A guest blog by Don Hollingum from Direct Debit 101 – https://northeypoint.com/direct-debit-101/
With 4.5 billion payments processed each year Direct Debit is the UK’s pre-eminent collection payment method.
For consumers, Direct Debit is the safest and most cost-effective method of paying regular or occasional commitments.
Direct Debit is the simplest way for organisations to collect regular or occasional payments from their customers – both business and consumer.
Direct Debit saves time, reduces the costs of collections and enables cleared funds to be available directly into the bank account of the beneficiary, the collecting organisation.
How does it work?
To set up a Direct Debit, a consumer provides an authority to the organisation they need to pay, and the organisation, (commonly known as a service user) collects the amount or amounts, on the due date(s), direct from the consumers account.
The consumer is advised of the amount and dates on which monies will be collected.
The consumer is protected by a money back Guarantee from their bank or building society in the event that the collecting organisation makes an error in the collection of the Direct Debit(s).
Note: the Guarantee is separate from any commercial or contractual matters between the parties.
Myth: Direct Debit is only used to collect fixed amounts on fixed dates, and as such is only appropriate for ongoing commitments such as mortgages and insurance policies.
Direct Debit can be used to collect payments on fixed dates but where the amount collected varies, for example for mobile phone contracts where usage may dictate that variable amounts become payable. Another example of situations where the amounts might vary could be where a consumer is paying off the balance on a Credit Card each month.
Myth: Direct Debit is only available where collecting organisations are taking payments from private individuals.
Use of Direct Debit for business to business payments is now very common. Whilst there may be additional complications in getting an authority to use Direct Debit from a business, particularly where more than one person is required to authorise payments on the underlying bank account, the same safeguards exist for business payers and the same processes can be followed by collecting organisations.
Myth: Direct Debits are only collected on a monthly basis (e.g., mortgage payments) or perhaps quarterly / annually, (e.g., subscriptions to clubs and societies or for the likes of car breakdown cover.
Direct Debits can be, and in many instances are, collected across a range of periodicities. Some of these are regarded as regular dates but some will vary for a number or possible reasons. The important thing is that the consumer is aware of how much and when, payments will be collected.
Whilst many people receive a monthly salary a significant number of people are paid at other times, including weekly, fortnightly, 4 weekly or more irregularly.
Budgeting for monthly collections in such circumstances can be problematic and could increase the likelihood of Direct Debit not being the preferred payment method, or where it is used, there can be a higher level of payment collection failures (unpaid Direct Debits).
Offering alternative collection frequencies to monthly Direct Debit collections could work well for both the collecting organisation and the consumer.
Direct Debit can also be used effectively for what are termed irregular payment collections, i.e., those that do not follow a specific pattern such as monthly or annual.
There are many instances where Direct Debit could be used for irregular payment collections.
Providing the consumer receives sufficient advance notice within the prescribed timeframe, use of Direct Debit is permissible.
For example, someone who has a credit card they use infrequently but want to pay off the full balance at the appropriate time when the card is used.
In addition to Direct Debit payment collections that may be agreed between the collecting organisation and the consumer, there may be occasions where the consumer elects to make an additional payment.
The consumer could request that the collecting organisation collect an additional or ad-hoc payment.
For example a additional or lump sum reduction to a loan, or where a consumer wants to support a specific appeal being organised by a charity.
In many instances using Direct Debit in such circumstances works well for both the collecting organisation and the consumer, for instance there is little risk that an incorrect reference is quoted nor that the payment cannot be applied.
Sometimes, collecting organisations offer their customers, (the consumer), a very limited, or no choice of the date on which payments will be collected.
As we have already referenced not all consumers receive their income on the same date. Offering a choice of payment dates to consumers may encourage them to use Direct Debit, make budgeting easier for them and again reduce the chance of payment failures.
It is true that there are additional activities for collecting organisations in terms submitting multiple payment files however these may be offset by reduced activity associated with failed payment collections or collecting money by alternative mechanisms.
The above is a very simple high level illustration of how Direct Debit can be used flexibly in a range of circumstances.