September 21, 2023

Direct Debit

A direct debit allows funds to be automatically collected from a customer’s bank account. The amount can be variable, making direct debit particularly suited to regular payments that can differ in value, such as for utility bills or mobile phone plans.

Before a customer is charged using direct debit, they first need to issue a mandate that authorizes the vendor (utility company, mobile phone carrier etc.) to charge their bank account at regular intervals. The amount charged can be variable, making direct debit particularly suited to regular payments that can differ in value each time (utility bills, mobile phone plans etc.).

How direct debits are processed differs from region to region. However, once the vendor has received the mandate, they need to inform the customer of the value that will be debited. The vendor then submits a request to their bank to debit the amount from the customer’s bank account. Once the request has been processed, the funds are transferred from the customer’s bank account to the vendor’s bank account.

Direct debit can also be used for business-to-business transactions. The SEPA Direct Debit Business-to-Business Scheme applies to SEPA direct debits where both parties (creditor and debtor) are businesses. This scheme offers shorter timelines and limited refunds, as the payer’s bank must ensure that the collection is authorized by verifying it against the mandate information. However, if the transaction was executed without a valid mandate, the direct debit can be reversed within 13 months, as with any other SEPA direct debit.

Direct debits are available in many regions including the EU, UK, US, Canada, Australia, Brazil, South Africa and many more. Each country or region uses its own banking network to process direct debits.

In Europe, SEPA (Single Euro Payments Area) direct debits are mandatory for all direct debits using euro as the currency. In the US, direct debit typically means an Automated Clearing House (ACH) transfer between bank accounts. In the United Kingdom, direct debits are handled by Bankers’ Automated Clearing Services (Bacs). Other countries have other similar systems in place.

Direct debits offer the following advantages:

  • They are well-suited to regular payments, particularly if the amount due can vary from payment to payment, e.g. utility bills.
  • They are significantly cheaper per transaction than paying by credit or debit card.
  • Unlike a credit or debit card, they do not expire, minimizing the number of failed payments.
  • Consumers are protected against fraud and payments made in error.
  • They are “set and forget” for consumers, eliminating the need to manually make payments on a regular basis. Customers avoid the risk of repercussions if they fail to make these payments on time.

Direct debits have some disadvantages:

  • Direct debits typically take several days to process, although this is not always the case.
  • They are dependent on the consumer having sufficient funds in their bank account to cover the charge.
  • Consumers may forget that they authorized a direct debit or not recognize the recipient, especially if the recipient is a parent or holding company with an unfamiliar name, and dispute the charge with their bank.

A bank transfer is initiated by the party making a payment, whereas a direct debit is initiated by the party receiving the payment. A bank transfer can be both a single transfer of funds or a recurring payment (via a standing order) of the same amount at regular intervals. A direct debit is used to regularly debit an account, but the amount charged can be variable, e.g. based on the amount of electricity consumed or minutes of phone calls made over the billing period.