Returned Direct Debits: what they are and how to prevent them

Collecting customer payments via Direct Debit can be efficient and secure however not only do you need to be clued up on legal consumer rights around them, sometimes Direct Debit payments can fail.

If a problem occurs and a Direct Debit isn’t processed, it can be frustrating – not to mention costly – for your small business.

In this guide, we’ll look at returned Direct Debits, why they happen and how you can avoid them as a small business owner.

What is a returned Direct Debit?

A returned Direct Debit is a Direct Debit that doesn’t process correctly through your payment processing provider, and therefore fails. The donor’s bank will reject the payment request for a variety of reasons, and the transaction will not go through.

Direct debits work by automatically taking the money owed from a donor or customer’s bank on a set date. The bank account holder must approve the request and amount. If a Direct Debit is returned, it means the request is rejected and the payment is not made.

Many small businesses use Direct Debits as a payment method alongside traditional cash transactions, digital currency, and store credit.

Businesses that offer services or subscription models will likely find Direct Debits a particularly useful form of payment.

How and why do Direct Debits get returned?

If a customer’s Direct Debit fails, you will be notified via an ARUDD (Automated Return on Unpaid Direct Debit Service) notification.

You will usually be notified that a Direct Debit has failed the next working day after the money was due to be collected. Often, banks will try to process the Direct Debit multiple times on the nominated day.

There are a variety of reasons as to why a Direct Debit is returned, the main one being insufficient funds in the customer’s account. If the customer does not have enough money in their account to pay the Direct Debit, the Direct Debit will bounce.

There are other reasons why you may encounter a returned Direct Debit, such as:

• The donor is deceased
• The customer or their bank has cancelled the Direct Debit
• The account has been transferred to a new bank and the Direct Debit has not been transferred over
• The account details are wrong
• The bank account has been closed
• The donor disputes the payment amount or date
• The item purchased has been returned, as per your returns policy

How do returned Direct Debits affect business?

Returned Direct Debits can hurt your business. Some of the problems they may cause include:

Disrupted cash flow

One of the positives of using Direct Debits as a payment method is that you know exactly when money will be entering your business bank account, and how much. This knowledge is useful for managing your cash flow and budgeting accordingly.

If a Direct Debit is returned, therefore, you’ll notice a disruption to your cash flow. You won’t have access to the funds that you expected and you may have to change your spending plans.

Increased admin time

Returned Direct Debits result in a substantial amount of admin time for the merchant.

You’ll first have to assess your ARUDD notification to understand why the Direct Debit hasn’t gone through and which customer it refers to.

You then may find that you need to contact the customer, await their reply, and then attempt to take the Direct Debit again.

It can be a lengthy and frustrating process that takes up a lot of resources. If the Direct Debit fails a second time, you have to start all over again.

Negative customer relationships

Even though a returned Direct Debit is unlikely to be your fault, it can end up hurting the relationship between you and your customer.

Once a Direct Debit has failed, you’ll need to contact the customer to find out what’s going on and try again.

If you can’t resolve the issue, you may have to block the customer from using your services or cancel their subscription orders, something that can leave a bad impression on loyal customers.

Sometimes a customer may be charged a fee for a returned Direct Debit too, further adding strain to your relationship.

It’s important to handle customer communication surrounding returned Direct Debits as professionally and politely as possible. Try to be helpful to your customers, assisting them with making the payment, rather than demanding.

How to avoid returned Direct Debits as a business

Now that you understand the negative impact returned Direct Debits can have on your business, you’re probably wondering how to avoid them.

The good news is that there are steps you can take to prevent your small business from being frequently stung by returned Direct Debits.

Always give advance notice

If you’re collecting a Direct Debit payment, make sure you provide the customer with enough advance notice of when and how much you’ll be taking.

You can set up an automated SMS or email to customers and ideally offer your customer the choice of how they receive the reminder.

This provides them with enough time to ensure the relevant funds are in their bank account, preventing a returned Direct Debit.

Be flexible

Try to be flexible when it comes to when you collect your Direct Debits. Some companies will allow the customer to choose the date on which the payment is collected. This can help ensure the Direct Debit is made on a day that suits the customer’s cash flow and budgeting.

You can either send an SMS or email to your customers asking what date they want to make the payment or even better, have this enabled as part of the initial sign up and payment process.

Set up a returned Direct Debit process

Setting up a returned Direct Debit process can help to cut down the admin time each bounced Direct Debit needs. Decide on things such as how you will contact the customer and what you will say. Devise scripts and processes, and train the relevant staff accordingly.

Monitor failed payments

Keep a close eye on your returned Direct Debits to identify any patterns or specific areas for concern. You may, for example, notice that an individual customer is the source of multiple returned Direct Debits, or that all of your returned DDs are coming from the same bank. You can then take steps to solve these problems and prevent them from happening again in the future.

Returned Direct Debits: final thoughts

Returned Direct Debits can be a thorn in a small business’s side, but they don’t have to be.

If you implement the tips we’ve discussed in this article, including providing advanced notice and setting up a dedicated process for dealing with bounced payments, then you should be able to cut how many you encounter, as well as the time it takes you to deal with them and their impact on your bottom line.

You may not be able to avoid returned Direct Debits completely, but you can be prepared for when they do come your way.