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How do I handle ACH or Direct Debit payments that are reversed?

Overview

Direct debit is a way of collecting payment from a customer by pulling the funds directly from their bank account. Direct debit is referred to by different names in different countries, for example, in the United States it may be referred to as ACH and in the United Kingdom it is called direct debit. One of the most powerful benefits of direct debit payments is that it there is a fixed transaction fee, which can be substantially less than the fees for credit card processing.  Comparatively, credit card fees are typically based on a percentage of the sale amount.  So, if you have a $1000 payment, a merchant could pay $30 in credit card fees (using 3% as an example) or .50 in direct debit fees (using .50 as an example).

Another key difference between credit card and direct debit processing is the nature of the approval process. A credit card transaction is immediately approved for payment, which means that the account is good and there is an available balance. With direct debit transactions there is no immediate approval for a payment.  Instead, the direct debit network will respond with an initial approval or decline after checking the format of the bank account number and transit routing number as well as other specific direct debit information. That initial approval from the direct debit network creates a payment tranasction with Processed status in Zuora. A processed payment in Zuora will decrease the invoice balance, just as it would for a credit card approval. Similar to the way a check is handled, you can accept and process the check and in 5-7 days, you will be advised if the payment was rejected or reversed (did not settle) or was accepted (settled) by the bank. Reversals may occur due to different reasons such as insufficient funds or a closed account.

When a direct debit payment is reversed, it is important to take the appropriate actions within Zuora to reflect the reversal. The steps and considerations for managing reversals in Zuora are outlined below.

Solution

One might be inclined to believe that a direct debit transaction is not truly processed until you are positive that the payment was successful and has settled. However, this is not correct. For example, if you go to your ATM and deposit a check, your account balance will immediately reflect that transaction. If the check bounces a few days later, the payment does not settle and there there is a reversal, your account balance will reflect the reversal and will be decreased.

Create an External Refund

When a reversal happens, the first thing you need to do is to reflect the reversal on the invoice balance. Because the payment has been applied to the invoice, we need to "credit" the payment. In Zuora, a refund is a credit to the payment. This allows you to model reversals, refunds, and other types of credits. You can create an external refund which "credits" the payment and updates the invoice balance accordingly (in other words, the invoice balance is open).

Considerations When Managing the Reversal Process

Managing reversals from an Accounts Receivable perspective is fairly easy, but we recommend that you think about your business process associated with this reversal, such as:

  • Process another payment, perhaps using a different payment method.
  • Create an invoice or invoice item adjustment (if you do not anticipate that the customer will pay their invoice) and you want to write off the invoice balance.
  • Contact the customer.
  • De-provision or remove the customer's access to our services.

Zuora recommends that you use a custom field called Reason Code on all refunds to track the type of refund. Custom fields help drive reporting, because the reversal is reflected in a separate object. You can report on the time it takes to get the reversal as well as how often a customer reversals occur within your customer base.

Last modified
08:38, 20 Mar 2015

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