By Richard Ransom, Product Marketing Manager, Bottomline Technologies,
Direct Debits (DD) are no longer associated with consumer collections alone. Recent figures reveal over one quarter of business to business (B2B) payments are now being made via DD. While the majority of these payments are for standard utility bills, the changing business attitude towards DD is clear.
From improving financial control and creating a known, trusted cash flow, the benefits of DD as a collection mechanism are compelling. Having been deterred in the past by the unlimited indemnity associated with the UK DD scheme – in clear contrast with the European version – businesses increasingly recognise that, as long as the right DD management processes are in place, the rewards far outstrip the risks.
Below I consider whether the ability to now embed strong DD control and management within the payment process will make 2014 the year of the B2B Direct Debit.
Too many UK organisations are still incurring significant – and unnecessary – costs associated with attaining and managing payments from customers. The issue is not only bad debt and late payment but the sheer overhead associated with receiving and processing cheques and cash. In addition to manual processing and bank charges, it is often time consuming and difficult to reconcile cheque, cash, even Bacs payments into the business, since customers rarely reference the invoice number – or use the incorrect number – when making a payment.
It is little wonder that the use of Direct Debits (DD) has silently gained significant ground for business to business (B2B) payments over the last year. While there has been a reluctance to embrace DDs for higher value B2B payments, due in part to the unlimited indemnity associated with all DDs in the UK, recent figures from the Payments Council reveal attitudes are changing.
Payments Council’s 2013 report confirms that DDs represented 27% of the volume of B2B payments; and 19% of the value. This significant growth year on year reveals both growing confidence in DDs and recognition of the potential benefits in comparison to other payment methods.
Improved cash flow
The benefits are clear: a company that can encourage its business customers to sign up to DDs takes charge of its own collections, with a huge beneficial impact on cash flow projection and management.
There is no need to wait blindly for a cheque or Bacs payment to arrive typically 35 to 90 days after an invoice has been generated. Instead, the business can set up any number of DD collection days during the month and use the trusted collections process to build an accurate cash flow forecast.
Collection timescales will be confirmed under the terms of the agreement and the correct reference number will be automatically applied. The cost is far lower, there is no complex reconciliation and the entire process is efficient.
Furthermore, when added to electronic invoicing, the use of DDs creates a seamless, end to end invoice to collection model that only requires manual intervention to manage exceptions. The cost reduction and improvement in cash flow is significant.
Clearly this model does not apply to occasional and ad hoc business. However, since the majority of businesses do upwards of 80% of trade with the same, trusted suppliers and customers, there is significant scope for extending the use of DDs beyond utility style payments.
So why have UK businesses been holding back? One of the concerns has been the fact that, in the UK, there is no limit on indemnity on any DD which means that a customer can potentially ask for any money collected via DD to be returned at any time. This is in clear contrast with the new Single Euro Payments Area (SEPA) B2B DD being introduced across Europe which has a six week indemnity limit – an approach that has seen B2B DD adoption soar.
However, UK organisations can reduce this risk by simply putting in place robust, effective processes for validation and DD management to ensure there is no reasonable call for reimbursement.
Just as with business to consumer (B2C) DD, strong DD management processes are now recognised as essential. Organisations need to minimise any opportunity for problems arising – from initial DD failure due to incorrect customer sort code and bank account details to later issues occurring as a result of a customer exploiting Account Switching.
Unlike B2C DD, the B2B model does not support paperless sign up: an organisation must get a customer to sign a paper DD mandate. Furthermore, it is slightly more complex at the moment to verify that a bank account is associated with a specific company than the totally automated process available for B2C DD. However, since organisations will only embark upon this process with long- term business partners, a strong degree of trust is already in place.
The same principles of point of entry account validation apply: by checking the validity of the sort code and account number as the information is entered, organisations can ensure the DD transaction occurs as expected and avoid the cost of a DD repair. Bacs estimates that every DD failure costs up to £50 to repair and according to research undertaken by Redshift Research on behalf of Bottomline Technologies, as many as 60% of businesses admit incurring a cost of £50 or more for every failed DD transaction. In addition to creating a significant business expense, the entire process of re-contacting the customer for information risks undermining what is already a good relationship – while any delay to the first DD collection will clearly have an impact on cash flow.
On-going lifecycle management is also key; with over 306,000 Account Switching instructions received since the new process started in September. This is a 17% increase on the previous year for the same period and, according to the Payments Council, that number is clearly set to rise as confidence in the process grows. Organisations must therefore regularly collect reports from Bacs relating to account changes and properly manage that information to ensure the correct payment continues to be collected at the right time and as expected.
As the growth in B2B DDs across Europe reveals, business confidence in DD as a collections mechanism is transforming attitudes. Indeed, growing numbers of organisations in Europe are now stipulating the use of DD payments as part of the contractual agreement. The benefits to these organisations extend beyond reducing costs and improving cash management: by creating a seamless, end to end invoice to payment process companies reinforce partnerships and build a solid foundation for long term business.
There is little doubt that the introduction of DD indemnity limit in the UK, akin to the six week SEPA limit, would make a huge difference to business confidence and boost B2B DD over the next two to three years.
However, in the interim, there is no reason for UK businesses to dismiss the benefits of DD, especially for routine and regular payments to long term business partners. Those organisations that put in place good DD management processes, combined with strong user understanding, will minimise the risk and rapidly reap the rewards of lower processing costs and improved day to day cash flow management.