What is direct debit for New Zealand businesses: benefits and setup guide

According to the Reserve Bank of New Zealand, direct debit and automatic payments are the most popular way to pay ongoing bills, used by over 75.3% of Kiwis.¹ The automated, low-fee payment method offers a plethora of business benefits, from reducing admin to improving customer retention and cash flow management.

In this post, we’re discussing what direct debit means for Kiwi SMBs with recurring payment needs, including the process, benefits, and start-up. We’ll also introduce Wise Business, a cost-effective solution for direct debit cross-currency payments.

What is direct debit?

Direct debit is a recurring payment method in which a business obtains the customer's permission to directly debit funds from their account on an agreed-upon schedule. Alternative recurring payment types include automated card payments and bank transfers.

In New Zealand, direct debits are governed by the Bulk Electronic Clearing System (BECS). This system defines transaction rules, standards, and procedures, including settlement and interchange timeframes, as well as dispute resolution procedures.²

Businesses generally use direct debits at predefined intervals, such as weekly, fortnightly, monthly, quarterly, or annually. Direct debits work best for recurring services such as mobile plans, gym memberships, streaming services, and software subscriptions, as well as utilities like electricity, water, and gas.

Direct debit types

There are three main types of recurring direct debit payments:

1. Fixed: Charging the same amount each billing cycle (gym memberships, most software subscriptions, etc.).
2. Variable: Charging a fee according to the customer’s consumption (utilities, some mobile and internet plans, etc.)
3. Hybrid: Charging a fixed fee and a consumption-based fee (mobile plans that have fixed rates plus extra fees for additional data packs).

Most consumer bank accounts will accept direct debits, although there are exceptions.³ Customers can check directly with their financial institution.

How does direct debit work?

For a direct debit to work in New Zealand, the customer authorises the business – known as the “initiator” – to take automated electronic payments from their nominated bank account. Consent is acquired through a direct debit authority form, sometimes known as a mandate, which covers the services provided, the payment schedule, and the associated fees.

Once signed, the initiator informs the customer’s bank, which schedules payments for the agreed-upon billing cycle. The business must give the customer 10 days’ notice before billing the first payment.³

Direct debits may take up to 5 business days to clear, though processing times vary between providers. Fees also vary, typically ranging from $0.20 to $2 per domestic transaction. Some providers charge a start-up fee, while others do not.

When it comes time for your end-of-month reconciliation, many direct debit providers integrate with the best accounting software. That lets you spend less time on manual admin and more time growing your business.

Direct debit vs automatic payment

The main difference between direct debit and automatic payment is the party that initiates the payment schedule.

While direct debits require the business to initiate the transaction, automatic bank transfers – also known as “automatic payments” in New Zealand – are set up by the customer through an online banking portal. Kiwis commonly use them to pay rent and employee salaries, or set money aside for savings or investment contributions.

As the customer sets the schedule and amount, automatic payments are only suitable for fixed recurring payments.³

Benefits of using direct debits for recurring payments

Direct debits offer numerous benefits for businesses, even when compared to other recurring payments such as cards and bank transfers.

• Lower fees: Direct debits and other BECS-driven bank transfers typically cost less than card payments, which rely on card schemes like Visa or Mastercard.
• Higher success rates: Cards can expire or get cancelled when lost or stolen. Direct debits only fail when customers switch bank accounts or have insufficient funds, which is less common.
• Strong security: Direct BECS payments aren’t susceptible to credit card fraud, potentially meaning fewer chargebacks and disputes.
• Improved cash flow: Predictable billing cycles let businesses better forecast and manage cash flow.
• Less admin: Direct debits don’t require manual invoicing or processing, and you can automatically notify customers of late or failed payments.
• Simplified reconciliations: Automated digital payments make it easier to monitor and reconcile payments.
• Better retention: Customers like the convenience of automated payments and can sometimes be too busy or forgetful to cancel a subscription.
• Predictable payments: Customers are more likely to pay promptly when no manual intervention is required.

How to set up direct debit in New Zealand

A Kiwi business can apply to become an initiator through a direct debit provider, such as a bank or payment processor.

The precise process varies between providers. Nonetheless, here’s a quick step-by-step guide for businesses setting up a direct debit in New Zealand.

1. Choose your direct debit provider, such as a bank or payment processor, and create an account.
2. Give the customer a direct debit authority form (mandate) outlining the services, fees, and billing schedule.
3. The customer reviews and signs the direct debit authority, providing details such as the bank account number, holder’s name, email address, and agreement to the BECS Direct Debit Service terms.

   Direct debits must usually be signed by a customer in-person. However, in some situations, it’s possible to establish a direct debit online or over the phone.⁴

4. Send the direct debit authority form to the customer’s bank through your provider.
5. The provider gives the customer at least 10 days' notice before the first payment.
6. The customer’s bank reviews the direct debit and sets the payment schedule.
7. The direct debit system (BECS) deducts funds at the agreed-upon interval and transfers them to the business’s bank account.

Common international payment challenges with direct debits

Establishing a direct debit with a foreign bank account is considerably more complex due to differing regulations. For example, foreign infrastructure, such as SEPA (Single Euro Payments Area) in Europe and ACH (Automated Clearing House) in the USA, has different rules from those of the Australia and New Zealand-based BECS.

Some small businesses establish recurring card payments through a payment gateway, as these may be less prone to regulatory complexities.

Nonetheless, time zone differences and varying banking holidays can lead to slower processing times and unexpected delays. Plus, many providers might add on a hidden markup to the foreign exchange rate, further inflating already high international transaction fees.

Wise Business: Simplifying International Payments for New Zealand Businesses

Traditional business accounts may seldom restrict your automated payments to local currency accounts, causing unnecessary hurdles if your operations span across borders.

A Wise Business account helps solve this friction by allowing you to set up direct debits in multiple global currencies, including AUD, NZD, USD, GBP, EUR, and CAD.

In addition, businesses have the flexibility to choose if they would want to automatically convert the missing amount from other currencies using the lowest possible fee to ensure that the automated payments run smoothly. This ensures that direct debit payments occur even if there is no balance in that specific currency.

How to set up direct debits with Wise Business

Setting up an automated payment from your account is simple, digital, and typically takes just a few days to finalize.

• Step 1: Locate your account details. Log into your Wise Business dashboard, navigate to Payments, and select the currency you need to pay with to view your local account details.
• Step 2: Share details with the merchant. Provide these account details to the company you want to pay. They will use this information to create a payment agreement online, over the phone, or via a digital form.
• Step 3: Track the authorization. The merchant will process the setup through their local banking network, which usually takes 1 to 3 business days depending on the currency. Wise will send you an email confirmation the moment the direct debit is successfully active.

Managing direct debit payments

Maintaining complete visibility over your business expenses is vital, so Wise gives you the tools to track or stop your payments instantly from your dashboard.

• To view active payments: Open the Wise Business app or website, head to Payments, choose your specific currency, and select Direct Debits to see a complete list of your current automated agreements.
• To cancel a payment: If you need to stop a recurring bill, simply go to Payments, select Direct Debits, choose the merchant you wish to remove, and click Cancel Direct Debit.

Important note: To ensure a payment does not leave your account, you must cancel the direct debit at least 1 working day before the next scheduled payment date.

Getting started with Wise Business

Expanding a business globally opens up exciting opportunities, but also new challenges like receiving payments across borders. Hidden foreign transaction fees and hefty currency conversions involved with international payments can eat into your profits and time.

Wise Business serves as a cost-effective solution where you can receive money from around the world at the speed and price of local payments.

Transform the way you receive payments with Wise Business:

• One-time fee of 40 NZD for local account details in 8+ currencies, including AUD, NZD, USD, and more—no recurring fees
• One account to hold, send, and convert money with no hidden fees or exchange rate markups
• Create and send professional invoices directly to your customers through Wise Business
• Create payment links to request money in specific currencies
• Seamlessly receive payments from customers, online sales, or PSPs like Stripe and Amazon.
• Wise is safe and secure - Trusted by 13 million people and counting

Sign up for the Wise Business account! 🚀

This general advice does not take into account your objectives, financial circumstances or needs and you should consider if it is appropriate for you.

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Direct Debit FAQs

1. What is a direct debit in New Zealand?
A direct debit is when a company obtains a customer's permission to bill their bank account at an agreed-upon schedule via a BECS transfer.

2. What is the difference between a direct debit and an automatic payment?
The main difference is who initiates the payment. An “automatic payment” is when a customer sets up a payment schedule in their online banking portal, while a direct debit is when the business pulls funds directly from the customer’s account.

3. Are direct debits popular in New Zealand?
Yes. Direct debits are widely used for recurring payments such as utility bills, mobile phone plans, and insurance renewals.

4. What are the benefits of direct debit in New Zealand?
Direct debit offers a convenient, low-cost way to process recurring payments, with fewer failures due to expired or stolen cards.

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Sources:

1. Reserve Bank of New Zealand: Future of cash
2. Payments NZ: BECS
3. Bank Omb: Direct Debit
4. Payments NZ: Direct Debit