If your business accepts direct debit, it’s critical that you understand what a direct debit return is and how it works. We’ll explain what a direct debit return is, the most common reasons for returned direct debits, and how Mollie can help streamline businesses’ direct debit collection.
What is a direct debit?
In Europe, direct debits are a safe and convenient payment method with high customer familiarity and trust. The Single Euro Payments Area (SEPA), which is 36 countries in and around Europe, means that banks in one SEPA member country can initiate and accept transfers from any bank in any other SEPA member country as easily as they could a domestic transaction.
Direct debits in an ecommerce context are most often one-time payments, meaning the customer buys a product, pays via a direct debit, and then the order ships. A recurring payment in which a customer authorises a direct debit instruction, like for a subscription, is also possible.
If you have an ecommerce shop with Dutch, German, French, or Belgian customers, it would be wise to offer direct debit as a payment method. According to the European Central Bank, SEPA Direct Debit accounted for 44 percent of all transactions in Germany in 2020.
Why does a direct debit get returned?
In a one-off direct debit situation, where the payment functions like a credit card payment, a direct debit returns, or bounces, if the customer’s account does not have enough money to cover the payment. A direct debit payment takes 24–48 hours to be booked into your account, so it’s a good idea to delay shipping anything until you receive payment confirmation.
In a recurring direct debit situation, like a subscription, bill, or instalment plan, there are many reasons a direct debit might be returned. Non-sufficient funds (NSF) is the most common reason code for a failed direct debit. Other reasons include incorrect address details (customer has moved), the customer has manually cancelled the direct debit, your business does not have a mandate to collect the funds, the customer has a new current account and account number, or they have died.
For more about how direct debits work in Europe, have a look at our full guide.
How does a failed direct debit payment impact my business?
For ecommerce shops relying on selling subscriptions or any other service via recurring direct debits, failed payments are inevitable but nonetheless an inconvenience. Failed direct debit payments can lead to more back office work, increased customer churn, and a decrease in revenue in the long term.
PSPs help with the direct debit mandate admin, which means the only real direct debit return problems are the customer cancels the direct debit themselves or the debit cannot be collected due to insufficient funds.
When dealing with an unpaid direct debit because of insufficient funds, it creates more administrative work for your team. Not just because you haven’t received payment for a service, but also because now you have to work to try and collect the payment. Many building societies allow payers a ‘retry process,’ which gives the consumer time to pay money into their bank account to cover the payment charge. However, if they fail to do so, the task falls to your team.
The good news, you are allowed to try re-presentation to collect the payment again and can do so automatically via a PSP like Mollie. If the payment fails again, you’ll have to decide if your policy is to connect with the customer directly or count the failure as a contract termination.
Churn rate is the percentage of customers that stop using or paying for your service or subscription over a set period.
Involuntary churn refers to when customers have no intention to cancel a subscription or service, but are forced to do so after their payment method fails. With credit card payments, this can be a big problem as they expire every two or three years, and customers often forget to update their details. The same thing happens when a new card is issued because the old one was lost or stolen – the number might remain the same, but the CVV is different. Failed payments as a result of involuntary churn can have a huge impact on your business’s revenue.
This isn’t such an issue with direct debits, unless the person has changed banks and forgotten to update their payment information. Again, it’s up to you to decide how aggressive your retention policy is for customers whose direct debits have failed.
Collect direct debit payments with the Mollie platform
With no hidden fees and an easy signup process, Mollie makes collecting direct debit payments a breeze. Plus, your personal dashboard gives you crucial insights into all your transactions and statistics. Mollie is the quickest and easiest way to implement SEPA Direct Debit, reduce administrative effort, and improve churn rate. Understand the benefits of accepting SEPA Direct Debit through Mollie today.