What is Direct Debit?

Direct debit is an automatic cashless payment method that authorises businesses to collect a certain amount from customer bank accounts when a payment is due. While there are many online payment methods to use, direct debit is often the preferred choice for subscriptions, utilities, and other services.

It’s a flexible, safe, and convenient option for businesses and customers alike. However, companies generally need to pay a fee to receive direct debit payments.

This guide goes over what a direct debit is, how it works, when it’s useful, and more.

What Is a Direct Debit?

A direct debit is a payment method that allows businesses to automatically collect a specific amount of funds from a customer’s bank. Customers authorise this type of payment by filling out a Direct Debit mandate form for a business. Direct debits are different to standing orders, which can be set up independently by any bank account holder.

Direct debits are a favourite in cashless countries because they’re paperless and streamline recurring payments, making them more convenient for everyone involved. They’re also flexible and secure, and can eliminate late payments.

There’s generally a small fee involved in collecting direct debit payments, but it varies depending on your bank and/or payment service provider.

How Do Direct Debit Payments Work?

Direct debits work by automatically transferring funds from one account to another based on previous instruction and authorisation. These payments are easy to set up and are a convenient option for both businesses and customers. People sometimes confuse direct debits and a continuous payment authority or CPA. A CPA is a method for setting up recurring card payments.

Here are a few steps you’ll need to take as you set your business up to accept direct debit.

Ensure You’re Eligible

The first step is to ensure you can accept direct debit payments as a business. You can do this by getting a six-digit Service User Number (SUN). A SUN is an identifier for all firms that get paid via direct debit.

All communication with Bacs (Bankers’ Automated Clearing System), the service in charge of clearing and settling direct debits in the UK, also uses this SUN.

You can get an SUN directly from your bank as long as you meet the eligibility criteria. The exact requirements vary from bank to bank, but they generally want to ensure you can comply with the rules, such as minimising payment errors and having enough funds to issue refunds as needed.

You can also work with a payment service provider (such as GoCardless or Access PaySuite), as it has a single SUN to collect payments for all merchants that use its services.

Gain Authorisation

Once you’re eligible to accept direct debit payments, you have to send customers a Direct Debit mandate form. The form collects your customer’s name and bank details, and serves as the authorisation you need to take funds from their account. You can use a paper or online form, or collect customer details on a phone call.

When the form is completed, a business submits the form to its bank/payment provider, and then that bank sends it to the customer’s bank.

Schedule the Payments

Once you have this authorisation, you can set up and schedule the payments according to the amount and frequency of the arrangement between your business and the customer.

A business needs to send a notice of the payment at least 10 days in advance to the customer. The notice has to outline the amount of the payment and the day it will take place.

When Are Direct Debit Payments Useful?

There are several scenarios where accepting direct debit payments is useful for your business.

When You’re Collecting Regular Payments

If your company collects regular payments, direct debits are incredibly useful. Instead of your customer having to manually pay each time, a direct debit can streamline the process.

For example, companies that offer a subscription service save a lot of admin time and effort with direct debit as opposed to requesting funds every month on the same day for the same amount.

Direct debit is even flexible enough to handle payment amounts that change every month, such as software that charges based on usage.

When You Want To Better Predict Cash Flow

Direct debit can also help better predict your cash flow. Because payments are automatically taken from customer accounts, you receive them on time and have less worry about late payments messing up your projections.

Having a better idea of how much income you have coming in enables you to financially plan, invest, and forecast with greater accuracy.

When You Want To Boost Customer Retention

Using direct debit can boost your customer retention. It’s an uncomplicated way to pay, and many customers prefer the straightforward nature of direct debit vs. paying manually each time.

In fact, direct debits comprise billions of annual transactions in the UK. So, if you don’t offer the option, you could lose potentially loyal customers to a company that does.

How Safe Are Direct Debit Payments?

Direct debit payments are a safe payment method for business as they’re bank-to-bank transfers. Banks take security very seriously and have numerous safeguards in place to protect your data. This includes encryption, fraud monitoring, and multi-factor authentication, among others.

Direct debit is also safe for customers, as they’re protected from unauthorised payments thanks to the Direct Debit Guarantee. This guarantee states that:

• Customers are entitled to a full refund immediately if a payment error is made (such as the wrong amount being taken from an account).
• Companies need to provide customers with at least 10 working days’ notice before changing the frequency, amount, or date of a payment.
• Customers can cancel a direct debit at any time by contacting their bank.

Risks

Direct debits are generally safe for everyone, but there are a few risks to be aware of. First of all, there’s the potential for failed payments. For example, if a customer has insufficient funds in their account, the payment might not go through.

While direct debit is a trusted payment method, some people may be uncomfortable with it as they don’t fully trust the company they’re buying from and won’t want it to take funds directly from their account.

Ways to Mitigate These Risks

To reduce these risks, you should have a system in place for dealing with failed payments. This could be retrying the transfer, reaching out to the customer immediately about the failure, or pausing the product/service until payment is successful.

Offering additional payment methods is a great way to satisfy those who may be uncomfortable with you having direct access to their bank account. You can also attempt to build trust quickly by outlining all the safety and security measures you have in place or by adding positive customer reviews on your site.

Direct Debit Pros and Cons

Here are the pros and cons of accepting direct debit: