A Direct Debit (DD) is an instruction from a customer to their bank or building society authorising an organisation to collect varying amounts from their account, as long as the customer has been given advance notice of the collection amounts and dates. Direct debits are initiated by the beneficiary, the collector on the agreed date (and time). Direct debit mandates can be given for one-off and/or for regular recurring payments.
Direct debits are primarily used to pay household bills or make regular payments. They are popular with many households as they save time, and are more convenient. Direct debiting providers claim that they give greater control, but only if the payer ensures that the direct debit agreements are stopped when the service is no longer needed or used. They beginning to be accepted for more types of Business-to-Business payments.
The level of direct debit usage varies greatly around the world.
Country Direct Debit Usage as % of All Non-Cash Transactions
Most direct debit schemes operate domestically. The DD clearing varies considerably with some schemes only allowing DD payments between accounts at the same bank, and others using bilateral interbank arrangements, while the majority of schemes use the national ACH for clearing and settlement. Other variations in the DD schemes include the refund periods - the period when the account holder can request a refund for the amount debited which range from no refund to unlimited period, the clearing cycle, how long before an unused mandate is canceled, and whether the account holder can authorise a company to collect a direct debit payment without notifying their bank.
Multi-country DD collection services are available from cash management banks. The corporate client submits a file of all the DD to be collected. The bank then splits this into the DDs to be collected from each country and submits the file to the local ACH or clearing scheme.
The only multi-country DD scheme is the SEPA.direct debiting ((SDD). There are two euro based SDD schemes which were launched in November 2009: the SEPA Core Direct Debit Scheme (SDD Core) and the SEPA Business-to-Business Direct Debit Scheme (SDD B2B). These schemes can be used for domestic and cross-border collections throughout the 32 SEPA countries. The SDD Core Scheme can be used for single or recurrent direct debit collections. The amounts are not limited. The SDD Core scheme grants payers a "no-questions-asked" refund right during the eight weeks following the debiting of the payer's account. In the event of unauthorised direct debit collections, the payer's right to a refund extends to 13 months.
The main features of the SDD B2B Scheme are that the payer can only be a business, the payer's bank guarantees to ensure that the collection is authorised by checking each collection against the mandate, the payer is not entitled to obtain a refund of an authorised transaction, and the SDD B2B has a shorter clearing cycle.
Implementing Direct Debit Programmes
Although direct debiting is the simplest and easiest way for consumers to pay their regular bills, care is needed in promoting the service to customers. To maximise acceptance, all the features in the direct debit guarantee - which states how the scheme is vetted and monitored, how an account holder is told of any changes to the amount, date, etc. and that customer can cancel a direct debit at any time by simply contacting their bank or building society - must be stressed. Customer service departments need to be able to sign up customers on the phone for direct debiting and then confirm in writing. One technique that works well in encouraging DD use is to offer discounts that only apply if the customer pays by direct debiting.
In many SMEs direct debiting is acceptable and is one of the ways they pay their regular commitments. The same techniques used to encourage consumers to accept payment by direct debiting also work for SMEs.
Direct debiting is far less popular with larger businesses because they are unwilling to give up control as to when they make their payments. Many large businesses insist that any disputes need to be resolved before they will make the payment, and they have internal processes and controls in the A/R department which are incompatible with direct debiting. Nevertheless, the efficiency improvements and cost savings from direct debiting are so great that the resistance is lessening, and the use of direct debiting for B2B payments is growing slowly world-wide.
Direct Debit Services
All major domestic banks offer some form of direct debiting service. Most international cash management banks offer multi-country DD collection services. There are also third party direct debit bureau services in many countries.