Repeated payments through electronic mandates

A good number of businesses have recurring receivables. A products company earns annual maintenance, which as the name suggests, accrues each year. Lenders get their principal and interest paid in a fortnightly or monthly repayment cycle. Insurance companies receive their premiums monthly, quarterly, half-yearly or annually. Utility companies like electricity or internet service providers have monthly receivables, though the value of receivable changes based on the utilization of service.

Imagine a retail customer who is likely to have all these payments to make at different frequencies and at different dates. It is not easy to keep track of all the payables and make the payments on time each week or month, the consequence of which is usually penal charges levied on her. Enterprises of all sizes have similar necessity to keep track of all their repeated payables such as office rent, debt repayments, utility payments, card dues, and many more. Substantial effort and mind space are invested in tracking these payables to avoid penal outflows.

Whilst such are the challenges at the payer’s end, the recipients of such payments as well are subjected to substantial hardships. To a utility company, each bill that is not paid on time leads to reduced inflows against the plan. This widens the gap between funds in hand against commitments. The company needs to bridge this gap through short term funding which usually comes at a high price. Besides, the company must spend on reaching out to the customer to recover the payment too. Hence the cost of a failed receipt is exponentially higher to the enterprise.

We have now established that it is to everybody’s benefit when payments are automatically made and received on the due date. But how best can we achieve this? One of the best and most preferred means to achieve this is to follow the mandate-based payments process. Mandate based payments are otherwise called as Automated Clearing House (ACH) payments. It is also called the National Automated Clearing House (NACH) payments.

It is, in essence, payments mechanism by which the payer can issue what is called a mandate to her bank. The mandate instructs the bank of the payer (called the destination bank) to accept a payment request from a specific entity (individual/corporate) on a given date or at a given frequency, for a given amount, debit her account, and credit the recipient. The recipient could have a bank account at another bank. Hence the recipient will send the payment request through his bank which is called the sponsor bank.

The destination bank reviews the mandate and validates the sponsor bank code, account number of the payer, frequency of payment, date of the month (if the payment is to be made monthly). Once satisfied, the destination bank sets up this mandate in their database and communicates the same to the sponsor bank through the central NACH processor.

At this moment both the destination bank (the bank which represents the payer) and the sponsor bank (the bank which represents the recipient of payment) are aware and agree that a payment transaction is expected at a given frequency and value between the two banks on behalf of their customers.

The recipient (usually an enterprise) needs to initiate a payment request referring to the same mandate and send the request to her bank (sponsor bank).

The sponsor bank verifies whether the details of the payment request matches with the mandate set up earlier. Once satisfied, the sponsor bank forwards this request to the destination bank through a central ACH processor.

The destination bank verifies the request against the mandate setup in their database. Once satisfied, they debit the payer, credit the sponsor bank, and communicate their action to the sponsor bank, through the central ACH processor.

The sponsor bank credits the recipient account and conveys the status to the recipient.

All of the above is done electronically and with very low or no manual intervention. The payer need not remember the due date each month and make a payment. All she needs to do is to keep her account sufficiently funded so the due amount could be debited automatically.

The process above is generally called ACH processing. ACH processing is domestic to each country. In other words, payments cannot be made across countries through the ACH mechanism. The central ACH processor is usually owned, or sponsored by the central bank of the country which implements it. Different countries give different names to this process. In the USA it is called NACH and the guidelines are defined by a not-for-profit institution called NACHA. In India, the same process is called NACH. National Payments Corporation (NPCI) is responsible for the central ACH processing in India. In the UAE, it is called UAE Direct Debits and it is implemented by UAE Central Bank (UAECB).

One important aspect of the mandate set up involves authenticating the payer. In other words, both destination bank and sponsor bank need to be sure that the payer is a valid entity, she holds a valid account at the bank she refers to as the destination bank. Many mechanisms have been established to authenticate the payer. In India, there are four different processes by which the mandate can be set up. Each process uses its own mechanism to authenticate the payer. Let us see how they work.

Variant 1: Paper mandate process. The customer fills out a physical form instructing his bank (the destination bank) to accept a payment request coming from the recipient enterprise represented by the sponsor bank. The destination bank verifies the contents physically including the signature, sets up the mandate and communicates the success to the sponsor bank through NPCI.

Variant 2: eMandate process: The payer uses his internet banking to set up a mandate instructing his bank to accept the payment requestcoming from the specific entity represented by the sponsor bank. The destination bank verifies the form, sets up the mandate and communicates the success to the sponsor bank through NPCI. This is simply the electronic process of Variant 1

Variant 3: NPCI Mandate approval gateway process: The recipient enterprise offers a portal with all the mandate details. The payer verifies and authorizes the mandate. The information is passed electronically to the payer’s bank (the destination bank) through NPCI’s gateway. The payer authenticates the mandate through his internet banking credentials. The destination bank electronically verifies and sets up the mandate and communicates the status to the recipient enterprise through NPCI.

Variant 4: eSign Mandate process: The recipient enterprise presents the mandate details in a portal and the payer authorizes the details. The portal forwards the authentication request to one of the licensed eSign Service Providers. The eSign service providers receive confirmation of identity from the UIDAI (Aadhar) database. Once the identity of the payer is authenticated, the enterprise forwards the mandate to the destination bank through the sponsor bank and NPCI. The destination bank verifies the mandate information, sets up the mandate, and reverts with the confirmation.

The first three variants of setting up mandates have been in practice for a few years in India. However, the 4th variant above, which is the eMandate through eSign service providers is introduced recently with the objective of taking advantage of the UIDAI database. The defining advantage of this variant is that the recipient enterprise can verify the details of the mandate upfront even before the mandate set up process is initiated.

This has two major benefits.

  1. The mandate verification and set up process takes anywhere between one to five days. This amount of time is wasted if the mandate authentication cannot be established. The eSign mandate saves this time and the corresponding cost of processing.
  2. This variant reduces the involvement of the payer to just submitting the mandate details. The payer need not authenticate through her internet banking credentials. This adds to the convenience of the customer.

As enterprises recognize the importance of mandate-based payments processing to their cash flow management, the volume of mandate-based payments is growing exponentially in India. Here is a graph showing how mandates-based transactions have grown over the last 6 years in one of the leading banks in India.

If your enterprise needs to receive repeat payments from same customers and if you have not been using the ACH payments mechanism for such payments, it makes perfect commercial sense to quickly switch to electronic mandates-based payments processing.

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