What is Automatic Debit? What are the reasons for low auto debit adoption rates?
Automatic debit, or auto debit, is a payment method where the paying entity authorizes the biller (or receiving entity) to automatically withdraw funds from their checking account or credit card account on some regular basis.
The pre-authorization process usually involves having the payer fill out and mail in a paper form indicating their desire to allow the auto debit by the biller, and the biller typically will require that the payer attach a voided check to the authorization form. The voided check is used to verify that the person requesting the auto debit is the actual holder of the account, and it’s also used to avoid keying errors that can be encountered when the payer manually enters the check information from the MICR line themselves.
In some cases the biller (or whoever is processing transactions on behalf of the biller) will attempt to do a pre-note transaction against the payer checking account prior to actually enabling the real debit to the account. The pre-note process is designed to allow a biller to send a non-financially impacting transaction to the institution that owns the payer checking account, and to receive back a positive or negative response from the bank as to whether the account is valid and able to be debited. The pre-note only gives the biller an indication that the account is in good standing for a potential debit, but doesn’t give them any indication about the amount of funds that are in the account or whether the actual debit will be successful or not.
Billers love auto debit when they can get consumers to sign up for it. It puts them in control of reaching out to the payer's checking account and withdrawing money on a set schedule as opposed to waiting for the payer to send a check in. It also helps them manage and predict cash flow. Aside from those advantages, it’s often the least expensive option that they have for collecting money owed to them, especially if the auto debit is a checking account debit as opposed to a credit card transaction. Some industries offer incentives to consumers to sign up for auto debit. Often, loan providers will offer a slightly reduced interest rate for consumer loans in return for the consumer’s agreement to pay the loan using an auto debit or automatic draft process. Other industries, such as health and fitness clubs, have taken a stance that they won’t provide their services to the consumer at all unless the consumer agrees to an auto debit payment plan.
For the majority of billers trying to sign up consumers for an auto debit payment plan, adoption levels have been relatively low when compared to the other ways that a consumer might choose to pay for services. Property management companies (apartment owners) have been trying for years to get their residents to pay this way, and have been largely unsuccessful. Research has indicated that overall consumers don't care for the loss of control that they experience with auto debit payment plans. If they are short of funds in their bank account on the day when their biller goes to collect, they subject themselves to overdrawn account fees from the bank as well as late fees and other charges that the biller may decide to impose. Also, although it can be really easy for a consumer to sign up for auto debit with a biller, it's not always as clear to them as to how to get the auto debit turned off once they have authorized it.
There are service providers that sell auto debit services to particular vertical markets, or you can buy auto debit services directly from your bank and get guidance from them as to what internal processes and capabilities you would need have to implement such services.