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Direct Debit Explained

Definition: "A Direct Debit or direct withdrawal is a financial transaction in which one person (or company) withdraws funds from another person's bank account. Formally, the person who directly draws the funds ("the payee") instructs his or her bank to collect (i.e., debit) an amount directly from another's ("the payer's") bank account designated by the payer and pay those funds into a bank account designated by the payee. Before the payer's banker will allow the transaction to take place, the payer must have advised the bank that he or she has authorized the payee to directly draw the funds. It is also called pre-authorized debit (PAD) or pre-authorized payment (PAP). After the authorities are set up, the direct debit transactions are usually processed electronically." Definition from Wiki.

How it works

You give this authorization by completing an ACH authorization form in the US. This can be a paper form or a web page that you complete online.

Once you authorize a company, they can automatically take payments from you (provided that they comply with certain rules).

Direct Debit can be used for nearly everything

Direct Debit can be used for most payments but it’s most often used to pay:

  • Regular bills for variable amounts - With Direct Debit, you know all your important bills will be paid on time each month.

  • Fixed subscriptions or memberships - Direct Debit is a safe and easy way to make recurring payments like magazine subscriptions or gym memberships.

  • Paying on account – Some companies will provide Direct Debit as an option for spreading your costs or paying on account.

Direct Debit can be used for one-off payments

While Direct Debit is usually associated with regular and recurring payments, it can also be used for one-off payments.

Direct Debit should not be used for one-off payments where instant transfer of funds is needed, like e-commerce. However, if the company you're paying doesn't need the money immediately, Direct Debit can be a great option.

Important Direct Debit rules you should know

  • Authorization - You must provide specific authorization to a company before they can begin collecting Direct Debit payments from you.

  • Notifications - When there are changes to your payment amount or frequency, the company collecting payment from you should warn you of these changes in advance.

  • Customer protection - You are entitled to a refund for any payments that shouldn’t have been taken (subject to some rules about ACH payments).

Direct Debit is safe, convenient, and cost effective for customers

There are three benefits to making payments using Direct Debit:

  • Convenience - Payments are automatic, so bills are never forgotten, lost or delayed.

  • Cost - Businesses may offer incentives for paying by Direct Debit, such as a discount.

  • Customer protection – Direct Debit is a highly safe payment method for consumers.

Direct Debit vs. Standing Order

In short: Standing orders give you control. Direct Debit gives you flexibility and safety.

Standing orders are good for regular payments of a fixed amount. However, if you want to pay variable amounts, or might need to change payment amounts, then standing orders are not the most practical option.

Direct Debit lets you pay variable amounts or at varying intervals without needing to do anything more. This makes it great for paying bills where you are charged depending on what you have spent that month.

Direct Debit is one of the safest ways to make payments. The ACH scheme rules (as well as federal regulations) give you protections for payments which shouldn't have been taken from you.

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