How electronic Debit Order Authorisations are possible

We recently told you that Electronic Debit Order Authorisations are possible. But I bet you are still using a paper authorisation form for your clients to sign in pen and ink. Why? Technology is there to help you with your business administration. Why not use it to obtain debit order authorisations electronically and avoid the hassle and costs of paper-based authorisations? This article is a discussion on how and why it is possible. 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.

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

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 inter bank 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.
• Bankserv is an independent legal entity, initially established by the four major banks, that 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.

Can a written debit order authorisation be in electronic form?

The answer is yes.  With regards to electronic debit order mandates, the Manual continues to state that “Electronic mandates are deemed to be valid mandates provided that they comply with the Electronic Communications and Transaction Act 25 of 2002.”   It also gives (i) guidelines which seem to be only applicable to voice recorded authorisations; and (ii) a specimen authorisation form to be used by users.  No “special” rules apply to electronic authorisations – the only requirement is that it “must comply with the Electronic Communications and Transactions Act 25 of 2002“.  The sections in the ECT Act dealing with “writing” (section 12) and “retention of records” (section 16) may therefore apply to electronic authorisations.  (And if your sponsoring bank contractually requires from you to obtain an (electronic) signature, section 13 of the ECT Act will also apply).

The Manual requires that the user (merchant) obtain written (in pen and ink or in electronic form) authority with the following details from the third party (customer):

1. Account number
2. Type of account
3. Branch code
4. Frequency of debit
5. Action date
6. Start and termination date
7. Third party name
8. Amount (Escalation of amount; variable amounts and maximum limits).

It also requires that the user (merchant) informs the third party (customer) of certain facts, for example that the user (merchant) may not cede or assign any of its rights to another party without the third party’s (customer’s) consent.  This will be important if you sell your business.

Does it need to be signed?

The manual does not require the authorisation to be signed – not in pen and ink or electronically. The specimen form makes provision for a signature, but it is not a requirement and it certainly does not exclude an electronic signature.  There are however a few exceptions where a signature is required by legislation – the Regulations to the Administration Adjudication of Road Traffic Offences Act 46 of 1998 and the Short-Term Insurance Act of 1998 refer to “signed debit order authorisations” in certain specified instances.  Signed in these instances means a signature in pen and ink or an electronic signature.

Let us recap

From this it is clear that the:

• Users (merchants) of this Bank must get a “written” debit order authorisation from the third party (customer);
• The written authorisations can be in pen and ink on paper or in electronic form;
• Authorisations can be voice recorded.  Authorisations can be given orally, provided they are recorded reliable in terms of the guidelines and that the user confirms the authorisation in writing;
• Authorisations do not need to be signed in terms of the requirements – subject to a few exceptions by legislation. The specimen form makes provision for a signature, but this is merely an example and not a requirement in terms of the Manual.

It is possible that there could be an intermediary between a sponsoring bank and a merchant.  It is possible that the agreement between the intermediary and the sponsoring bank contains restrictions on electronic debit orders.  It is also possible that the agreement between the sponsoring bank and user may contain restrictions on electronic debit orders.  In these circumstances, electronic debit order authorisations are still legally possible – the parties have just decided (for their own purposes) to make them impossible.

The norm is most definitely still to sign a written debit order authorisation in pen and ink.  But from the above it is clear that in terms of the Manual of at least one of the four major banks in South Africa, these are not requirements. Also, the PASA rules do not require a signed authorisation.  On the contrary – it makes provision for recorded mandates on the one hand, so how can a signature be required on the other hand?

In terms of the law, you can get electronic debit order authorisations from your customer.  As with other electronic transactions,  you need to comply with is the ECT Act.  This is not too difficult and considering the business benefits it is worth it.  Have a proper look at your agreement with your sponsoring bank. Does it really require you to obtain paper based and signed debit order authorisations? If not, why are you still doing it? And if so, perhaps it is time to approach your bank with a presentation on electronic debit order authorisations.   In the long term this will safe you a lot in time and money.