Charging by direct debit and avoiding "chargeback"

Direct debit is one of the most common ways to collect or charge in Spain. More than 45% of transactions are made through direct debit. In the ranking of payment methods preferred by Spanish people, it is in first place, above paying with credit cards. If you think about it, electricity bills, water bills, your trusted gym, children's private lessons, all insurance, etc. are charged through direct debit, so what makes this the most popular payment by companies in our country?

How does direct debit payment work?

The collection by direct debit basically consists of your bank extracting from your client's bank the money they owe you for the sale of a product or service. In order to withdraw this money and carry out the transaction, first, your client must give you permission by signing an authorization through a SEPA mandate, and then you must justify that they owe you that amount of money by issuing a bank receipt detailing the products or services provided.

Month after month you must update and send your bank an XML file with the data of your clients and the amount to be charged to their account so that the transactions can be carried out.

We will explain these basic concepts to be able to collect through direct debit so that you understand them better:

What is a direct debit?

A direct debit is a document issued by the seller's bank that justifies the charge of an amount of money in exchange for a product or service, that is, for an economic transaction between two parties. It would be the equivalent of a cash receipt when a purchase is made in a physical establishment, only in this case, as the bank has mediated, what is obtained is a direct debit.

What is the SEPA mandate?

The SEPA mandate (also called SEPA direct debit) is in itself the process by which a provider can charge for their services directly through the customer's bank account. In order to do so, the client must sign an authorization in which he consents and authorizes this procedure.

The acronym SEPA stands for Single Euro Payments Area, and refers to the area where customers and companies can carry out monetary transactions in euros through banks. All these transactions are just as fast and secure at all points in the SEPA zone and are carried out using the same instruments and regulations.

What characteristics do the collection through direct debit have?

SEPA direct debits have a number of common features:

  • Economic transactions are carried out in euros.
  • If the transaction is made within the SEPA area, it will be 100% safe and reliable wherever it comes from.
  • In order to carry out the transaction, you need to know the BIC and IBAN code of the client's account.
  • Before starting to charge, the customer must have given you their authorization through the SEPA mandate. You must keep this document for the duration of the commercial relationship with the client.

The client has the right to return payments that he considers fraudulent up to 8 weeks after they occur. This return is what is called chargeback and has a cost for the issuer of the receipt as a penalty.

Advantages and disadvantages of charging by direct debit

Like all payment methods, charging by direct debit has its advantages and disadvantages:

Advantages of charging through bank receipt

As we have already said at the beginning of this post, charging by direct debit is the preferred payment method in Spain and this is because it has a series of advantages that do not go unnoticed:

  • Convenience for clients. Although for the seller it is a tedious bureaucratic process, especially if the service is paid monthly, for the client it is super comfortable, since they only have to worry about filling out the consent and having money in the account at the time of payment.
  • You ensure the day of collection. With direct debit you can choose the day you collect, and all payments will be made at the same time. There is a risk that a customer will not have funds and a chargeback will occur, but most of the income will enter your bank at the same time. This allows you to plan your own payments to your suppliers and not have unforeseen events or overdrafts in your account.
  • It is 100% secure. As we have mentioned before, the collection through bank receipt within the SEPA area is reliable and secure. Customer bank details are encrypted and stored very securely.

Disadvantages of charging through direct debit

On the other hand, there are also a series of disadvantages that mean that the rest of the payment methods are increasingly used compared to charging by direct debit.

  • Heavy bureaucratic procedures. Before starting to collect, each of your clients must fill out the SEPA mandate. This means keeping an eye on each client individually to fill it out and then keeping all these documents for the duration of the business relationship with the client. Then you must fill in and update an XML file every time you want to charge your customers. This procedure becomes especially complicated because if you collect the receipts periodically, for example, monthly, at the end of the month you must eliminate those that you do not give service to and add new ones.
  • A direct debit return or chargeback. When a customer reverses the direct debit, that is, returns it, or when collecting it there are no funds in his account, the bank charges the issuer a commission that usually ranges between 3 and 8 euros per receipt and customer. This is one of the big problems of charging by direct debit since the cost per receipt is very high and often, if the amount to be collected is not very high, money is lost per customer. We will discuss this topic in more detail later.
  • Decentralization of information. There is no place to verify that all these receipts have been collected correctly, which ones have been returned, a list or customer database or metrics where time periods can be compared, difference in income between the different services, etc.

What is a chargeback?

A chargeback is when the customer returns a charge that they do not recognize. Banks allow their users to make receipt refunds to protect customers from fraudulent charges. But the reality is that customers sometimes return the bank receipt when the charge does not suit them, or because there is a lack of funds in the account, or because they do not want to pay.

This type of practice is very frustrating for the issuer of bank receipts, since it costs them quite a lot of time and money. Time loss, because you must reissue the bank receipt if you want to collect. And money loss, because in addition to the commission for returning the receipt, you must pay the commission for issuing the receipt and hope that the client does not repeat the chargeback.

Chargeback not only means a reduction in revenue for your business, it can also be a cause of significant money loss each month.

How much does the chargeback or direct debit return policy cost?

The chargeback has a penalty cost that can range from 3 euros to 8 euros per transaction depending on the bank. But in addition to the economic cost of the commission itself, in the case of small direct debit , it can mean not only reducing income but also losing money. For example, if you charge a monthly service of 10 euros and subtract the commission from the first issue (€2) then the cost of returning the direct debit or chargeback (€8) and then the cost of the new direct debit issue (€2). ), what you charge for that service will end up totalling -2€.

On the other hand, there is the cost of time involved in re-updating the XML document to send it back to the bank to try to collect the direct debit again.

How to avoid the chargeback for returning direct debit?

Avoiding 100% chargeback if you charge by direct debit it is very difficult. However, there are some things you can do to reduce the receipt return rate:

  • Set a collection day. If you establish a permanent collection day and make sure your customers know when it will be, you allow them to organize their collections and have funds available at the time of making the transaction and avoid chargeback.
  • Has the customer received the service? It is very important to have the file that you send to the bank to collect, updated. If you charge a customer for a product or service that they did not enjoy, they will charge you a chargeback which will cost you money.
  • Communicate with your customers. Knowing your customers and talking to them is important. You must know if they are satisfied with the prices, with the services you offer and that everything is in order before you charge them. If they are not satisfied, they will not hesitate to make a chargeback.
  • Your name on the bank statement. It is important that your users know how you appear on the bank statement. If you have a fiscal name that is not similar to the name of the business you are charging for, they will not hesitate to return the direct debit. Tell them how you are going to appear on their bank statement so that they recognize the charge without problems and do not request a chargeback.

Accept online payments

On the other hand, you can also allow your customers to pay you by other payment methods that do not have the disadvantages of a chargeback. Updating and entering the digital age is almost essential to survive today. Through the internet, users have more control over their payments and feel more secure, since they are the ones who enter their payment details when purchasing a product or service. Due to this, there is no possibility of chargeback since they themselves authorize the payment.

In addition, in the case of periodic payments, online payments allow automation. Online payment gateways allow you to establish automatic periodic payments, that is, subscriptions, in which active subscribers are updated and charged month by month without having to do anything.

On the other hand, it is important to mention that the chargeback disappears through online purchase. Payment gateways, although they charge commissions for successful transactions, do not charge if there is a failed payment, and they will also try to process the payment until it becomes effective without any additional cost.

Accept all possible payment methods

If you can count on a platform that allows you to process payments from different gateways and accept different payment methods, the chargeback problem will disappear.

When you offer your customers a variety of payment methods, you give them flexibility when it comes to paying you, something they appreciate since you allow them the comfort of choosing how they want to pay you. Thus, not only do you avoid chargeback, but by offering them a simple payment experience, they will not hesitate to purchase from you again.

With Uelz you can save time and money when issuing direct debit

And, have everything in one? With Uelz you can.

If you want to continue charging your customers through direct debit, but also incorporate a wide range of payment methods for your customers to choose from, Uelz is the perfect solution. Why?

  • You will be able to streamline the collection by direct debit. Your customer database is kept up-to-date automatically, so if you charge by direct debit with Uelz, all you have to do is download the XML file and send it to your bank.
  • You will enjoy several payment gateways. Uelz automates the payment gateway that best suits you in terms of commission, collection speed and country, so that you make the most of your collections. You will only have to enter the payment data once to activate a generic payment gateway that includes all the payment gateways available on our platform.
  • Give your customers the opportunity to finance their purchases without interest. If your customers choose to pay you in installments, it is possible with Uelz, without the need to assume the risk. Financial companies like Klarna give you the full amount of the purchase at the time of payment and assume the risk and cost of financing so that your clients can pay you up to three months without interest.
  • No complications. You can enjoy all this simply by being a Uelz customer. You will not need technical knowledge or tedious implementations. Uelz is designed to make everything very easy for you.

Enjoy all the advantages of online payments confidently with an online platform for payment management. Start your free trial of Uelz today and utilize all the advantages of direct debit and other online payment methods. You can control all your sales and payments in one place, and also save on commissions and costs.

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