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Setting up regular payments is great for cashflow but you need to ensure that the process is easy and that payments are secure for each customer to avoid payment processing becoming an issue.

The two key options for recurring business payments are either via Direct Debit or credit/debit card payments. In this article, we assess the differences, pros and cons of each to help you decide.

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What’s the difference between Direct Debit and recurring payments?

The answer is pretty simple – a Direct Debit comes directly from each customers’ bank whereas the alternative is to take a regular payment using a credit card.

A Direct Debit Mandate is basically an approval granted by the customer which enables you (the business) to pull payment from their (the customer’s) bank account. The Direct Debit remains in place until the customer cancels their authorisation.

A recurring card payment (also known as a Continuous Payment Authority (CPA)) also requires authorisation from the customer which enables you to take payments from their credit card.

Direct Debits are often used for recurring payments such as utility bills, subscriptions and paying off larger ticket items in smaller amounts. Recurring card payments can be used for things like subscriptions and payday loan repayments.

Recurring card payment vs Direct Debit

Fees: As a business, you will be required to pay up for whichever payment option you chose.

Expect to pay a monthly fee for recurring card payments as well as possibly a transaction rate on top.

Direct Debit fees are transactional but there may also be bureau costs to pay depending on whether you have a (Service User Number) SUN.

Security: It’s unfortunate fact of life that sometimes errors can occur and payment processing is no different.

If a card payment has been made incorrectly or fraudulently, the customer will try and resolve it with you. Whilst the consumer has the legal right to cancel and reclaim any card payments that have been taken in error, the process can be difficult.

When cancelling a credit card, the account stays open for a few more months to ensure there haven’t been any payments made on the card that haven’t been processed yet. If the recurring payment is still being requested by the organisation, it will count as a new incoming payment, causing the account to remain open and the organisation asking you to settle payment.

In contrast, with Direct Debits, if money is charged incorrectly, the bank will refund the customer directly as part of the Direct Debit Guarantee.

Payment success rates: Direct Debit has the clear advantage in this case with a typical success rate of just 95% or more. This compares to recurring card payment failure rates over 80% or above.

When should you use Direct Debits?

  • If customer churn from failed payments is a problem for your business

Recurring payments via a card commonly fail because the card has expired; in contrast, the Direct Debit comes directly from the bank account which obviously doesn’t expire. Introducing Direct Debits could be a good strategy if your business struggles with failed payments.

  • If you want to give customers added reassurance

Another advantage is the Direct Debit Guarantee, which is specifically designed to give your customer added reassurance and legal rights should something go wrong. Many people are more comfortable with Direct Debit payments because of this, so that might make a difference to take-up levels when you’re targeting new customers.

When to use recurring card payments

  • If you need faster payment processing

Recurring card payments can be processed either immediately, on the same day or the next day. In contrast, a Direct Debit can take several working days to clear. If speed is an issue, then setting up a new recurring card payment might be the ideal course of action.

  • If you need flexibility in payment amounts or dates

You can vary payment amounts with both recurring card payments and Direct Debits however the key difference is flexibility. You’ll have to give the customer advance notice of the revised payment amount or date if they’re paying by Direct Debit. That’s not the case with a recurring card payment.

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