What is a Direct Debit and how does it work? Guide for businesses

In this guide, we'll detail all there is to know about Direct Debits so you can be informed as a business and customer. Click the links to jump to the section:

• What is a Direct Debit?
• How does Direct Debit work?
• What can Direct Debit payments be used for?
• Direct Debit vs standing orders
• Why choose Direct Debit?
• How to set up a Direct Debit?
• Direct Debit rules
• Common Direct Debit problems
• FAQs

A Direct Debit is a simple and easy way of making regular or occasional payments to a business. They are a simple financial transaction where a company can “pull” funds from a person’s bank account with their prior authorisation to streamline the payment process and save the person having to constantly complete payments. This is often used for bills, subscriptions, or memberships and provides a hassle-free experience for the customer as well as less administration for the company. 

Also consider Direct Credit as an easy way to streamline transactions and increase efficiency.

Before a bank will allow the transaction to take place, the payer must set up a Direct Debit and authorise the bank that the company is allowed to draw the funds from their bank account.

Once agreements are in place on when the money will be taken and how much, money is deducted automatically when the time comes. If any changes to frequency, date of collection or Direct Debit amount occurs, the organisation has to inform the customer first before it can be processed. The new agreement has to be confirmed before the Direct Debit can continue.

Direct debit usage in the euro area increased by 2.7% in transaction volume and 5.8% in value in the first half of 2024 compared to the previous year.1 source

Direct Debit payments can be used for any recurring payment to a company. The most common transactions people use Direct Debits for are:

1. Utility bills - People use Direct Debit to pay things like their electricity bills, or council tax, or even their mobile phone bill. If you're a utility company or phone service provider, you can easily set up a direct debit and streamline your customers payments to make transactions easier for both you and them.

2. Gyms and fitness memberships - Fixed subscriptions or memberships are the easiest way for your customers to make their recurring payments to services like sports clubs and magazine subscriptions.

3. Donations - Regular giving to not-for-profits hugely relies on people transferring a portion of their monthly wage to a charity of their choice via a Direct Debit.
   
   

4. Insurance payments - Monthly life insurance or car insurance premium collections through to processing insurance claims are made far easier with Direct Debits in place.
   
   

5. Health and social care- Setting up regular payments to care homes for example.
   
   

6. Education - Many schools and colleges are now accepting Direct Debit payments for tuition fees.
   
   

7. Financial services - Accountants and brokers are common financial institutions using Direct Debits so their customers can easily pay for their services.
   
   

8. Software - Web development or digital marketing services for example can benefit hugely from on-time payments from clients.

The difference between direct debit and standing orders is that, whilst a standing order is a fixed, unchanging amount you set up to pay regularly, a direct debit is a variable amount that a company takes from you that may change depending on several factors like inflation, your usage, or price changes.

A Direct Debit will tend to be for utilities and subscriptions that may change at the company’s discretion and it is the company’s responsibility to ensure the payment is correct. A standing order will more likely be for fixed payments like rent and is set up by the payer, meaning it is the payer’s responsibility to ensure the payment is correct.

The benefits of a standing order is that it is a fixed amount that the customer has full control over. This also means however, they have full responsibility too, and they will be liable for any missed payments or mistakes made. Whereas a Direct Debit offers flexibility and safety for the customer, as it places the responsibility on the business.

• A direct debit is a convenient way to complete a transaction automatically, for both businesses and customers.

• Direct Debit payments are trusted and used by the majority of businesses across the UK and Europe. Our SEPA Direct Debit payment collection solutions can help across 36 SEPA countries. 

• Direct Debit offers flexibility and control for a company over incoming payments and allows customers to know exactly what they’re going to pay and when.

• With the Direct Debit guarantee, any transaction is protected in case something goes wrong.

Compare the best UK Direct Debit providers to start your Direct Debit scheme today.

Setting up a Direct Debit for your customers isn’t that complicated. You'll just need to get set up with Bacs and join the Direct Debit scheme in order to start to accept Direct Debits from your customers. Use our direct file submissions to Bacs to increase efficiency and save time. 

To learn about the differences between Bacs and a bank transfer, read our guide.

1: Speak with your bank

Get in touch with the bank handling your business transactions to talk about Direct Debits. There are a few administrative aspects to go over before you can join the scheme.

2: Choose a direct debit company

To make your payments simple, find a payment specialist (like us!) or another Bacs approved bureau. 

Depending on what type of business you are and who you choose to go with you may need to get a Service User Number (SUN) from your bank. Our guide goes into more detail about how to obtain a service user number.

3: Get direct debit mandates from your customers

When setting up a Direct Debit, tTo be able to actually collect the money from your customers you'll need to get a Direct Debit mandate, also known as a Direct Debit Instruction (DDI).

This is an integral part of the Direct Debit Scheme which gives permission from the customer for you, the business, to collect payments from their bank.

Customers need to sign these DDIs for you to begin your Direct Debit Scheme. At Access Paysuite, customers can sign either digitally, through paper forms, or over telephone approval, making your life and the customer’s easier. Simply let us handle it all with our Direct Debit facilities managed services.

Of all direct debits in the euro area in the first half of 2024, 12% were initiated with an electronic mandate, while 88% used other forms of consent. - source

To make your Direct Debit scheme more efficient for both you and your customers, also consider reading our 9 steps to smoother Direct Debit.

When setting up a Direct Debit for your business, it's important to make sure you understand what Direct Debit collection rules are in place to make sure you don't get stung down the line.

All customers are protected by a Direct Debit Guarantee., Tthis is when their bank that gives your customers an immediate refund should a payment be taken from their account that was not agreed upon. It's up to you as a business to ensure that any changes to Direct Debits are communicated to your customers or you could find yourself with late or failed payments and reconciliation nightmares. There is an appeals process you can follow should you believe a payment should have been met.

You are required to give your customers an advance notice at the start of the scheme which states the amount and date of each payment in advance.