASA is investigating their implementation.

A debit order, as we refer to it in South Africa, may be referred to as a direct debit in many parts of the world. For more information on direct debits please see the relevant Wikipedia page.

In South Africa there are commonly two types of debit order. Electronic Funds Transfer (EFT) and Early Debit Order (EDO) which may further be broken into Authenticated Early Debit Order (AEDO) as well as Non-authenticated Early Debit Order (NAEDO).

EFT debit orders run after EDO debit orders when processed via the standard banking debit order runs. Both AEDO and NAEDO debit orders run in a randomised manner before EFT debit orders and allow creditors an equal chance to collect funds from their debtors.

NAEDO debit orders were launched in 2006 due to a National Credit Act initiative and allow creditors to collect up to R5,000.00 in the most fair manner possible.

It is important to note that regular EFT debit orders make provision for collecting up to R500,000.00 per debit instruction.

EFTs are generally more cost effective than AEDOs and NAEDOs but do not include the ability to track a client account/credit card for up to 32 days. If funds were to arrive in the account within the tracking period, these funds would be reserved for collection by the party initiating the debit.

Some brief examples to clarify where EFT and NAEDO debit order collections would be used:

1. An investment company wishing to collect an additional contribution from one of their investors would most definitely make use of an EFT debit order as the likelihood of the client having funds available for collection is very high. The amount to be collected would also many times exceed the R5,000.00 NAEDO limit and cost of the collection would be a factor.

2. Insurance brokerages collecting a monthly premium from one of their clients for funeral cover would be best off making use of a NAEDO debit order system. The likelihood of this client having funds available is quite low and tracking will be useful to keep tabs on the clients account for when funds do arrive (usually their monthly salary).

Any micro lender would be best off making use of NAEDO as they deal with clients who usually do not have money available within their accounts especially on the standard debit collection dates. This is quite obvious as these individuals would have a history of applying for credit and would possibly have multiple debit orders to various creditors going off on the same day. It is because of this that the randomisation of NAEDO transactions may become a major benefit to ensure each creditor has an equal chance of being paid.

Conversely any service provider will likely choose EFT as their preferred debit order method as they maintain some form of leverage over their client in the form of ending/suspending service in order to obtain payment. Service providers also usually do not offer any credit terms and payment is done on a month to month basis.

I realise there are many situations and edge cases which may warrant a service provider or creditor choosing to make use of either EFT or EDO debit orders and will delve into these situations in more detail in my next post.