A guest blog by Don Hollingum from Direct Debit 101- Visit: www.directdebit101.co.uk
Why offer Direct Debit?
Direct Debit has been working for thousands of businesses, both large and small for over 50 years. Its usage continues to grow both in terms of the number of organisations that use it and the number of payments collected, in excess of 4.5 billion payments were collected in 2019.
If your business receives payments, either regular and/or irregular, then Direct Debit can be made to work for you. Remember using Direct Debit has benefits both for the organisation receiving the money from its clients, and customers that need to make the payments.
Some small businesses can be reluctant to suggest to their clients the use of Direct Debit. This may be because they are just happy to get paid when the funds arrive. However cashflow is critical to all businesses and therefore receiving funds on/by the due date can be vital for the success or even the ability of the business to continue as a going concern.
Some customers may deliberately take advantage of ‘unofficial’ credit terms, i.e., pay late, but others, in their busy lives, may overlook or not find the time to ‘push’ a payment at the correct point.
Direct Debit will address these issues and more besides because the business that is due the money can collect it from its clients accounts when they fall due.
How to get started?
In essence there are three ways, or options, in which a business can harness Direct Debit to collect amounts that fall due.
This article does not seek to promote any one of these three options, as there will be different considerations and priorities for each entity seeking to use Direct Debit.
It is likely that developing a ‘business case’ will effectively weigh up the pro’s and cons of the three options referenced below. The ‘business case’ does not need to be a lengthy document but will undoubtedly focus on the costs and benefits of each option.
Option 1 – Direct Participation
This involves the business seeking to collect monies by Direct Debit becoming a service user, obtaining sponsorship from a sponsoring payment service provider (likely to be their existing bank), and being responsible for undertaking all the necessary Direct Debit processes and procedures including payment file submission.
Businesses electing to select this option will need to obtain and use approved software that will need to be maintained, lodge their clients authorities at different banks and building societies, generate advance notice of collections at the appropriate time, collect monies on the due date, as well as deal with a number of other aspects including failed payment collections and messaging advices generated through or by the Bacs service. In other words undertake activities in compliance with industry rules and best practice.
Option 2 – Indirect Participation
In many ways this option sounds similar to the previous one in that it involves the business seeking to collect monies by Direct Debit becoming a service user, and obtaining sponsorship from a sponsoring payment service provider (likely to be their existing bank).
There is at least one crucial difference which reduces the administrative overhead, namely that there is no need to obtain and maintain the approved software. This is because the collecting organisation uses the services of a bureau to submit the payment file on its behalf. In fact many of the approved bureaux offer a range of packages or services in addition to just the submission of payment files, reducing still further the activities the collecting organisation may elect to complete itself.
Naturally the more the chosen bureau undertakes the lower the cost directly for the collecting organisation, however it is likely that the charges that the bureau will levy may increase.
The business (collecting organisation) remains responsible for compliance with industry rules and best practice.
A list of Bacs approved bureaux is available on the Bacs website: https://www.bacs.co.uk/documentlibrary/babs_directory.pdf
Option 3 – Using a third party or Facilities Management provider
This option is likely to appeal to any business that wants to collect monies by Direct Debit and to do so without needing to become a service user and undertake the activities touched on in the previous options.
Under this option, the Direct Debits will be collected in the name of the Facilities Management (FM) provider, frequently set up for the collection of Direct Debits as “FM Provider re the business (name)”.
The FM provider will receive the monies into a ‘ring-fenced’ account and will transfer the money to the beneficiary business shortly afterwards.
Like bureaux, FM providers offer a range of services and each business will need to decide which package is appropriate for them.
A list of Bacs accredited FM providers is available on the Bacs website: www.bacs.co.uk/Services/Bacsapprovedservices/Pages/AccreditedFacilitiesManagementProviders.aspx
Which option to choose?
As can be seen there are both positives and negatives to each of the above options and, of course, there are different cost profiles.
We cannot provide specific advice on the best option for you in a general article but we’d welcome the the opportunities to talk through these options with you.
Previous articles have referenced both the flexibility of Direct Debit and the benefits of ensuring that the solution you ultimately choose is appropriate for your needs, including for example adopting AUDDIS and possibly paperless Direct Debit.
This article is a very simple high level illustration of how and why you might want to consider introducing Direct Debit both for the benefit of your business and its clients. Making the final decision will require more detailed consideration on a number of levels and we’d welcome the opportunity to discuss these with you, please email us at: DirectDebit101@ northeypoint.co.uk, visit us at www.directdebit101.co.uk or call us on 07590 538 820.