Direct Debit

Direct debit is a popular form of payment where the customer gives you their bank account details along with permission to debit funds directly from his/her account.

It is typically used to make recurring payments for credit card or utility bills. Unlike standing orders, which require the amounts to be fixed, direct debits can be used for varying amounts; the payee can simply indicate a different amount each time. However, in countries where setting up authorisation for direct debit is easy enough, it can also be used for one-time payments in the mail order business or even at a point of sale.

It is available in the banking systems of several countries, including the United Kingdom, Germany and the Netherlands. It is scheduled to be available across the whole Single European Payments Area by the end of 2010. In the United States, where cheques are more popular than bank transfers, a similar service is available through the Automated Clearing House network.

The rules that govern direct debit vary from country to country. Depending on where the customer lives and the type of permission given, direct debit can be used to pay an invoiced amount, to pre-pay an order or to arrange recurring payments.

It’s the easiest way for you to pay your household bills or make regular payments to any organisation that accepts Direct Debit payments. It saves time, is more convenient and gives you greater control over your money.

Direct Debit is the preferred payment method for over 48% of the UK bill paying population because it provides so many advantages. Independent consumer research shows that 74% of users agree that direct debit makes life easier and 80% agree that direct debit saves you time.

The Direct Debit Scheme also protects you and your money by means of the Direct Debit Guarantee. All banks and building societies that take part in the Direct Debit Scheme operate this Guarantee. The efficiency and security of the Scheme is monitored and protected by your own bank or building society.

The Advantages

* Ensures timely payment
* Reduces administrative costs associated with payment reminders and follow-up
* Convenient for customers
* Reduce customer attrition and increase renewals through monthly payment programs

Direct Debit Authorisation

The biggest difference to a direct deposit is that there must be some sort of authorisation for the payee to collect funds from the payer’s account. There are generally two methods to set up the authorisation:

One method only involves the payer and the payee. The payer simply authorises the payee to collect the amounts due from his or her account. As the payer’s bank is not involved, it can not check the payee’s authorisation, so other safeguards are required. This typically means that the payer can instruct his or her bank to return any direct debit note without giving a reason. The payee then not only has to pay all fees for the transaction (which can be hefty for returned direct debits) but may eventually lose his or her ability to initiate direct debits if this occurs too often. However, it still requires all account holders to watch statements and request returns if necessary.

The other method also involves the payer’s bank. It requires the payer to instruct his or her bank to honour direct debit notes from the payee. The payee is then notified that he or she is now authorised to initiate direct debits transfers from the payer. While this is more secure in theory, what it can also mean for the payer is that is harder to return debit notes in the case of an error or dispute.