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CBN’s 1% Charge On Failed Direct Debit Transactions: What It Means For Bank Users

How CBN's 13% Interest Rate Increase Directly Affects You, CBN to Charge 1% on Failed Direct Debit Transactions: What it means for Bank Users

Are you aware that the Central Bank of Nigeria (CBN) will now charge you for failed direct debit transactions?

The new policy, contained in CBN’s updated guide (PDF), will apply to every account holder in Nigeria.

According to the guide, bank customers will be required to pay 1% of the failed direct debit amount as penalty.

Mind you, the guideline doesn’t only apply to bank customers but also other financial institutions, including fintech companies.

Currently, the guideline is already effective in some banks like Stanbic IBTC. Some customers of the bank have started receiving mail notifying them of the new policy.

Titled “Fund your account always to avoid penal charges,” Stanbic IBTC notification mail shared more insight on the new policy.

In line with the CBN’s Guide to Charges, a failed direct debit transaction resulting from an unfunded account is liable to a charge of 1% of the transaction amount or #5,000 – the higher amount is applicable,” the mail reads.

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CBN Governor, Godwin Emefiele

The bank further urged its customers always to have their respective accounts funded to avert the said charges.

Although the said guideline has been issued since December 2019, it is only playing out recently.

What exactly is direct debit and how does it play out?

Similar to the traditional debit transaction, direct debit is a pre-instruction from you (account holder) to your bank to debit your account of a fixed amount on a scheduled time frame.

Usually, a direct debit authorises a third-party, e.g., a loan company, to collect payment from your account when due.

In most cases, you are mandated to fill a form of authorisation either online or offline to complete the instruction.

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How does it play out in this case? The CBN wants to ensure that remittances of direct debit transactions are made as at when due.

From our discovery, we realised that many account holders flout the direct debit policy.

The reason behind this, however, cannot be far-fetched, considering that majority of the account holders operate multiple accounts.

The introduction of the penal charges is, however, the apex bank’s attempt to clamp down on the illegal practice.

How exactly will the penal charges be debited? You may like to ask.

Quoting industry sources, an additional fee of #5000 or 1% will be deducted from your account once you miss a scheduled remittance date.

Mind you, a 1% fee will be charged on amounts in which the 1% charges surpass #5,000.

For instance, if your direct debit instruction of #20,000 fails on a scheduled date due to insufficient funds, you will have to pay an additional #5,000 when next your account is funded.

Where the direct debit instruction is or higher than #500,000 for instance, only 1% of the amount will be charged.

How does the not-so-new policy affect bank users?

Although very unlikely to affect most bank users, some selected users may be affected for various reasons.

Again, direct debit isn’t a mandatory payment, as it requires the express approval of the account holder.

CBN to Charge 1% on Failed Direct Debit Transactions: What it means for Bank Users

Source: Connect Nigeria

The category of people that may be concerned about this policy include the following set of people:

  • Anyone who borrows from a third-party loan company that requires the authorisation of direct debiting.
  • Those making an installment payment for a previously acquired item or property. Here some third-party vendors may require you to sign a direct debit authorization form.

There is, however, an exception to this policy, at least in the meantime.

Further sources said that recurring payment channelled through gateway payment platforms like Flutterwave and Paystack may be exempted.

Flutterwave said that “it had no update regarding the issue.”

On the other hand, Paystack stated that “the fees on failed direct debit do not apply to recurring payments processed on their platform.”

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Direct debit refers to standing orders customers make at their bank, and it requires written authorisation to the bank,” Paystack detailed.

Currently, the policy has barely reached its maximal point of implementation among financial institutes. As such, more insightful updates on this will be shared in subsequent publications.

An extension of government’s plan to regulate the lending sector

This is not the first time that the CBN will make an attempt to clamp down on chronic loan defaulters.

Recall that the apex bank recently issued a guideline aimed at reducing non-performing loans in the banking sector.

The guideline that was issued in July, according to CBN, will allow the apex bank to monitor chronic loan defaulters.

More so, the guideline also gave banks the authorisation to debit loans and accrued interest due across the Nigerian banking system.

For instance, if you collected a loan from your GTB, and failed to fund your account; the management of GTB can debit you from your Access bank account if it’s funded.

Now, the implementation of the direct debit policy will only be an extension of the Global Standing Instruction (GSI) policy.

This is because both policies are aimed at the same course – clamping down on chronic loan defaulters.

What Techuncode thinks

Clamping down on chronic loan defaulters is not a bad idea; however, this could backfire in other ways.

While there is no real justification for defaulting on a loan term, living in a country that is currently battling with her worst recession in over four decades suggests otherwise.

To shed more light on that; Q3 2020 Real GDP contracted for a second consecutive quarter by -3.62 percent.

What this means for an average Nigeria beyond the unknown, is very low spending power.

As such, it will be unfair for the government to exert excessive force on loan defaulters without rendering adequate assistance.

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More so, this excessive clamping down on loan defaulters could render the effort towards cashless policy useless.

With the realisation that banks can debit across multiple accounts of an account holder, people will result into cash-at-hand, where possible.

CBN to Charge 1% on Failed Direct Debit Transactions: What it means for Bank Users

Source: Bloomberg

Otherwise, people may indulge in fund diversion, where a person requests to be credited in a third-party account.

Either way, none of this may be healthy for the resuscitation of the Nigerian economy as intended by the apex bank.

We believe that if the government channel more effort into increasing people’s spending power, things might just play out differently.

What do you think about the implementation of the direct debit policy? Kindly share your thought with us in the comment section below.

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