Direct Debits Explained: An Introduction

In our new series our articles, we’ll be explaining all there is to know about Direct Debits to help guide you in how you are collecting recurring payments from your customers. Read on for a quick introduction into this popular payment method.

What Is A Direct Debit?

A Direct Debit is an instruction between a customer and their bank or building society. It authorises your organisation to collect a varying amount directly from a customer’s account – providing advance notice is provided of the amounts and collection dates.

Once an agreement is in place, you can collect that amount from your customer’s account on a recurring basis. This agreement is known as a Direct Debit mandate.

This method offers you and your customers a simple, hassle-free and reliable method for recurring payments.

Direct Debits Are Bank-To-Bank Payments

Direct Debits are bank-to-bank payments rather than relying on the card networks. In the UK, Direct Debits are run by Bacs.

Choosing Direct Debits over card payments for recurring payments will be more cost efficient for your business. Accepting card payments typically involves several fees.

  • A processing fee for each payment taken. This will vary based on the type of card and transaction value, as well as the volume and average value of payments you are taking
  • A monthly rental fee if you have a terminal. A merchant service charge if you use a payment service provider
  • And, potentially, a security bond to cover the cost of unauthorised transaction that are refunded later

By using the Bacs clearing scheme to take recurring bank-to-bank payments, rather than using credit or debit cards, Direct Debits are more reliable.

Payment cards are typically valid for a few years only. For recurring payments, once a card expires the payment will fail and you are at risk of loosing that customer if new card details are not provided. Direct Debits are more reliable as customers do not tend to change bank or building society accounts so regularly.

In addition, if a payment fails you can reattempt taking it, provided the customer is notified.

Direct Debits Give You Control

A pull payment is one where you initiate the transaction rather than a customer, Direct Debits are a pull payment. You are in control of the collection of payments to your organisation.

The pull nature of Direct Debits is the main difference between this method and Standing Orders. The control over Standing Orders lies with the customer who will set up and give instruction as to how much should be paid and when.

Benefits of Direct Debits over Standing Orders include:

  • Improved cash flow as you have control over when a payment is received
  • Reduced administration work as typically the process of taking Direct Debit payments is automated
  • Control to change when a payment is taken and how much is collected (with appropriate customer notifications)

The Direct Debit Guarantee

As Direct Debits are a pull-based payments, the Direct Debit Guarantee is in place to protect your customers giving them confidence and peace of mind over this type of payment. It offers 3 safeguards:

  1. Guaranteed immediate money back from their bank should there be an error in the payment of a Direct Debit
  2. Advanced notice if the date or amount of a payment changes
  3. Ability to cancel at any time

How To Collect Direct Debits

To collect Direct Debit payments independently, you will need a Bacs Service User Number (SUN). A SUN allows communications to be stored and recorded where needed. It will be used to display the correct business name on a customer’s bank statement.

To get a SUN, you will need to apply via your bank and undergo several checks designed to assess your capability to operate within the Direct Debit scheme rules.

Working with a payment institution like Harlands Group, which manages the collection of Direct Debits on your behalf is an effective option for both businesses with or without a SUN – learn more about our Direct Debit Collections services.

The largest brands in the health & fitness industry rely on Direct Debit collections to take membership subscription payments from their customers. It’s easy to see why – Direct Debits are a cost effective, reliable and trusted payment method that put you in control of membership payments.