Oh no, a chargeback. What now?

A SEPA Direct Debit is a fantastic way to take control of invoice payments. By initiating the direct debit and managing the bank transfer yourself, you hold all the cards, and your customer doesn’t have to worry about it. It ensures fast cash flow, a controlled process, and a positive customer experience. A triple win!

This all holds true until a direct debit fails. Not only does it mean no money was transferred, but banks can also charge high fees for processing a chargeback, especially when dealing with foreign accounts.

Exception to your process

A failed direct debit is a typical example of an exception to your process. However, by handling it smartly – and automating these types of exceptions – you can still achieve significant efficiency gains.

Reasons for chargebacks

A failed direct debit always has a cause, and the underlying reason can vary greatly. Fortunately, the collaborating banks have made clear agreements and assign a code to each chargeback, indicating the reason. In the feedback on the direct debit instruction – such as your bank account’s daily statement – you’ll find the chargebacks along with the reason code.

You can find an overview of these codes (also known as reason codes) on betaalvereniging.nl. 

These reasons can be divided into a few main categories:

• Insufficient funds
  At the time of the direct debit, there wasn’t enough money in the customer’s account.
• Technical reason
  The direct debit couldn’t be successfully processed because the necessary conditions were not met, such as a valid mandate and/or an active bank account.
• Customer-specific reason
  The customer has set restrictions within their banking environment that specifically apply to the direct debit mandate.
• Direct debits outside the EEA
  The customer has a bank account outside the European Economic Area (EEA). Additional information is required to execute a direct debit successfully.
• Intentional reversal
  After a successful direct debit, the customer has initiated a reversal.
  By linking chargebacks to one of these main reasons based on the provided code, you have a basis for taking the appropriate action for each chargeback.

Insufficient funds

When a customer has insufficient funds in their account at the time of the direct debit, it results in the reason: ‘insufficient funds’.

In this case, you could:

• Send the customer a notification informing them that the direct debit failed and that another attempt will be made at time x. Kindly request them to ensure there are sufficient funds at that time.
• Ask the customer when in the month would be the best time to carry out the direct debit going forward. You can document their response and adjust future direct debits accordingly.

Technical reason

A chargeback due to a technical reason will continue to fail unless action is taken. For example, the mandate has been revoked, or the bank account no longer exists.

Based on the ‘technical reason’ chargeback, you can:

• Simply terminate the existing mandate.
• Stop the direct debits under this mandate. They will always fail, which can be costly.
• Inform the customer about the failed direct debit and request a new mandate linked to an active and suitable bank account. For example, you could use a combination of email and the process of setting up a new mandate via your website’s customer portal.

Customer-specific reason

A customer can always add restrictions to a direct debit mandate within their banking environment. For example, they might set a maximum direct debit amount or limit the frequency of debits. As long as you stay within these limits, everything runs smoothly.

If you receive a chargeback for a customer-specific reason, you could:

• Contact the customer to ensure that these restrictions do not hinder a regular direct debit.

Direct debits outside the EEA

If you want to process a direct debit from an account outside the EEA – but still part of SEPA – there are additional requirements to fulfil. For example, you may need to include the customer’s address details. (See also our article on IBAN discrimination.)

To successfully process a direct debit outside the EEA, you must:

• Register the additional address details together with your customer.
• Correctly include these details in your direct debit instruction so that the process can be completed successfully.

Intentional reversal

Lastly, there are chargebacks initiated by the customer after a successful direct debit. Clearly, the customer disagreed with the direct debit and reversed it themselves.

For this type of chargeback, it’s essential to:

• Contact the customer and inquire why they disagreed with the direct debit. Often, the real issue relates to the service provided and the accompanying customer experience. This is a direct reason to reach out with one-on-one communication.

Structuring exceptions

By properly organising the above within your systems, you can also structure exceptions in your processes, on top of your standard procedures. This saves a lot of manual work. The Abillity^® Credit Management module fully supports all the above processes and the corresponding workflow.