Thursday, January 23, 2003

Innovation: 3D model for direct debits..?

Yesterday, during a conference on mobile payments, a discussion took place on the (il)legitimate use of the direct debit system for debits over the internet. Officially there are no rules and consumers should abide with the old procedure (send a fax with their signature) to allow a one-time direct debit over the web. Unofficially all kinds of arrangements exist, some more explicit and open than others. It is for example possible to start a direct debit relation with the Chamber of Commerce, without fulfilling the necessary criteria (signature). Users get an id/password and can then order excerpts of the register. If problems occur, the Chamber of Commerce will take the loss.

Now in practice this specific Chamber of Commerce application works fine, but officially such practices are contrary to the joint direct debit rules of the banks. And a possible negative effect of these implicit/informal arrangements is that the direct debit product may be the victim of bad publicity as a result of bad informal practices in the market. If organisations do not have their back-office in working order but do use the direct debit system, a lot of work may occur for banks and consumers (basically the regular chargeback issue as a result of insufficient authentication or fraud). Consequently Dutch banks have set out to develop rules and requirements for the Internet-direct debit.

During yesterdays conference, it turned out that Dutch banks have not succeeded in establishing a workable model for Internet direct debit. And may need some more months for contemplation.... Yet, a possible solution may be to implement the 3D model and a liability shift for direct debits. How would this be done?

1. Formally, the current direct debit rules and regulations can be viewed as baseline rules and regulations, for which the responsibilities of issuing and acquiring bank are clear.

2. Individual banks may go beyond these baseline rules and allow all kinds of new products based on the direct debit, yet in those cases, these individual banks need to guarantee chargebacks and need to solve any problems that they may have created by geoing beyond the baseline rules.

In my view this solution may be a very workable solution, very much in line with the recent developments in the competition area and in other product domains (debit- and credit-cards). So I've suggested the bankers association to further explore the idea. Not only would it formalize current practices, it would also be a nice first Dutch innovation in the world of payments.