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Banks cream it off bounced debit orders

Fees charged by banks for bounced debit orders range from R5 to R115.

Banks are raking in between R500 million and R800 million a month from bounced debit orders. That’s a sizeable portion of the banks’ non-interest fee income each year for little more than running a piece of computer code.

Fees for bounced debit orders range from R5 for Capitec clients to R150 for Absa and Nedbank clients. The question arises why the fees vary from the reasonable to the ridiculous.  

It’s a question bank customers in Australia, New Zealand and the UK started asking several years ago, leading to class action suits against the banks in these countries. The class action suits in the UK and Australia failed because the courts found the fees for bounced debit orders and other charges reasonable if they formed part of a basket of services. SA’s financial regulations are less prescriptive, so the chances of a class action suit succeeding here are much better, according to financial services legal consultant, Leonard Benjamin.

The Competition Commission investigated banking charges several years ago and recommended capping bounced debit order fees at R5 per item. “We have no reason to believe that, currently, banks would be unable fully to recover their costs ordinarily incurred in respect of rejected debit orders within such a cap,” concluded the Commission. “Such a cap should be imposed by regulation. It should apply to both savings and current accounts, and to ordinary as well as early debit orders. Banks, which incur additional expenses or losses in particular cases through their customers’ default in respect of debit orders, can terminate those customers’ accounts and/or sue for damages.”

Benjamin, a former national judoka who trained in martial arts in Japan before becoming a senior legal advisor to financial services companies, says the banks (with the exception of Capitec) failed to implement the recommendations of the Competition Commission because it is a cash cow. “We know that about 10% of the 33 million debit orders processed each month bounce for various reasons, usually insufficient funds. Customers are then charged sometimes more than R100 for reversing a single bounced debit order transaction. If there are multiple bounces, the fees can run much higher than this. The banks claim these are penalty charges intended to promote more virtuous behaviour by clients, but the effect is to further drive the client into financial difficulty, making it more likely their debit orders will bounce the following month. It’s great business for the banks.”

Benjamin estimates fees from bounced debit orders alone range between R6 billion and R10 billion a year for the six largest banks. That’s not counting fees for debit orders that are processed successfully. Non-interest income for the six largest banks came to about R120 billion last year, so the debit order bounce business is not something they are likely to give up without a fight.

According to the Payments Association of SA (Pasa), 33.5 million “normal” debit orders are processed each month, and a further 14.7 million so-called “early” debit orders.

Benjamin started to look into debit orders when his wife was the victim of a fraud. Illegal debit orders were being run through her Standard Bank account for the benefit of three “service providers” named as HotspotteryYD, PHOB YD and Somu YD. When she contacted the bank, she was informed that several other clients had suffered the same fate, but that there was nothing the bank could do, as more than 40 days had elapsed since the debit orders were processed.

Benjamin’s wife then escalated the matter to the bank’s Complaint Resolution Department, which stood by its position that 40 days had elapsed since the debit order was processed, so there was nothing it could do. For future debit orders, however, it could assist her at a cost of R52 per item, provided she visited her branch two to three days prior to the debit orders being presented. And if she wanted help in tracing the company presenting the fraudulent debit orders, it would be happy to so for a tracing fee of R26 per transaction.

In a written response to the query, the bank replied that it “merely fulfills the function of payment facilitator…. A debit order is an agreement between the accountholder and an external company in which the customer would authorise such service provider to debit an amount from his/her bank account. The debit order is not a contract between you and the bank, and the latter is not a party to the agreement at all.”

In terms of the rules of the Payment Association of South Africa, if a customer disputes a debit order after 40 days, the customer’s bank is required to give the bank presenting the debit order (the sponsoring bank) 30 days’ written notice to prove the validity of the transaction. If the sponsoring bank does not respond within 30 days, the funds must be manually returned to the customer’s account.

Incensed at the bank’s apparent refusal to abide by Pasa rules, Benjamin took the matter up with the Banking Ombud, who exonerated the bank of any maladministration. Standard Bank eventually refunded the fees charged as a “gesture of goodwill”.

“The main difficulty that consumers experience once a bank refuses to refund debits is that the amounts are relatively small so instituting legal proceedings, even through the Small Claims Court, to recover the amounts unlawfully deducted from their bank account is not viable. Under those circumstances, the Ombudsman’s office is a final resort for many customers, so it is imperative that it holds the banks accountable,” says Benjamin.

With as many as 1 million debit orders being disputed each month, this means the banks are having to resolve around 40 000 disputes a day. “The industry is clearly overwhelmed and as a result resorts to obfuscation and misdirection,” he adds.

The tendency of South African banks to charge a fee for almost every service associated with a bank account sets them apart from banks in many other countries, according to the Competition Commission inquiry into banking.

The findings further state: “We find that pricing decisions of the banks are driven by a number of considerations but are generally constrained only by what the customer will bear.”

The Banking Association referred questions concerning the industry’s lack of action on the Competition Commission’s findings to Pasa, which referred the same questions to the individual banks.

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and the big 4 wonder why they become the “client cow” for Capitec, it’s just a matter of time and Capitec will have complete control over the 10% of the 33 million bounced debit orders @ R5,…clever,..thinking ahead.

Well, not if this advantage gets regulated away in the mean time.

And all the court cases associated with debit orders?

I am curious – do banks even want to do debit orders? What are the profit margins here (debit orders in general, not defaults)? It might also be a question of being selective about which customers they will allow debit orders for.. If there is a threat of a large penalty due to default, some people may go to a different bank.

I also understand that there are some cases of fraudulent debit orders occurring, but surely this is the minority of cases. I would be willing to bet that most defaulting debit orders are due to people extending their credit lines too far and/or not keeping enough money in their current account to meet repayments. So in essence it comes down to poor money management and not properly understanding or appreciating that repayments have to be made. When it comes down to choosing between having cash to pay one’s debit order or put food on the table, it is an understandably tough choice..

From my personal perspective, I see nothing wrong with it. Banks are not charities. But I can understand that some people who have been negatively/fraudulently affected may have an issue.

Moral of the story? Do not buy what you cannot afford and then come crying afterwards that you were penalised for defaulting.

This is legalized pick-pocketing, period. And because it is legalized, they are getting away with a killing (crime essentially)!!!

and if my debit order goes through ABSA charges me R51.00
so just imagine what their income is on debit order charges?

Thats nothing, say you get funds credited into your ABSA account, determine how much that costs and you will be shocked. Money-grabbing unsustainable practices.

I forgot about that. FNB charges my business bank account R 20 cash deposit fee if I deposit R10.

This is one way the banks make money out of people that don’t have money. And it is amazingly easy – simply debit their accounts. No sending out of invoices, no debt collection process, nothing. Just take it. As the author says: making money out of running a piece of software.

I am thinking of just moving to Capitec once but they have only 1 type of account isnt it? I want prestige banking asseblief or private clients option at capitec.

If you want to feel more important than the rest, stay where you are and pay the price. Banks make a lot out of people’s selfish need to be treated better than others.

I live in Belgium. Annual bank fee is 30 EUR. Zero transaction fees. Can draw cash at ANY ATM throughout the EU with no fees. SA banks are ripping off the public in a BIG way.

I was recently charged R185.00 for a bounced debit order by the gangsters at FNB.
This despite the fact that my other accounts with them were in credit by over a million Rand at the time.
I had merely forgotten to transfer funds from another account in order to meet insurance debit orders.
I will never again sign a debit order for any supplier.
Debit orders as a banking product were suitable in the days before EFT, they are no longer needed.
I’ve been in the management car park at FNB head office and I saw where my money is going.
I’ve never met a poor banker.

Use the principle of set off and your problem is solved
It’s like speeding fines ignorance or lack of attention is not an excuse

I shifted my account to Capitec in 2006. My banking costs at that time was around R180 per month. At Capitec, I maintained a minimum balance of R4000. I used to get about R26 of interest per month. My costs at Capitec was around R16. Adding the R10 saved from my interest to the R180 charge, I have saved R190 X 12months X 11 years, which is R25080 in total. n.b the savings are in my top40 Satrix portfolio (totals savings of R51000 at 12% returns).

I now use the money saved to visit our national parks. Being a retired person, my monday to friday accommodation is subsidised by 50% by the parks.

It’s even worse than what you guys think!!!
The banks not only charge the customers but also charge the other bank that processes the debit order. Also the banks, particularly FNB and Capitec, make the option to bounce or reverse a debit order so easy and they in some curcumstances use scorecards and pro active messaging to push customers to bounce the debit orders so they can make money.
I know this for a fact as I used to be very involved in the debit order industry.
It is despicable behavior. Even capitec is a partisan tin this and in fact they are the worst culprits.

Let’s call it what it is. Fee skimming. I will not engage with a service provider that insists on debit orders, and would rather go elsewhere. The risk and propensity for abuse it too great. The bank services are designed to punish you for any momentary lapse in concentration on your part. A prime example is on mobile banking, certain banks default the source account for transactions to your credit card and must be manually changed, because they know it attracts high fees if you one day forget. Simple things to make the user experience seamless are subverted to trick you for fees, and we pay them for this.

As an ex banker what really is at play here is poor financial management by the client, and for that a penalty is appropriate. Whether the fee is appropriate as a penalty – not it is not the banks are acting like highway robbers, in my day 3 returns and the account was closed for unsatisfactory conduct

Nonsense!!! I expect the bank to be a transactional service provider that charges fees in line with the cost to render the service, ie. running a piece of software that simply pays out if the funds are available, and rejects the payment if not. The debit order fee of around R5 is a good indicator of the cost to provide the service of rejecting a payment. If any penalty for non-payment is owed, then it should be to the intended recipient of the payment to compensate for the time value of the money owed. For the bank to act as a police force, self-righteous judge, jury, executioner, admonishing preacher and sneering toll collector… that’s just way out of line. Do you still wonder why Capitec is gaining a loyal client base?

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