Standing Order vs Direct Debit – which is best?
So you’re looking for a way to collect regular payments from your customers, and wondering which is the best way to do it: Standing Order or Direct Debit?
Both are automatic payment methods with a lot of similarities. However, there are some important differences that we need to consider.
Before we explore the differences between Standing Orders and Direct Debit, let’s examine them up close:
What Is a Standing Order?
A standing order is a payment method that lets you take regular, fixed payments from your customers:
- A standing order reoccurs on a set date each month for a certain time period but can’t be edited.
- Your customer is responsible for setting up the standing order and deciding how much will be paid.
- Your customer sets up the standing order by completing a form with their bank.
What Is a Direct Debit?
- Direct Debits let you take payments directly from your customer’s account.
- You can change the frequency and amount of a Direct Debit payment after it has been set up.
- You set up Direct Debits with customers by getting them to sign a Direct Debit Mandate.
To learn about Direct Debits in more detail, see our guide to direct debits.
What Are The Differences Between a Standing Order and Direct Debit?
Let’s compare them to help determine which payment collection method is best for your business:
Who makes the payment?
Standing order – It is your customers’ responsibility to make the payments, whether it’s weekly, monthly or annual.
Direct Debit – Although your customers must first authorise you to collect from their account, ultimately it is your job to collect directly from their account.
Who has control?
Standing order – Your customer has control. They determine the payment frequency and amount, and can change or cancel the payment whenever they like. They do not have to notify you of changes or cancellations.
Direct Debit – Once the Direct Debit is authorised by your customer, you have full control over the payments. You are free to change the value and the frequency of your collections (as long as you notify your customer in advance).
How much do they cost?
Standing order – A standing order can be collected for free, although depending on your bank, there may be some additional charges.
Direct Debit – It depends on your Direct Debit provider. Usually there are fixed fees, or a percentage charge based on the transaction amount.
Although standing orders can be entirely free to use, it takes a lot of work to administer the payments and update your accounts. There’s also no way of knowing if a payment has failed, making reconciliation difficult.
What are the failure rates?
Standing order – Failure rates for standing orders are usually high. If cancelled or your customer lacks funds, you will not be notified. It is up to your payment systems to pick up the failure. You’ll then need to chase the customer for payment.
Direct Debit – Typically less than one percent. If a failure does occur, your Direct Debit provider will inform you. You can then contact your customer and re-attempt to take the payment.
How flexible are the payments?
Standing order – Very rigid, as your customer has to cancel the old standing order themselves and then set up a new one, which could cost you money if they are unwilling.
Direct Debit – Direct Debits are much more flexible. They let you change the date or the amount of the payment without authorisation. You do have to send a notification in advance, but you can automate this and send it electronically.
Standing orders are good for regular, fixed payments like monthly subscriptions or gym memberships. However, if you collect payments that vary in their frequency and amount, a Direct Debit system is probably a better fit for your business.
What are the risks of late payment?
Standing order – High risk as it can be hard to persuade your customers to set up the standing order in time.
Direct Debit – Much safer because with Direct Debit you can change payment dates yourself and collect the money when it suits you. Your Direct Debit provider should also inform you when a customer cancels their Direct Debit.
How much administration is required?
Standing order – Lots of admin, not only do you have to check business accounts regularly to see whether payments have been made, but you also have to manually update your accounts. There are also no notifications if a payment fails.
Direct Debit – The admin is minimal. Your Direct Debit provider will automatically submit the payments on your behalf and update your accounts so you can see which payments have been made.
Which has the best customer protection?
Standing order – There is absolutely no protection for the customer once the payment has been made.
Direct Debit – Direct Debit payments are backed by the Direct Debit Guarantee. This ensures your customers can get an immediate refund from their bank if an incorrect payment is made.
Is A Direct Debit Or Standing Order Better Suited To Your Business?
Standing orders work well if you are a very small businesses with less than 30 customers, have a close, trusting relationship with your clients, and only need to take fixed payment amounts.
But Direct Debit is probably a better option if you have more than 30 customers and are looking to grow.
With Direct Debit, you are notified of failures which reduces admin and helps tighten up your credit control and payment processes, which is great for your cash flow.
There is also less reliance on trust when using Direct Debits. With the Direct Debit mandate, you are responsible for collecting payments, which completely fixes the issue of late payments.
Directs Debits are well suited to fixed payments, but they really come into their own when collecting variable payment amounts. This flexibility is one of the Direct Debit’s greatest strengths.
Start collecting with Direct Debits
If Direct Debit sounds like the right payment system for your business, take a look at the Direct Debit services available from London & Zurich to see how we can make your payment process more flexible, affordable and easier to manage. For more information, please get in touch.