Direct debit for small business

Direct debit has been around for decades bringing convenience not only to regular consumers but also to businesses who need to run their accounts payable regularly. With the help of this payment method, companies are able to collect and pay bills on time and effortlessly.

Most banks have adopted this payment method to bring more value to their customers. Other services like Wise has also recently introduced this method to help customers manage their payables more cost effectively and with less pain.

This article will help you understand how direct debit works and how your business could benefit from it.

What is direct debit?

Direct debit can be used both for collecting and sending payments. Unlike the traditional way where you ask for your recipient’s bank account details and manually transfer the funds, direct debit lets you authorize the recipient's bank to deduct a certain amount and time from your account. This solution is best helpful for businesses who collect payments from their customers regularly. The process is very similar to credit or debit card payments except that you don’t need the customer’s card details. It’s also cheaper to collect payments this way.

What are the pros and cons of direct debit?

There are more pros than cons for both the sender and receiver when using direct debit and here are some of them.

Pros

• Less effort - the sender would usually initiate/authorize a direct debit payment once for the rest of the billing cycles.
• More control - Instead of waiting for the sender to make a bank transfer, you could debit the payment from their account after it has been authorized.
• Receive payments on time - lesser risks of receiving late payments as its already been pre-authorised to be debited on a specific date.
• less costly - its cheaper to collect/send payments using direct debit compared to debit or credit cards.

Cons

• Can be lengthy - Direct debit can take up to 5 working days to be received
• Higher chargeback risk - Customers have to be notified before the debit happens. Under direct debit guarantee rules, customers are entitled to a full and immediate refund of any payment that has been taken in error and this includes failure to send the notice beforehand.

Direct Debit Guarantee

This rule favors the payee as it protects them from payments taken in error. It’s important to keep this in mind to lessen the risk of getting chargebacks. The Scheme states the following:¹

• The Guarantee is offered by all banks and building societies that accept instructions to pay Direct Debits

• If there are any changes to the amount, date or frequency of your Direct Debit the organisation will notify you (normally 10 working days) in advance of your account being debited or as otherwise agreed. If you request the organisation to collect a payment, confirmation of the amount and date will be given to you at the time of the request

• If an error is made in the payment of your Direct Debit, by the organisation or your bank or building society, you are entitled to a full and immediate refund of the amount paid from your bank or building society

  • If you receive a refund you are not entitled to, you must pay it back when the organisation asks you to

• You can cancel a Direct Debit at any time by simply contacting your bank or building society. Written confirmation may be required. Please also notify the organisation.

Notices given in writing or electronically should be as clear as possible, and must be signed off by your sponsor bank. However, if the customer explicitly requested for a payment to be taken in advance, this rule doesn’t apply.

Indemnity claims

When a customer requests for a refund from a direct debit payment, it’s called “indemnity claim”. Under direct debit guarantee, the rules are quite strict around this process. Provided that the bank agrees with the validity of the refund request, you’re required to issue an immediate refund.

If you wish to file an indemnity claim, you should notify your bank if you believe that there has been an error. Banks will normally take your word for it and will immediately credit the full refund. They will then notify the merchant (payee) of the claim via a system called DDICA message with a code which stands for the reason. The amount refunded to the customer will be reclaimed from the merchant automatically 14 working days later.

There are cases when the merchant can dispute an indemnity claim. This includes:²

1. The customer's bank has made an error in raising the indemnity claim. For example, the customer's bank may have mistakenly sent the same indemnity claim twice.
2. The customer's bank failed to inform the merchant after the customer's mandate was cancelled, and then allowed payment to be taken under the cancelled mandate. In this case the customer's bank is liable for the indemnity claim, as they are responsible for it.
3. The customer claims they never signed a Direct Debit Instruction, but the merchant can produce a signed paper DDI, which the customer then accepts.

Such counterclaims must be submitted to the sponsor bank within 14 working days of an indemnity claim being settled. Any counterclaims made after this deadline will be automatically rejected.

Direct debit for EUR, GBP and AUD

Although direct debit is quite convenient both for collecting and sending payments, it can only be used for local transfers in the same currency. If your business is registered in the UK, it can be quite a challenge to use direct debit in a different currency even in countries within Europe.

Luckily, there are services like Wise Business that can help you process direct debit in EUR, GBP and AUD. This means that you can pay your overseas suppliers and contractors in these currencies using direct debit. Using this method, you’ll save up to 40% of the overall payment cost you’d incur using traditional banks or PayPal. You can also receive payments from across the world in USD, EUR, GBP, AUD and NZD for free, convert between them and send to over 40 different currencies.

Additional benefits includes:

• Multi-currency debit card attached to the account
• USD global - pay overseas contractors in USD
• Linkable to accounting software such as Xero

Create your multi-currency account in minutes and start saving money today!