Standing Order vs. Direct Debit

Standing orders and direct debit are automatic payment methods that transfer funds from a customer’s bank account to a business when a payment is due. They’re often used for paying for subscriptions, memberships, rent, and utilities.

While there are various options for companies choosing an online payment method, standing orders and direct debits are popular as they streamline the process.

There are some similarities between the two, but also plenty of differences. This guide takes a closer look at a standing order vs. direct debit, examining how they work, how they compare to one another, and more.

Standing Order vs Direct Debits: What Are the Main Differences?

There are some important distinctions between standing orders and direct debits to be aware of.
In regards to standing orders, they have the following advantages:

• Generally free: There’s usually no fee to set up or use a standing order, for either businesses or customers.
• Less work for your business: Customers set up and initiate a standing order with their bank, so your business doesn’t have to do anything to get paid other than provide your business account details.
• Some customers aren’t comfortable with direct debit: Some customers aren’t comfortable with a business being able to pull funds from their account. A standing order puts control in their hands and can ease these worries.

But direct debits have their own advantages over standing orders:

• Better flexibility: It’s easy and quick to change payment amounts and frequencies with direct debit. If you need to alter something about a standing order, the customer would have to cancel it and set up a new one.
• Less admin for businesses: While both payment types happen automatically, your business has less to manage with direct debit. With standing orders, there’s no notification if a payment fails and you’ll have to manually check to ensure customers have set up the payment properly, too.
• More convenient for customers: Your business sets up direct debits, which leaves less work for customers. All they need to do is fill out a form with their bank details to authorise the payments to take place automatically.

How Do Standing Orders Work?

To set up a standing order, a customer instructs their bank to send a set amount of funds on a specific date to another account. They will need to present the request to their bank online, over the phone (if their bank allows it), or on paper.

They’ll need to provide the bank details of the recipient, how much to send, the date on which to send it, and how long the standing order should last.

Once the standing order is set, the bank transfers the funds on the set date until the order ends or is cancelled. To cancel a standing order, a customer just has to ask their bank to stop the payments.

How Do Direct Debit Payments Work?

With direct debits, a company automatically collects funds from a customer’s bank account when a payment is due. It requires previous authorisation from the customer, of course.

Businesses set up direct debits by sending customers a direct debit mandate form to fill out. This asks for the customer’s bank details and authorisation to pull the funds. Once the company receives the completed form, it sends the form to its bank, and that bank shares it with the customer’s bank.

Once you receive the proper authorisation from the customer’s bank, your business can set up the payment schedule and begin taking direct debits.

Standing Order vs Direct Debits: A Detailed Comparison

Now that you’re aware of the basics, let’s do a more detailed comparison between standing orders and direct debits.

Setting Up

To set up a standing order, a company just needs to provide its bank details to a customer.
The customer then initiates the order with their bank, which begins making the agreed payments on the agreed schedule.

Conversely, when it comes to setting up direct debits, it’s the business that does most of the work. You’ll first collect a customer’s banking information and authorisation for the direct debit, and then you pass these on to your bank.

To set up a direct debit in the UK, your company also needs a Service User Number (SUN). This is a unique six-digit code that identifies you as a company that collects funds via direct debit. It’s also used to communicate with Bacs (Bankers’ Automated Clearing System), which is the service tasked with clearing and settling direct debits in the UK. Read more about BACS payments on our pahe.

Flexibility

Direct debits have a lot of flexibility, and you can easily change payment amounts and dates. However, you have to notify customers 10 business days in advance if you make any changes to the amount or frequency of payments.

On the other hand, standing orders aren’t flexible, and once the initial terms are set, they can’t be altered. To change the amount of a payment or the day it comes out, you’d have to ask the customer to cancel the existing standing order and then create a new one.

Customer Convenience

While both methods are more convenient than manually making payments each month, direct debit is much easier for customers. All they do is provide their bank details, and the receiving business handles the rest. With standing orders, a customer is solely responsible for setting up and managing them.

Cost Per Payment

One of the biggest advantages of standing orders is that they have no fee involved, for either your business or the customer. The only time you’ll be responsible for a fee is if your bank charges to receive transfers.

The specific cost of direct debit varies depending on your bank or provider. It’ll generally be a small flat fee and/or a percentage of each transaction. For example, GoCardless charges 1% + £0.20 per transaction for its Standard plan. International direct debits can have slightly higher fees.

While this costs more than standing orders, it’s still cheaper than credit card transaction fees, which can reach 3% or higher.

Risk/Security

Both of these payment methods are inherently safe as they’re bank-to-bank transfers, and banks are known for taking security seriously.

Standing orders are especially safe for customers as they maintain full control of the payments, but this method is riskier for companies. This is because a customer can cancel or change a payment at any time without notice.

In some cases, it can take weeks for a business to realise a payment has failed/changed or a customer has cancelled. There’s the risk of the customer setting up the payment incorrectly or not doing it in time, too.

Direct debits are less risky for businesses as a business can set up and control them. However, some customers feel uneasy about giving a company access to pull funds from their account. To overcome this stumbling block, you could point out to customers that the Direct Debit Guarantee protects them from companies making unauthorised transfers.