Reapit is exploring ways to mitigate the impact of a tenant fee ban
Direct Debit has, traditionally, been considered a risky payment method for rent collection. However, in February 2017, the rules for Direct Debit payments were changed, closing some loopholes which posed these risks. With a tenant fees ban looking increasingly likely, could Direct Debits offer agents a way of mitigating significant costs?
Standing Orders – tried and trusted
At present, most agents encourage tenants to pay their rent by Standing Order. It is a tried and trusted method of rent collection, where the tenant issues an instruction to their bank to send a specific amount of money to the agent on a specific day each month. This certainly sounds simple, but in practice it can lead to a multitude of potential risks.
Despite Standing Orders being a robust method of payment once they are established, most agents will have experienced issues with administration and arrears from hurdles such as an incorrectly completed form, or it being sent to the wrong branch. More recently, some agents have left it to tenants to set up their standing order payments using online banking, with the tenant providing screenshots to the agent as a proof of mandate. Although this removes some of the administrative burden, the significant pitfall of tenant arrears remains. Standing Order payments are subject to delays and confusion, simply because the agent has absolutely no control over them and so has no visibility of delays until after the fact. This means that chasing arrears is highly reactive and can be costly, both in terms of staff time and landlord confidence.
Direct Debits – a new landscape
From 1st February 2017, BACS changed how the DDIC (Direct Debit Indemnity Claim) is handled and have introduced new protection for service users – there is now a finite timeframe for an DDIC and clear supporting evidence is required from the customer prior to the claim, plus it gives service users the right to counter claim immediately, making it much more robust. The upshot of this is that Direct Debits are now viable, as the agent is more protected using this method than they have ever been.
Benefits to agents
CONTROL – the agent can take back control of the collection of rent, rather than rely on the tenant to pay it.
AUTOMATION – the collection of rent can be highly automated with Direct Debit, requiring one batch process to be run per day for the collection of all rents due on the agreed collection date.
EFFICIENCY – Direct Debits are highly efficient, because they collect what is due rather than a fixed amount, they can be easily adjusted and efficiently handled on renewal. Direct Debits also do not require any manual input as they are automatically matched to the corresponding tenancy.
SCALABILITY – whether you are collecting five or five hundred pounds, the Direct Debit process is handled in the same way and takes the same amount of time, making it a very scalable collection method.
PROACTIVITY – if an agency has a problem with tenant arrears, then Direct Debit can be prevention and cure. It prevents arrears situations arising in the first place, by giving the agent control over the collection and can alleviate arrears situations by giving the agent the chance to pro-actively manage credit control.
The potential savings of switching to Direct Debit payments are significant. Not only do they have the potential to eliminate repetitive, manual processes, but they also have the potential to minimise tenant arrears. In a time when every letting agent is concerned about the impact of a ban on tenant fees, Direct Debits could go some way to mitigate the impact of a ban through greater efficiency.
Reapit’s Client Accounts solution is fully compatible with Direct Debit payments and this works well with our ongoing commitment to reconcile every client account to the penny, every day. Reapit have been helping several major clients to migrate to using Direct Debit and the early signs are very encouraging, with one client processing over £1m in rental payments via Direct Debit in just 15 minutes.