Direct debit payments: what are they and how to use them?

Direct debit payments: what are they and how to use them?

Financial institutions come up with many solutions to allow customers to navigate the banking sphere more accessible and straightforwardly. Direct debit payments are one such tool.

In this article, Genome will explain what direct debit transactions are and the benefit of direct debit.

Direct debit: meaning of the term

A direct debit transaction is a payment method used for collecting payments. Using direct debit, the account owner authorizes the third-party (different kinds of businesses and merchants) to pull funds from the said account to pay for the company’s products or services. The clients must notify their financial institution that they have authorized the direct debit payment before it occurs.

The funds will be pulled from the account on the date agreed by the payer and payee. As online direct debits are generally used for recurring payments, the date that the funds are pulled can occur monthly or during other specified periods of time.

Some clients find direct debit transactions quite advantageous when it comes to paying their utility bills, buying subscriptions, and handling other recurring purchases. That’s because direct debit management is quite simple – you need to provide your banking details just once and then get billed regularly with no participation on your part. Of course, you still need to be mindful of what goes on with your transactions, but we will discuss it a bit later in the article.

Let us give you a direct debit example. Imagine that you want to buy a monthly subscription to a digital magazine. The company that offers these magazines has a direct debit payment option.

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So, how do you set up a direct debit with the said business? This is how the process usually goes:

1. The merchant will send you a form, which you need to fill out with payment details, so the business knows where to pull funds from during direct debit transactions.

2. After collecting the necessary data, the merchant will send you a mandate – a contract between them and you that is necessary to carry out direct debit payments. The mandate will contain the date the funds will be pulled from your account and the payment amount. The client needs to read and sign the mandate.

3. After the mandate is sent to the merchant’s bank, it will come into force in a couple of days.

4. Once the mandate is activated, a merchant must notify you before the direct debit transaction takes place. Normally, the notification comes 10 to 14 days before the debit payment or earlier if both sides agreed upon that in the mandate.

Note that if you want to transfer direct debits to another bank, you will need to notify the merchant so they have the new payment details to pull funds from your other account. 

The difference between a direct debit payment and a wire transfer

The description of how direct debit transactions are made makes it clear that they differ from regular money transfers people send each other. Let’s compare online direct debits to wire transfers to uncover more differences.

Direct debitWire transfer
It is used for recurring payments.Works better for one-off payments.
It is usually limited to one currency, as many countries have their local direct debit services. For instance, SEPA DD can only be made in EUR and in the US – in USD.The transfer can be made in different currencies.
Direct debit is available in particular countries for domestic transfers (except for SEPA Direct Debit, which works within the SEPA zone).Both domestic and international transfers are available.
It is relatively cheap.Transfers can be expensive due to conversion rates and intermediaries.

It is a general gist of how direct debit services work, but some processes may differ a bit, as many countries have local direct debit options.

So, let us next focus on SEPA Direct Debit.

SEPA Direct Debit for the EU clients

If you live in Europe, chances are you have already heard of and used SEPA transfers – either for your day-to-day errands or corporate payments.

Usually, when we talk about SEPA payments, we mean SEPA Credit Transfers (SCT). These are cheap money transfers made in euros that can be sent and received within the SEPA zone. We at Genome also provide SEPA payments, and you can find out more about them in this article.

But, for now, let’s focus on SEPA Direct Debit (SDD), which allows making domestic and cross-border direct debit transactions, while other direct debit systems are more domestic-oriented. It is one of the differences between it and other direct debit systems, as SDDs are enabled all over the EU and the SEPA zone. 

SEPA Direct Debit payments are only available in euros and require clients to sign the SEPA Direct Debit mandate to authorize the transaction. 

Also, SDD offers two payment schemes:

  • SEPA Core Direct Debit (SDD Core) – used between merchants and consumers;
  • SEPA B2B Direct Debit (SDD B2B) – the payers must be companies;

Find out more about SEPA Direct Debit and the difference between SDD Core and SDD B2B in this article

Pros and cons of using direct debit services

Now that our team described the main features of direct debit payments, we want to explain their advantages and disadvantages, so people can decide for themselves if they need them.

Benefits of direct debit

  • Simple and efficient. As a client, you don’t need to do much to set up a direct debit. Your only tasks are to send your financial data to a merchant, so they can start billing you and sign the mandate.
  • You won’t miss the payment date. A merchant will charge you automatically, so you don’t have to worry about the service provision being interrupted due to you missing the payment. Canceling direct debit is usually as easy – you just need to contact your bank or do so in the banking app. 
  • The security guarantee. Another benefit of direct debit is that it is pretty safe – if the merchant charges you more than was discussed, your money will be returned. And you can cancel direct debit anytime.
  • You may be able to save funds. Lastly, some businesses that use direct debit services can offer discounts if you use this payment method.

Disadvantages of direct debit

  • Direct debit management. Although you don’t need to instruct and send direct payments yourself, you still need to track your account and ensure that you have enough funds for the upcoming billing in it each month. 
  • Errors can happen. Direct debit payments are heavily regulated, but it doesn’t mean that you can’t be charged more than you agreed upon, so be mindful of this.

Direct debit for business: do merchants need it?

If you are a merchant and considering setting up a direct debit for your customers, it may be a good idea. Primarily if your business is subscription-based, even if you have a small business. Here are the benefits of direct debit for your company. 

With direct debit transactions, merchants can reduce the number of missed payments on customers’ part, as the latter don’t have to remember that they have to pay monthly – all is taken care of with automatic billing. Online direct debit payments are generally easier for clients to manage, so they can be more prone to using this payment option.

Of course, when you accept direct debits, the payments are more timely than when you have to deal with regular transfers from clients. This, in turn, will increase your cash flow, allowing for a more stable business environment.

Last but not least, the more payment methods you offer – the better, as customers get used to different transfer and payment options, so having direct debit services in your arsenal is a plus.

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What does direct debit mean?

Direct debit is a method of accepting payments during which a client authorizes a business to pull the funds directly from the client’s account. Direct debit transactions are generally used for subscriptions, utilities, and similar recurring payments.

How does direct debit work?

A merchant will need to send a client a form to collect the payment data, which they will later use for billing. Then, the merchant will create a mandate to facilitate the direct debit services, which the client must agree to and sign. Then, the merchant’s and client’s banks will receive the mandate to instruct the direct debit transaction. Meanwhile, the merchant has to notify the client 10 to 14 days before the direct debit payment will occur. Then, on a set date, the client will be billed automatically.

What are direct debit advantages and disadvantages?

We have described both pros and cons of direct debit transactions in the article. The main advantage is that direct debit is convenient for recurring payments, but on the downside, clients still need to check if they have enough funds before every monthly payment.  

What happens if there is not enough money for direct debit?

In this case, the direct debit payment will likely fail, and your bank can even charge you. That’s why keeping your eye on how much money you have before the monthly billing is crucial.