Dubai: The new Direct Debit System (DDS) will change the payment culture in the UAE, said a senior banker. Although there are lots of questions surrounding the process, the UAE Central Bank is trying to make it as smooth as possible, Shaikh Abdul Karim, Senior Vice President and Head of Operations Control Division at Sharjah Islamic Bank, said in an interview with Gulf News.
“This system will help create a database for the credit bureau in the UAE which is common in a developed economy. This will discipline the customer in terms of managing his/her finance and expenses,” he said, while explaining the UAE Direct Debit System (UAEDDS) in detail.
Karim, a veteran banker, serving the UAE’s banking sector for nearly 25 years, spoke at length in explaining the DDS.
Following are the excerpts:
What is the Direct Debit System? What sort of payments would come under the purview of the Direct Debit System?
Direct Debit System is a new means of payment. It’s a paperless transaction between the payer’s (customer) bank and the beneficiary’s (service provider or originator) bank on an agreed regular payment transaction where the payer allows the beneficiary’s bank to collect money regularly (monthly, quarterly or half-yearly) from his account.
These could include payment of house rent, school fees, auto loan, mortgage etc. where the amount payable will not vary. This could also be applicable to the payment of utility bills, insurance premiums, credit card bills where the payable amount might vary.
How does it work — from a consumer’s point of view?
The Direct Debit System is a batch process, using a standard file format, designed to process electronic files relating to multiple payments from payers’ accounts in various banks. The system provides the framework under which banks enable Originators or Service Providers to collect amounts due from Payers in an efficient and cost effective manner.
As per the system, the customer or the payer will sign bank documents giving the details of the services procured — be it auto loan, mortgage, house rents or fees — authorising the bank to release it. The Beneficiary (Service Provider) will do the same authorising his/her bank to collect the money from the payer’s account. The beneficiary’s bank then regularly receives the money from the Payer’s account through the UAEDDS.
What is the difference between the current Standing Instructions on payments with the Direct Debit System?
In a Standing Instruction — a customer advises his bank on regular payments. So his bank pays. However, under a Direct Debit System, the beneficiary’s bank is given the right to collect payment from the payer’s account. So, under the Direct Debit System, the beneficiary’s bank collects the money. For a customer — it’s almost the same — in reality.
What are the benefits for the customers?
A customer need not worry about remembering to pay at the right time. The only thing a payer needs to remember is that there is sufficient cash in the account to cover the payment. The customer does not need to write post-dated cheques, neither is there any need for the beneficiary to submit and process the cheques. It eliminates the need for the beneficiary to queue up at payment offices, banks, exchange houses or post offices to realise the payment. There is a substantial reduction in the cost of collection that should benefit all payers and receivers.
Does this mean that the banks and customers do away with cheques? Are cheques going to become redundant?
Almost. I do not foresee the need for issuing cheques. In fact, the whole idea is to promote paperless or chequeless transactions. Cheques might still be needed for larger business transactions. But for a retail customers, there won’t be a need to issue cheques.
What happens when someone fails to make the payment – or the account lacks sufficient balance to honour the payment?
We believe all customers are responsible people. You do not make commitments for payment if you do not have the means to support this. However, there are uncertainties. Banks are left to their choice of handling for the non-payments. Similarly, service providers will also act as per their policy. For example, if a consumers fails to pay the etisalat bill, the customer will be denied the services, after a certain period.
Would the fine/penalty vary from bank to bank — or will this be uniform across the banking system?
For a retail customer the charges for a returned cheque is Dh100. However, banks will later decide on their course of action.
Cheque bounce used to be a criminal offence. Could the beneficiary’s bank take the payer to court for failing to honour an instalment or two?
There cannot be a police case in case of return of instalment. But the bank can take the matter to the court to file a civil case. Usually banks want to settle the outstanding amicably with the customer. But for sure, since this will be recorded with the Central Bank, the customer’s credit rating will be affected. Hence, the customer will be more careful to fail in his obligation to pay.
How complicated is this transition? Are the banks ready to launch the system on deadline — June 15, 2013? How is your bank’s preparedness?
All banks are coordinating with the UAE Central Bank which is conducting periodic meetings with banks on operational procedures and changes. Most of the banks are hiring vendor solution to be integrated to their core banking to accommodate this change. The customer and service provider learning process may take some time. It should be a smooth transition although there are lots of back-office preparations happening already.
Should we be worried?
Not at all. In fact, as a customer, you should be happy with the new system. It eliminates extra hassle and headache for you. The only headache is when you do not have sufficient balance in the account. However, we are there to help you out while in stress. After all, who could be a better friend in need than a banker, indeed?
Is this system unique?
The system has been in operation in developed countries for years. It’s new for this part of the world. It’s unique because, it has some unique features — from a banking operations perspective as well as the service industry.