Many merchants receive payment from their customers via debit order.  In South Africa (with its culture of late payment) it is a great way to receive payment from customers.  The level of non-payment and the costs of chasing payment are dramatically reduced.

Debit orders are useful because payment automatically gets taken from the customer’s bank account each month and the customer does not need to action anything from their side afterwards.  In other words, if a customer must actively pay a merchant each month, then each month the customer considers whether it is receiving value.

We often get asked questions around what form does the debit order authorisation need to take?  Must it be in “writing”? If so, must that “writing” be “physical writing” (i.e. pen and ink visible on paper) or will “electronic writing” (i.e. electronic bits and bytes visible on a screen) be legal in terms of our law?  If in (electronic) writing, can it be an electronic debit order authorisation or electronic mandate?  Must it be “signed“?  What form must the signature take?  Must it be a pen and ink manuscript signature or can it be an electronic signature?  Can the authorisation be obtained verbally?  Over the phone for example?

The reason for the questions is simple.  Merchants want to reduce the barriers to making a sale – they want to make it as easy as possible for a customer to pay them money.  If a prospective customer has to print out a debit order form, complete it by hand, sign it, and then either fax it back to the vendor or scan it and then e-mail it back to the vendor, this acts as a barrier and inconveniences the prospective customer.  Merchants also want to reduce the admin burden.  You can obtain debit order authorisations electronically and avoid the hassle and costs of paper-based authorisations.

There is no legislation that prohibits you from obtaining electronic debit order authorisations.

Electronic debit order authorisations are legally possible

They seem like straightforward questions at first glance, but they are more complicated than they appear as none of the role players have a definitive or clear answer on the matter.  This is a complicated area of law and therefore the explanation is quite complex, but we have tried to make it as easy to understand as possible.

Electronic debit order authorisations are not prohibited by the law and are legally possible.  There are, however, various conditions that need to be complied with and met (many of which revolve around information to be provided by the merchant’s customer and steps to be taken by the merchant to ensure reliability).

Kickstarting the process

If you as a merchant want to start obtaining electronic debit order authorisations, the first place to start is with your sponsoring bank.  Before a merchant can use the debit order systems it firstly needs the approval of its sponsoring bank.  This approval normally takes the form of an agreement between the merchant and its sponsoring bank.  You need to review this agreement and ascertain whether or not your sponsoring bank has laid down any specific requirements for debit order authorisations.

If your sponsoring bank does not allow you to obtain electronic debit order authorisations, then please contact us.  We might be able to assist you in convincing your sponsoring bank that it is possible to use electronic debit order authorisations.

How and why electronic debit order authorisations are possible

First, let’s get an understanding of the relevant role players in the payment industry and the rules governing debit order authorisations:

  • The National Payments System Act 78 of 1998 makes provision for the appointment of a payment system management body by the Reserve Bank of South Africa. The Reserve Bank has recognised the Payments Association of South Africa (PASA) as this body, to manage, govern, and control all matters affecting interbank payments, payment clearing and settlement within the national payment system. All the major banks are members of PASA and parties to an agreement with PASA and one another under which the banks all agreed to implement the PASA clearing rules (“PASA Agreement”).  These rules deal with the requirements for debit order authorisations, amongst other things.
  • BankservAfrica is an independent legal entity, initially established by the four major banks, which provides inter-bank electronic transaction switching services (including debit orders) to the banking sector.  In other words, Bankserv is the service provider responsible for the clearing and settlement of payments between the banks.

Now let’s look at the relevant parties to a debit order transaction:

  1. The vendor or merchant is also called the “user”.
  2. The customer or consumer – the receiver of the goods or services authorising debit order payment is the “third party”.
  3. The bank – the merchant’s bank is called the “sponsoring bank”.

There are three relevant agreements:

  1. The agreement between the sponsoring bank and PASA (and the other member banks) under which the sponsoring bank agrees to implement the PASA rules (PASA Agreement referred to above).
  2. The agreement between the user and its sponsoring bank under which the user will agree to implement the PASA rules. (The sponsoring bank will require this because the bank is bound in terms of the PASA Agreement).
  3. The agreement between the user and the third party. The user must obtain a debit order authorisation for payment from the third party in line with the requirements of its agreement with the sponsoring bank (agreement 2) – in line with the PASA Agreement (agreement 1).

So the bottom line is that the debit order authorisation must meet the requirements of the sponsoring bank – which will include the PASA rules

Each bank has its own set of rules dealing with Electronic Fund Transfers (EFT), but all participating banks that are part of the PASA Agreement, must incorporate the PASA rules in their  own rules.  The PASA rules make provision for authorisations in writing or to be recorded.  The Ombudsman for Banking Services confirms this in Bulletin No 12 dealing with Debit Orders. It states:

“The user must obtain a written authority from the customer before any transactions can be processed through the EFT system.” and “There is also provision for users to use voice-recorded authority under certain circumstances.”

The PASA rules also specify that the authorisation must “conform with the requirements of the sponsoring bank’s Bank User Manual”.   We have obtained a copy of one of the four major banks’ EFT User Manual (“the Manual”). We are led to believe that the manuals of all the major banks will correspond when it comes to debit order authorisation requirements.  So, what does this Manual say? The Manual explicitly allows electronic debit order authorisations.  That’s right, it allows it!  It starts with the following introduction:

“This section covers the requirements to be met by users to be able to process transactions through the EFT Service and which have been agreed by all participating banks.”

This confirms the PASA agreement, and it is safe to say that all major banks will have the same minimum debit order authorisation requirements.

In summary

If you are a sponsoring bank, it is in your interests to allow your customers to obtain electronic debit order authorisations.  If you’re able to allow them to do so, it will make your customers’ lives easier and therefore you are going to get more customers.  If you would like to find out how to allow your customers to obtain electronic debit order authorisations, please contact us.