Consider the Direct Debit scheme if your company needs to collect recurring customer payments. Numerous benefits of Direct Debit are accessible to small companies and larger organisations and their clients.
This article reveals the core characteristics of Direct Debit services and compares them with other alternatives. You can also learn how to establish Direct Debit in your business smoothly.
Let’s start from the beginning – the Direct Debit definition.
What is Direct Debit?
Direct Debit, or direct withdrawal, is a convenient way to collect recurring payments directly from your customer’s bank account. You only need one-time authorisation, which is called the Direct Debit mandate. Then, your money will be transferred electronically between UK banks using online banking. It works like a subscription to Netflix, Amazon Prime, or automatic payments for your utility bills. These recurring payments can be processed automatically. So, transferring recurring customers’ bills and subscription payments to your bank account as quickly as possible becomes an excellent idea. Direct Debit is also a unique opportunity to improve the customer’s account payable process.
The Direct Debit business is constantly growing. According to the UK Finance Payment Markets Report, in 2023, 4.7 billion Direct Debit payments were made in the UK, with an overall value of £1,331 billion. The latest statistics show that it has become one of the most popular payment methods in the UK.
How does Direct Debit Work?
Direct Debit requires adhering to a specific step-by-step process. You need to pass five primary stages to set up Direct Debit properly.
- Communicate with your bank: Tell your bank you would like to establish Direct Debit payments. They will check if you are eligible to do that.
- Select a service: Find a Direct Debit bureau, a mediator that helps set up Direct Debit service.
- Receive aservice user number(SUN): The Bankers’ Automated System (Bacs) uses SUN to identify records of all corresponding transactions.
- CollectDirect DebitInstructions: Get signed permission for money transfers from your customers through mandates or instructions.
- Notifycustomers: Inform customers about payment processes beforehand.
- Acceptpayments: When everything is established and signed, you can receive money to your bank account from customers’ bank accounts.
To correctly establish Direct Debit for your clients, discover the necessary aspects of each step in more detail in the following sections.
Why is Direct Debit so important?
Using Direct Debit offers plenty of benefits to you and your clients. Let’s explain what bonuses this service provides to each counterpart.
Benefits for your business:
- Less expensive than other payment methods;
- Manageable and efficient possibility to collect regular payments;
- Simplified cash flow oversight because now you can control what payments will be transferred into your account;
- Save time on reconciliation.
Benefits for yourcustomers:
- Enhanced safety with Direct Debit Money Back Guarantee, which allows money refunds to customers in case of mistakes.
- Saves time because payments will be taken from clients’ accounts automatically;
- Cost-effective option for customers.
Direct Debit use cases
Are there many businesses that need Direct Debit services? Several instances are worth mentioning when this payment method improves customer relationships and cash flow management.
Regular invoices
When your business needs to collect recurring payments from customers, you can establish a Direct Debit to collect those payments. For example, you can set everything up if you have a magazine, gym, club, or other small business.
Repeat customers
Once you established your relationships with regular clients, you can connect with Direct Debit, asking them for the Direct Debit mandate. You can change the amounts and dates of payments for a particular customer. Notify your clients before each payment is collected.
Subscription-based services
Direct Debit is a convenient payment method for maintaining customer loyalty if you own a subscription-based business that provides products grounded on subscription fees. The customer churn rate will shrink since you set an automatic payment collection.
One-off payments
Customers don’t have to worry about their one-off payment transfer. There is no need to log in to a bank account. They can provide the Direct Debit Instructions so you can schedule the necessary payment.
What are the Alternatives of Direct Debit?
Other options you may choose instead of Direct Debit are usually typical and straightforward. However, they have specific limitations which you need to consider. Selecting the preferred payment method may be crucial for your organisation. So, let’s take a closer look at possible ways of receiving money transfers for businesses:
- Cash:Dealing with physical money is convenient both for businesses and customers. You can immediately control what was paid to you. Your clients can pay face to face. However, if the payment amount rises significantly, cash payments become challenging. Money can go astray or can be stolen.
- Cheques: This is an outdated method of payment requiring additional administrative work for your staff. Keep in mind that there are delays in receiving transfers while they clear.
- Credit and debit cards: You can proceed with card payments using this method, but your business still needs more time to manage and accept card payments.
There is another payment option available for organisations that are not mentioned above. It is called ‘standing order’. At first glance, this alternative payment method offers similar advantages for small businesses. But is it true? Let’s discuss that in the next section.
Standing Order and Direct Debit
You can find one similar aspect for both standing orders and Direct Debits. Your organisation can automatically receive money from your customer’s bank account on a predetermined date. But do you control payments that proceed using standing order? Let’s find out the specifics of each payment method below.
- With a standing order, the customer instructs their bank to pay a fixed amount on their account regularly. Your customer needs to arrange any changes to withdrawal frequency, the amount, or the payment date with their bank.
- Using Direct Debit requires instructions from a customer to their bank that enable money collection from their account. Direct Debits allow your business to change payment dates, amounts, and frequencies. In this case, your organisation should only send an advance notice to inform a customer about any changes.
As you can see, Direct Debit gives you more control over your payments from customers’ accounts. Standing orders allow customers to make changes in their money transfers. With standing orders, they can cancel or change everything without notifying you. So you will be discouraged if you don’t get paid on time.
Such fluctuations can cause cash flow problems because you are uncertain if this payment will proceed. Late payments violate your payment discipline and jeopardise your business growth.
A Direct Debit is an entirely different story. You will be informed instantly when this service is cancelled. So you can take the necessary actions to improve your cash flow immediately.
Using a standing order might temporarily put you on the unknown path, losing more time and money.
Is Direct Debit Accessible for Small Business?
In the past, Direct Debit was only for large businesses with significant turnover. They can invest in costly business solutions, spending substantial costs on primary setup, staff and software fees, and managing their schemes. But now, Direct Debit bureaus assist any organisation, including small businesses, in facilitating Direct Debit most cost-effectively.
Approved by Bacs, these service providers act as mediators and consultants that ensure Direct Debit runs smoothly and benefits your business and your customers.
Bureau’s fees depend on various factors, including the type of service you use and the number of collections you make.
How to Choose Your Ideal Bureau
Multiple companies provide Direct Debit services for small businesses. But what factors do you need to consider before choosing the right one?
Start with the company’s experience and reputation. There are well-established Direct Debit companies as well as new innovative businesses. Consider the Bacs inspection or Trustpilot scores to estimate their proficiency and recognition. Analyse companies’ reviews to depict the portrait of each bureau.
You can also consider the number of channels you can sign up payers with and the system’s level of security, cost-efficiency, user-friendliness, and performance. It is an excellent practice to compare different pricing options to make your choice.
You can also ask yourself several questions to crystallise your final choice. Here are the most critical of them:
- Does a bureau have enough trading history and an excellent reputation to provide high-quality service?
- Does a service provider offer initial advice about which service is the best for you?
- What kind of customer support do they provide?
- What are their setup fees and regular costs?
- How quickly can you start using Direct Debit service?
- What kind of ongoing technical support do they provide?
- What reporting tools do they offer?
- Can your software be integrated with theirs?
- What type of documentation can they provide, including branding for your business?
Communicate with Direct Debit companies and ask them questions that allow you to determine whether it is worth working with them. Consider all the necessary factors to make an informed decision for smooth, reliable and convenient usage of Direct Debit service.
The UK’s most popular Direct Debit service providers are GoCardless, Fastpay, Eazipay, Smart Debit, Eazy Collect, London & Zurich, Access Pay, and others.
The Direct Debit Guarantee
What about benefits for customers? Clients obtain protection in the form of Direct Debit Guarantee. It provides a decent level of security compared to other payment forms, making Direct Debit one of the safest payment methods in the UK.
How does the Direct Debit Guarantee work? Here are its core aspects:
- All banks and building societies that accept instructions to pay Direct Debits offer the Guarantee.
- The organisation notifies customers about any changes to the Direct Debit date, amount, or payment frequency, usually ten working days in advance. The same is relevant in case their account is debited or they agree otherwise. If the customer authorises the organisation to collect money, he receives the information on the date and amount at the time of the request.
- Customers are entitled to a full and immediate refund of the amount paid by the bank or building society if the organisation, the bank, or the building society makes an error.
- If the customer receives a refund, which they are not entitled to, they must pay it back when the organisation asks them to.
- The customer can cancel a Direct Debit at any time. To do that, they need to contact the bank or building society. Confirmation may be required in the written form. The customer should also inform their organisation.
Setting up a Direct Debit for your customers: what you need to know
If you decide to set up a Direct Debit service, here is a step-by-step guide.
Accepting Direct Debits begins with access to the Direct Debit scheme, which is usually considered with Bacs in the UK. If you are not a large organisation with an enormous amount of everyday payment data, establishing Direct Debit as an ‘indirect submitter’ is the best option. This variant is applicable for charities, sole traders, and small businesses who don’t proceed with their payments directly to Bacs. Instead, they apply for third-party services that enable Direct Debit processing and management.
The path you need to go looks like this:
Step 1. Talk with your bank
The starting point is communication with your bank. Let them know that you plan to commence the Direct Debit scheme. Your bank should check if you are eligible to do that. They analyse your administrative capability, financial situation, and other factors. If everything is clear, you will enter the Scheme. Ask your bank for advice, including the scheme rules and the necessary facilities.
Step 2. Choose a Direct Debit provider
After your bank’s Direct Debit scheme authorisation, the next step is to seek the right way to submit payments to Bacs. If the number of Direct Debit payments to process is extremely high, you can submit them directly. Then, you are called a direct submitter. But if you’re a small business, the most suitable option is to become an ‘indirect submitter.’ You need to choose a Bacs-approved specialised payment service provider to go for it.
Step 3. Get a service user number
You also need your bank’s service user number (SUN) to enable Direct Debit service. The service user number is a code identifying an organisation collecting money through the Direct Debit scheme. SUNs are helpful tools for recording all correspondent transactions by Bacs. It also helps banks to determine the company’s name and include it on the payers’ bank statements.
Two options are available: Service for companies with SUNs from a bank and Managed Service for charities, small businesses, partnerships and organisations that can’t obtain SUNs.
Managed Service providers offer service user numbers to smaller businesses needing help getting their own SUN.
Step 4. Ask for Direct Debit Mandates from your customers
After setting up your service, you must request a Direct Debit agreement from a customer to collect payments. Such approval from a customer is called a Direct Debit mandate, also known as Direct Debit Instruction (DDI). Once a customer signs the mandate, you receive permission to collect money from their bank account. You only need to notify the client about any future payments beforehand, usually within ten working days. The DDI stays valid, allowing payment collection of amounts until it is cancelled.
Customers can sign the mandate using Bacs-approved online or paper forms. It is also possible to get permission via phone.
Step 5. Taking payments
Since you get customers’ authorisation to collect payments, you can get paid in your account. With a Direct Debit, you can examine regular reports about any transactions. Email notifications will inform you about failed payments or cancelled Direct Debits.
Problematic transactions are called Automated Return of Unpaid Direct Debit Service (ARUDD). These notifications from Bacs include 12 reason codes.
The most frequently appearing codes are:
- “Refer to payer”: This message will show you when a bank cannot collect the Direct Debit, usually because of insufficient funds in the customer’s account.
- “Instruction cancelled”: This applies when either your customer or their bank has cancelled the arrangement.
- “Accountclosed”: The customer’s account is closed, so you cannot process the transaction.
- “Advanced notice disputed”: The customer disputes the payment date, amount, or frequency.
Connect with your Direct Debit company to quickly take the necessary measures to resolve any issues. Usually, your customers are not required to do anything, and failed payments will be recharged within days. However, a cancelled Direct Debit needs your reinstatement and the customer’s or their bank’s consent.
How fast the money will appear in your bank account depends on the service. Clients who use the bureau service can get direct money transfers via Bacs from their customer bank account into their account on the same day.
You will receive the funds in a Client Trust Account held by your bureau in your name if you are a Managed Service client. Then, these Direct Debit payments will be cleared, and the money will be deposited into your account. The clearing process usually takes around three days.
Connect Your Systems
Even if you haven’t optimised your accounting software for Direct Debit, specialised providers can help you. They can integrate their systems with yours through APIs. The solution provider enables secure, reliable, real-time reporting about your transactions in your account. They increase transparency, reduce time managing those accounts and enhance cash flow efficiency.
How Wallester can help
We are here to help if you are looking for a comprehensive option to make your financial management easier in addition to a Direct Debit company. Our innovative White-label business expense tracking solution enables budget management, smooth invoicing and efficient expense control.
With Wallester’s product, you can manage payment approvals to employees, upload invoices via a mobile phone app in minutes, and receive detailed reports on corporate expenses.
This application will be a great addition to any Direct Debit service you choose. You can keep tabs on your business, focus on strategic tasks, and leave control over your payments to the Wallester’s platform.
Explore our business solution for free here.
