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Understanding Direct Debit

The basics

Direct Debit is a simple way of paying bills for a customer, and ensures reliability of payment for organisations. Once payments are authorised, they can automatically be made directly from a customer’s bank account either as a one-off, or on a regular basis.

The payments happen from one bank to another without the need to use debit cards or other payment methods. As well as reducing admin, the BACS clearing scheme that Direct Debit uses is low cost and available to anyone with a UK bank account, including business accounts.

How does it work?

Direct Debits are ‘pull based’ which means once a customer has given their permission, it’s the merchant who ‘pulls’ the payment from their account. This is different to a standing order where money is ‘pushed’ from one bank account to another on a regular basis.

Direct Debit is a straight-forward way for a merchant to get authorisation to take money from customers’ accounts, meaning regular payments don’t have to be chased and making cash flow more reliable.

The amount paid and how often it is paid can be varied, which is great where bills may vary each month because of changing costs or uptake. However, merchants do need to give advanced notice of changes to customers.

This is part of the guarantee customers get when paying by Direct Debit which also ensures they will get their money back if there is an error made in the payment and an assurance they can cancel payments at any time.

Long-term benefits

Another major benefit to merchants is that once Direct Debits are set up, they tend to have a longer retention rate as they enable hassle-free payments to be made, and are not interrupted by expiration dates of payment cards.

Direct Debits reduce the chance of late payments, avoid higher transaction costs associated with card payments, and allow the flexibility to take varied payments.

Any downsides?

It is worth noting that a drawback of Direct Debit can be the time it takes to set up –transfers will take a minimum of three days. It’s not suitable for transactions needing instant payments, although Direct Debit can be used for one-off payments as well as regular transactions.

Initial payments and set up also takes time. To collect payments through Direct Debit, a ‘mandate‘ must be set up first. This is how your customer authorises payments to be taken when they are due.

Advance notice of changes to Direct Debits of 10 working days is required in many cases, although this can be reduced through agreements between with the customer and with your bank.

London & Zurich have been providing many businesses with the option to accept Direct Debit payments for over two decades. To find out more speak to our team on 0121 234 7999.

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