E-invoicing: The Growing Importance Of Validating Customer Credentials

UK Direct Debit (DD) volumes are predicted to grow to £4 billion by 2020, as organisations exploit the chance to impose greater control over payment collection and, increasingly, consider the use of DD for corporate as well as consumer payments, in tandem with e-invoicing.

However, with escalating fraud and DD instruction failure rates, UK banks are becoming increasingly stringent about applying validation and verification requirements – most notably for paperless submission. Indeed, many organisations are actually being prevented from adopting paperless DD and exploiting the benefits of streamlined processes, due to their inability to undertake bank account and sort code validation in tandem with stringent customer verification at the point of entry.

Electronic submission

With the increasing maturity of online sales models, growing numbers of organisations are looking to exploit paperless Direct Debits to impose greater control over collections and streamline administrative processes. As consumer confidence in the DD model grows, individuals are increasingly happy to sign up online or via the telephone to a DD for a new service – from Internet subscription to regular charitable donation.

However, DD related fraud figures are growing. According to findings from home insurer, LV, conducted by the Centre for Economics and Business Research (CEBR), over 97,000 individuals in the UK have fallen victim to criminals setting up fraudulent DDs from their accounts.

With this number set to escalate over the next three years, banks are keen to minimise exposure without undermining the value of the DD payment model. Furthermore, with upwards of 10% of new DD instructions entered incorrectly, DD failure rates are growing in line with the associated costs and inconvenience to businesses and customers alike.

As a result, banks are getting far tougher on customer validation and verification checks: any organisation wanting to use paperless DD must not only validate the sort code and account number but also prove to the bank that in depth identity checks have been undertaken on customers signing up over the web or via the phone.

Validate and verify

The banks’ decision makes sense. In addition to reducing fraud, improving validation offers huge financial and customer service benefits to organisations by removing the risk of DD failure. At a cost of up to £50 per repair, according to Bacs, every DD failure is a significant business expense; it demands time consuming attempts to re-contact the customer for information; risks undermining a new customer relationship and significantly delays the first DD collection, impacting cash flow.

So what are the new validation and verification requirements? DD submitters are already familiar with the need to validate account number and sort code before submission to ensure the sort code is valid, the account number is valid and whether it can support Direct Debits.

In addition, banks are now insisting on a robust Know Your Customer check to minimise the risk of fraud. Using a raft of information sources such as credit checks, electoral role, mortality lists and BT landline, an organisation is able to verify that the individual exists, is still living, and that the individual can be linked to a correct address. Increasingly, many banks now nominate the checking agencies that organisations must work with to attain the correct information.

The challenge is to achieve strong customer verification quickly and efficiently. With the ability to collect Direct Debits within 10 to 14 days of initial submission, organisations are keen to get new instructions through to the bank as quickly as possible. Furthermore, it is also important to avoid imposing on the customer by asking for paper based identity information such as passport or driving license, and hence undermining the relationship before it has even begun.

Point of entry

However, for many organisations the current processes for capturing customer information are inefficient and rife with opportunities for errors to creep in. Information is often input into CRM systems, only to be rekeyed into finance and Bacs solutions. It is only just before the submission process that the account number and sort code validation is undertaken – and often, the submitter will opt to over-ride any error warnings, resulting in DD failure and expensive repair.

This process is fundamentally inefficient – and certainly inadequate for paperless DD submission. Opting to verify and validate at point of entry transforms the process. Issues with account number or sort code are immediately flagged, enabling the company to check the details with the customer in real time. In addition, the Know Your Customer checks can be fired off to the relevant agencies ensuring customers have to wait a matter of seconds to complete the process.

Taking this approach not only reduces fraud and minimises DD failures – hence reducing the costs associated with both repair and resubmission – but also facilitates better customer relationships. Administrative time spent re-contacting customers for additional information or to check details is no longer required, releasing customer service staff to focus on other activities. Critically, cash flow becomes more predictable: DD instructions can be set up quickly and, with no failure, organisations can be far more confident about cash flow forecasts.

Imposing control

DDs offer a fantastic way of imposing control over cash flow, improving revenue forecasting and streamlining payment processes. But failure to impose adequate validation and verification can rapidly undermine DD value. From escalating fraud to the £50 cost per repair and, critically, loss of potential revenue for several weeks if a DD fails, the cost of poor DD processes cannot be underestimated.

With some organisations still not using automated DD services, it is clear that too many companies are incurring unnecessary cost and business risk. Getting it right, with real time validation and verification at the point of entry, not only eases the process for customers, but also avoids costly errors, minimises the risk of fraud and provides faster access to a predictable revenue stream.

As organisations increasingly look towards corporate DDs and the benefits of e-invoicing, this level of verification will become essential; it is those businesses that tie down these processes today that will be best placed to realise the potential of DD to gain faster access to revenue and fundamentally streamline processes.

Richard Ransom is an expert on UK Domestic, SEPA, and SWIFT based payments and collections. Based in Reading, UK, Richard combines more than 15 years of experience with a broad understanding of UK and European payment regulations to set Bottomline’s payments-related product portfolio and strategy in the EMEA region.