The typical loan application-to-disbursement flow has many moving parts. Before a digital lender can make an informed lending decision, they must verify borrowers’ identities and quickly access their accurate bank statements and credit history, all in real time.
But this is only one end of the process. The second half comes when it’s time to collect loan repayments from borrowers.
Traditionally, lenders have relied on cards to collect these repayments when due. They often don’t work half the time; think of cancelled or expired cards, resulting in late payments and high default rates.
Now, lenders need better and more more guaranteed convenient ways to collect loan repayments, and are turning to Direct Debit.
What is Direct Debit?
Direct Debit is an automatic payment method that allows businesses to collect payments directly from customers’ accounts at scheduled intervals.
In contrast to cards which require users to manually share their card information to authorise the business to take recurring payments from their accounts, the authorization process for Direct Debit is different.
Consent is given through Direct Debit mandates. Here, the customer has to complete a physical or e-mandate form, which is then approved by their bank before any payment can be collected from their account.
How Direct Debit can work for lenders or BNPL operators
Direct Debit is useful for lenders and Buy Now Pay Later operators who need a faster and more seamless way to collect loan repayments at due dates.
Let’s consider a simple scenario of Direct Debit in play.
For example, if a Buy Now Pay Later operator, XYZ Ltd, has accurately assessed the risk profile appetite of a customer looking to buy a solar inverter worth N500,000 and considers them eligible for the credit.
The BNPL provider can then prompt the user to pay an upfront fee of N100,000 and spread the remaining N400,000 over 8 monthly instalments.
At this stage, XYZ Ltd can prompt the borrower to set up a Direct Debit mandate on their account, instead of adding a debit card they could easily cancel to get out of repaying the loan.
Once the Direct Debit mandate is set up, the business can automatically collect repayments from the customer’s account at the agreed due dates.
How Direct Debit benefits lenders or BNPL operators
Lenders, Buy Now Pay Later operators, or credit businesses who switch to Direct Debit for collecting automated repayments get benefits like:
Reduced loan defaults: Direct Debit payments are directly processed from one account to another, making them more reliable. This means you don’t have to charge missing, cancelled, or expired cards, and possibly miss the set repayment deadline.
Secure transactions: Cards have higher chances of being used in fraudulent transactions and unauthorised debits on customers’ accounts. This is because transactions can still be successfully processed with a stolen card. Direct Debit offers better security for customers, as their account and identity information are verified by the bank before any payment is initiated.
More convenient repayment experience: Direct Debit improves the payment collection experience for your customers and your business. With repayment schedules set on customers’ accounts, the borrower won’t have to repeatedly update their card information on file, and the BNPL service won’t spend time chasing payments, to ensure loan obligations are fulfilled.
Cheaper processing fees: Sticking with card payments means dealing with higher transaction fees from interchange fees to payment processor fees. Direct Debit payments are more affordable than cards with transaction costs as low as 1%, so you can collect faster, more secure payments while keeping your profit margins up.
Managing recurring payments with Direct Debit
If you’re considering using Direct Debit as an alternative way for your customers to repay you, you should pick a Direct Debit provider that offers a mix of flexibility, security, and reliability.
Other important features to look out for are their:
Bank coverage
Mandate authorization methods
Settlement schedule
Payment success rates
With Mono Direct Debit, you get a great mix of these features and other added functionalities.
In Nigeria, Mono is one of the pioneers of Open Banking-powered Direct Debit payments via the Mono Direct Debit product powered by NIBSS. This enables businesses in Nigeria to securely and more easily collect automated, recurring payments directly from customers’ accounts with their consent.
The typical flow for setting up a payment mandate with Mono Direct Debit looks like this:
The lender/business prompts the borrower to set up a direct debit mandate on their account.
The borrower/customer chooses their preferred bank and account type (personal, business, or joint account).
They enter their account details to verify their account ownership and complete the account linking process.
The borrower authorises the mandate by completing a transfer of NGN 50 to a NIBSS account (e-mandate), or via a signature which will be confirmed by their bank.
The setup process takes less than 2 minutes, and a processing timeline of 1 to 72 hours before the customer’s account is ready to be debited.
Mono Direct Debit also offers access to:
20+ financial institutions in Nigeria including traditional and non-traditional banks
Three ways to authorise a direct debit mandate (e-mandates and signature mandate)
Instant or next-day settlement, whatever your choice
A smart retrial system for automatically retrying failed transactions, increasing your payment success rates
More secure payment process: customers’ accounts and mandate details are double-verified and approved before any payment is processed.
Two methods for collecting scheduled payments: the Mono Direct Debit API or the No-code Mono Direct Debit Mandate setup.
Key takeaways
Here’s a quick comparison between cards and Mono Direct Debit for lenders who want to accept recurring repayments on schedule:
| Cards | Mono Direct Debit | |
|---|---|---|
| Authorization flow | Borrowers have to manually input their card information. | Borrowers fill out a paper or online Direct Debit mandate form with their account details. |
| Security | The chance of payment fraud and unauthorised debits are higher with cards. | Direct Debit payments are more secure and approved by both the customer and bank. |
| Transaction cost | The lender pays interchange fees that cost 1% to 3% of the transaction amount. | The lender pays a 1% fee for every transaction, capped at N1000. |
| Flexibility | The borrower has to regularly relink their card if it gets missing or outdated. | Bank accounts don’t expire and no future authorization is required for payments to work as scheduled. |
| Failure rates | Payments might fail often due to card expiry and cancellation. | Payment failure rates are lower, as funds remain accessible because the mandate is on a bank account. |
| Settlement timeline | Settlements usually take 1-3 business days. | Settlements are instant or next day. |
With Direct Debit, lenders are better positioned to provide personalised borrowing experiences to their customers and reduce their rate of non-performing loans. Here’s how Sycamore is recording higher repayment rates from using Mono Direct Debit. To achieve repayment success rates as they did and automate your loan recovery process, you can sign up here to start using Mono Direct Debit and check our technical guides at mono.co/docs.
