Incoming Payments and Bank Reconciliation

Process returned direct debits

365 business Banking recognizes returned direct debits, links them to the original collection, reopens the invoice and handles the fee.

A returned direct debit occurs when the bank of the payer does not honor a SEPA direct debit, for example for lack of funds, because of a closed account or because the payer objects. The invoice that was already applied with the collection is then open again, and the bank usually charges a fee. 365 business Banking processes this case in the payment reconciliation journal, from recognition to posting.

Standard functionality in Business Central

In the standard, a returned direct debit is an ordinary debit on the bank statement. You undo the application between collection and invoice manually, post the return against the customer and ensure yourself that the invoice is not included in the next collection again. For more information about SEPA direct debit in the standard, see Collect payments with SEPA Direct Debit (Microsoft Learn).

What 365 business Banking adds

Recognition of a returned direct debit by the codes of the bank or by your creditor ID.
Assignment to the original collection, automatically or with Assign Returned Direct Debit.
Posting: The application of the collection is undone, the return settles the collection, the invoice is open again and handled according to your setup, and the mandate counter is reset.
Fees: split off into a separate line and, on request, charged to the payer.

How a returned direct debit is recognized

At retrieval, 365 business Banking classifies every transaction. Only the return of a direct debit you collected counts as a Direct Debit Return. It is recognized by:

the business transaction code (ZKA code) 108, 109 or 193,
or the ISO bank transaction code of family IDDT with UPDD or RCDD,
or, if the bank delivers no code, your own creditor ID on a debit, as stored on one of your bank accounts.

A returned direct debit always debits your account. If the bank reports a "return" that is credited to your account, it is not treated as a returned direct debit. 365 business Banking classifies it by its other characteristics, for example as Incoming Transfer, and marks it Needs Manual Review. Money returned from a direct debit that was collected from you is an ordinary incoming payment.

You see the classification in the Bank Transaction FactBox and in the bank transaction details in the Transaction field (Direct Debit Return).

Assign automatically

Choose Apply Automatically in the payment reconciliation journal. For returned direct debits, 365 business Banking turns off the ordinary matching, because otherwise an open credit memo of the same customer with the same amount could be applied although it is not related to the return. Instead, after the matching run, 365 business Banking searches for the original collection:

via the end-to-end reference the bank reports back. It leads to the bank account ledger entry of the collection and therefore to the payment of the customer.
alternatively via the mandate reference.

The return is only assigned if exactly one collection fits that has not been returned yet. How exactly the amount must match depends on the search route:

Via the end-to-end reference, the amount decides first: the returned amount or the original amount the bank reports with the return (for example in a camt file, together with the charges). A collective reference covers several payers, who are distinguished by the amount. If no amount matches but there is only one collection under the reference, it is still assigned. If the return is smaller, it is a partial return. If it is larger, the difference that the bank did not report as a charge is split off as a return charge (see below).
Via the mandate reference, the collected amount must equal the returned amount or the original amount reported by the bank exactly, because the reference alone does not identify the collection reliably enough.

The line then receives:

Account Type Customer and the payer as Account No.,
the description "Returned direct debit …" with the document number of the collection,
the document number of the collection in the Returned Direct Debit column. Choosing the value opens the customer ledger entry.

If several collections fit, or the amount differs on an assignment via the mandate reference, assign the return manually. An automatic selection could assign the return to the wrong payer in this case.

Assign manually

Select the line of the returned direct debit and choose Apply Manually.
The Payment Application page only shows the collections of the payer, newest first. Closed collections are also shown, because a collection that settled its invoice is closed. If no customer is assigned to the line yet, the collections with the mandate reference of the transaction are offered.
Select the collection that was returned and choose Assign Returned Direct Debit.

Afterwards, Applied Amount and Applied are locked, because the application now belongs to the returned direct debit. To resolve an incorrect assignment, remove the application of the line. The assignment is removed with it.

Return fee

Fee in the same transaction: If the bank reports return and fee as one transaction, 365 business Banking splits off the fee at retrieval. The line of the returned direct debit keeps exactly the collected amount, and the fee appears as a separate line, "Return fee …". The Return Fee Amount column of the returned direct debit line shows the amount split off. This does not apply if a split rule has already split the line.

Fee as a separate transaction: A fee that is delivered as transaction Fee related to a direct debit and carries the same end-to-end reference or mandate reference as a returned direct debit in the same journal is attributed to it.

The handling of the fee is defined by Direct Debit Return Fee Action:

Value	Handling
Manual or Reconciliation Rule (default)	The fee line is applied like any other line, typically through a reconciliation rule to the bank fee account.
Charge Customer	The fee line is charged to the payer as an open amount. This only happens if the payer is unambiguous and the line is not already specifically assigned to a customer, vendor or bank account. An assignment to a G/L account by a general rule is overwritten.

Whether you may pass on a return fee depends on your contract with the payer. For this reason, Charge Customer is not the default.

What happens on posting

When the line of an assigned returned direct debit is posted, the following steps are performed:

Check: The collection must not have been returned already, and the returned amount must not exceed the collected amount.
Unapply: The application between the collection and the invoices it settled is undone. The posting date of this unapplication is never before that of the original application.
Settle the collection: The return settles the collection, which is open again. With a partial return, the rest of the collection remains open.
Handle invoices: The reopened invoices are processed according to Direct Debit Return Invoice Action (see below).
Reset the mandate: With a full return, the counter of the SEPA direct debit mandate is reset, and the collection counts as not having taken place. A partial return leaves the counter unchanged. For direct debits by pain file, the returned direct debit is the only way Business Central learns of a collection that was not honored, because the bank does not send any other notification in this case.

All steps take place in the same posting. If the posting fails, the application of the collection also remains unchanged.

Set up invoice and fee handling

The settings are in the Banking Setup, Direct Debit FastTab, Direct Debit Returns group:

Field	Meaning
Direct Debit Return Invoice Action	Set On Hold (default): The invoice receives the on-hold code and is skipped by payment and direct debit suggestions. Change Payment Method: The invoice receives another payment method, such as bank transfer. Do Nothing: The invoice remains unchanged, and the next Suggest Direct Debits collects it again.
Direct Debit Return On Hold Code	Code for Set On Hold, default RLS. Mandatory as long as this option is chosen.
Direct Debit Return Payment Method Code	Payment method for Change Payment Method. A payment method that collects by direct debit is rejected.
Direct Debit Return Fee Action	Manual or Reconciliation Rule (default) or Charge Customer, see above.

Only the field that belongs to the chosen invoice action can be edited.

Troubleshooting

Message or observation	Cause and remedy
The line is not recognized as a returned direct debit	The bank delivers neither a matching code nor your creditor ID. Apply the line like an ordinary debit.
The returned direct debit is not assigned automatically	No collection or several collections fit, or the amount differs on an assignment via the mandate reference. Assign it with Assign Returned Direct Debit.
"Select the direct debit collection that came back first."	Select a collection on the Payment Application page.
"The direct debit collection … has already been returned. A collection cannot come back twice."	The return has already been posted. Check whether the transaction exists twice.
"The returned amount … is larger than the collected amount … of entry …. …"	The transaction probably belongs to another collection.
"Customer ledger entry … is not a direct debit collection. …"	Only a customer payment collected under a mandate can be returned.
"An On Hold code is required as long as … is set to Set On Hold."	Enter a Direct Debit Return On Hold Code.
"Payment method … collects by direct debit. …"	Choose a payment method without direct debit for Direct Debit Return Payment Method Code.

Process returned direct debits

365 business Banking recognizes returned direct debits, links them to the original collection, reopens the invoice and handles the fee.

Standard functionality in Business Central

What 365 business Banking adds

Recognition of a returned direct debit by the codes of the bank or by your creditor ID.
Assignment to the original collection, automatically or with Assign Returned Direct Debit.
Posting: The application of the collection is undone, the return settles the collection, the invoice is open again and handled according to your setup, and the mandate counter is reset.
Fees: split off into a separate line and, on request, charged to the payer.

How a returned direct debit is recognized

At retrieval, 365 business Banking classifies every transaction. Only the return of a direct debit you collected counts as a Direct Debit Return. It is recognized by:

the business transaction code (ZKA code) 108, 109 or 193,
or the ISO bank transaction code of family IDDT with UPDD or RCDD,
or, if the bank delivers no code, your own creditor ID on a debit, as stored on one of your bank accounts.

You see the classification in the Bank Transaction FactBox and in the bank transaction details in the Transaction field (Direct Debit Return).

Assign automatically

via the end-to-end reference the bank reports back. It leads to the bank account ledger entry of the collection and therefore to the payment of the customer.
alternatively via the mandate reference.

The return is only assigned if exactly one collection fits that has not been returned yet. How exactly the amount must match depends on the search route:

Via the end-to-end reference, the amount decides first: the returned amount or the original amount the bank reports with the return (for example in a camt file, together with the charges). A collective reference covers several payers, who are distinguished by the amount. If no amount matches but there is only one collection under the reference, it is still assigned. If the return is smaller, it is a partial return. If it is larger, the difference that the bank did not report as a charge is split off as a return charge (see below).
Via the mandate reference, the collected amount must equal the returned amount or the original amount reported by the bank exactly, because the reference alone does not identify the collection reliably enough.

The line then receives:

Account Type Customer and the payer as Account No.,
the description "Returned direct debit …" with the document number of the collection,
the document number of the collection in the Returned Direct Debit column. Choosing the value opens the customer ledger entry.

Assign manually

Select the line of the returned direct debit and choose Apply Manually.
The Payment Application page only shows the collections of the payer, newest first. Closed collections are also shown, because a collection that settled its invoice is closed. If no customer is assigned to the line yet, the collections with the mandate reference of the transaction are offered.
Select the collection that was returned and choose Assign Returned Direct Debit.

Return fee

The handling of the fee is defined by Direct Debit Return Fee Action:

Value	Handling
Manual or Reconciliation Rule (default)	The fee line is applied like any other line, typically through a reconciliation rule to the bank fee account.
Charge Customer	The fee line is charged to the payer as an open amount. This only happens if the payer is unambiguous and the line is not already specifically assigned to a customer, vendor or bank account. An assignment to a G/L account by a general rule is overwritten.

Whether you may pass on a return fee depends on your contract with the payer. For this reason, Charge Customer is not the default.

What happens on posting

When the line of an assigned returned direct debit is posted, the following steps are performed:

Check: The collection must not have been returned already, and the returned amount must not exceed the collected amount.
Unapply: The application between the collection and the invoices it settled is undone. The posting date of this unapplication is never before that of the original application.
Settle the collection: The return settles the collection, which is open again. With a partial return, the rest of the collection remains open.
Handle invoices: The reopened invoices are processed according to Direct Debit Return Invoice Action (see below).
Reset the mandate: With a full return, the counter of the SEPA direct debit mandate is reset, and the collection counts as not having taken place. A partial return leaves the counter unchanged. For direct debits by pain file, the returned direct debit is the only way Business Central learns of a collection that was not honored, because the bank does not send any other notification in this case.

All steps take place in the same posting. If the posting fails, the application of the collection also remains unchanged.

Set up invoice and fee handling

The settings are in the Banking Setup, Direct Debit FastTab, Direct Debit Returns group:

Field	Meaning
Direct Debit Return Invoice Action	Set On Hold (default): The invoice receives the on-hold code and is skipped by payment and direct debit suggestions. Change Payment Method: The invoice receives another payment method, such as bank transfer. Do Nothing: The invoice remains unchanged, and the next Suggest Direct Debits collects it again.
Direct Debit Return On Hold Code	Code for Set On Hold, default RLS. Mandatory as long as this option is chosen.
Direct Debit Return Payment Method Code	Payment method for Change Payment Method. A payment method that collects by direct debit is rejected.
Direct Debit Return Fee Action	Manual or Reconciliation Rule (default) or Charge Customer, see above.

Only the field that belongs to the chosen invoice action can be edited.

Troubleshooting

Message or observation	Cause and remedy
The line is not recognized as a returned direct debit	The bank delivers neither a matching code nor your creditor ID. Apply the line like an ordinary debit.
The returned direct debit is not assigned automatically	No collection or several collections fit, or the amount differs on an assignment via the mandate reference. Assign it with Assign Returned Direct Debit.
"Select the direct debit collection that came back first."	Select a collection on the Payment Application page.
"The direct debit collection … has already been returned. A collection cannot come back twice."	The return has already been posted. Check whether the transaction exists twice.
"The returned amount … is larger than the collected amount … of entry …. …"	The transaction probably belongs to another collection.
"Customer ledger entry … is not a direct debit collection. …"	Only a customer payment collected under a mandate can be returned.
"An On Hold code is required as long as … is set to Set On Hold."	Enter a Direct Debit Return On Hold Code.
"Payment method … collects by direct debit. …"	Choose a payment method without direct debit for Direct Debit Return Payment Method Code.

Process returned direct debits

Standard functionality in Business Central

What 365 business Banking adds

How a returned direct debit is recognized

Assign automatically

Assign manually

Return fee

What happens on posting

Set up invoice and fee handling

Troubleshooting

See also

Process returned direct debits

Standard functionality in Business Central

What 365 business Banking adds

How a returned direct debit is recognized

Assign automatically

Assign manually

Return fee

What happens on posting

Set up invoice and fee handling

Troubleshooting

See also