Mar 12, 2012
This article is by Heather Ballachey, Marketing and Business Development Specialist, and was originally published on TechSoup Canada's Learning Centre in February, 2012.
The world is bracing itself for a bleak year of minimal economic growth, unpredictability and yet another worldwide credit crunch that may bring banks to their knees. Sadly, Statistics Canada reported that the national debt-to-income ratio rose to a record 153% in the third quarter of 2011. The economic climate has a huge impact on how consumers – and donors – choose to make payments, submit donations and interact with their finances in general. Many Canadians may be reducing or eliminating their use of credit cards as a result of lingering economic uncertainty. Or, given the option, consumers may choose to use another payment method such as direct debit from their bank account. This may be a more attractive option for the many Canadians who are looking to close the gap on their debt-to-income ratio. Direct debit is also known as PAD (pre-authorized debit), EFT (electronic funds transfer) or ACH (automated clearing house). Direct debit as described in this article is not to be confused with using physical debit cards at a point of sale terminal (in the retail environment, for example) or Interac Online. This article will specifically discuss the benefits and potential drawbacks of offering direct debit from a donor’s bank account as a payment option for nonprofit organizations.
Benefits to Offering Direct Debit
For a nonprofit organization, offering direct debit is an incredibly cost-effective way to accept donations, especially for recurring payments or large transactions. Nonprofit organizations have been accepting direct debit payments in the form of a signed form and a blank cheque for ages, but the rise in popularity of electronic payments makes direct debit a great option for nonprofits to offer as a payment method on their online donation form. The fee structure involved with direct debit is typically a flat per transaction fee rather than a percentage of the volume processed (as is the standard with all major credit cards). This has a huge impact when you consider the recipient of the funds (the nonprofit organization) would pay the same transaction fee no matter the size of the donation, be it $20.00 or $2000.00. If those donations were made by credit card the nonprofit would pay standard merchant rates on top of other fees, depending on the agreement they have with their payment processor. In the end, the cost effectiveness of direct debit makes it an attractive payment option for nonprofit organizations to offer to their contributors. Another compelling benefit to offering direct debit as a payment option is the fact that people change bank accounts very infrequently compared to credit cards. In addition, with direct debit payments there is not an expiry date on the bank account like there is with credit cards. As a result, there will be fewer rejected transactions. Credit card expiry dates are a big factor in payment processing, especially with recurring donations. This in itself can have a big impact on the success of fundraising efforts. Background and Regulations in Canada Rules and regulations surrounding direct debit payments are regulated by the Canadian Payments Association (CPA) in Canada. There are clear guidelines and requirements established by the CPA for the payors and billers involved in a direct debit transaction to protect the interests of both parties. Direct debit transactions start with the payor (the individual whose bank account will be debited) authorizing the biller (the ‘payee’) to withdraw funds from their bank account. The payor and the biller have an established agreement that can be in the form of a signed document, a completed website form or a documented verbal agreement over the telephone. The CPA refers to this as the PAD agreement. The CPA recommends the payor to keep a copy of the e-mail confirmation and check their statement regularly to confirm the withdrawals are being made in accordance with the agreement. The following elements need to be included in an organization’s online donation form if they wish to offer direct debit: The amount of the debit In the case of a recurring donation, the debit will be for a fixed amount. The frequency of the debit The online form must indicate the frequency of the payment (typically in the form of a timetable). Cancellation policy Specific cancellation procedures should be outlined as a best practice. Recourse statement The payor has recourse rights if any debit does not comply with the agreed terms. For example, the payor has the right to receive a reimbursement for any PAD that is not authorized or is not consistent with the PAD agreement. Potential Weaknesses or Drawbacks Although direct debit is an incredibly secure and cost-effective way to make and accept payments online, there may be individuals who are uncomfortable with the idea of entering their bank account information into an online form due to perceived security concerns. Additionally, the process of entering all of the required details for direct debit into an online form may be intimidating. In order to submit a direct debit payment in Canada the payor has to enter the transit number, bank number and account number associated with their bank account into the direct debit form. A suggested best practice is to minimize this intimidation factor is to offer a visual representation of a printed cheque to identify where to find the bank account details. Regardless, entering bank account information will likely take the average donor longer than inputting their credit card number and expiry date. It’s difficult to measure how many donors will simply give up before completing the transaction. The David Suzuki Foundation and Unicef Canada have both made an effort to make the direct debit portion of their online form as user-friendly as possible in order to help minimize donor drop-off. Most payment processors will remit funds processed by direct debit within 4 – 10 days, which is significantly longer than the typical remittance schedule for payments made by major credit cards. Additionally, it’s not possible to provide real-time or instant approval for direct debit payments. It could take anywhere between 3 – 45 days to decline or return the transaction if the donor enters their bank account details incorrectly or does not have adequate funds. There are fees involved with returned direct debit payments, just like there are fees involved with credit card chargebacks. Unfortunately, the window to identify and correct a declined direct debit transaction is much longer than with credit cards. Getting Started with Direct Debit Nonprofit organizations who wish to offer direct debit as a payment method can first start by approaching their current merchant services provider to see if they offer direct debit processing services. Additionally, all the major banks in Canada offer direct debit or EFT processing services, so it could be worth looking into what type of services are available through the nonprofit’s existing banking relationship. In Summary The economic outlook for 2012 and beyond may be full of doom and unpredictability, but one thing that is certain is the fact that many Canadians will continue to think differently about their finances and the way they choose to make payments. Offering direct debit as a payment method (especially in an online payment form) is a safe, efficient and cost-effective way to support online fundraising efforts.