The Advantages of Using Direct Debit to Collect an Organisations Income

This informal CPD article, ‘The advantages of using direct debit to collect an organisations income' was provided by Movimo, who help organisations improve their Direct Debit and Bacs Direct Credit processes to ensure successful, stress-free payments.

Numerous organisations, large and small, use Direct Debit as a payment method. Typical organisations using Direct Debit include insurance providers, membership bodies, utility providers, financial institutions and more. Given the clear advantages offered by Direct Debit, it is not surprising why so many organisations choose Direct Debit over other payment methods such as standing order, credit card, cash and cheques.

What is Direct Debit?

A direct debit is a type of bank-to-bank payment that is governed by Bacs (now part of Pay.UK). It is the only payment method where money is ‘pulled’ rather than ‘pushed’. This means that the organisation looking to receive the funds (known as the Service User) initiates the transaction. The Service user takes authority from the payer to allow a Direct Debit to be collected; they provide advance notice of the amount and date of the Direct Debit; they initiate the request for payment and money is received on a known date into their bank account.

10 Advantages of using Direct Debit as a Payment Method

1. The Organisation is in control. The Service User for example, decides the amount and the date for the collection. It is the Service User that initiates the transaction. In this way, the collecting business has complete control. In contrast for example with standing orders, the paying customer will decide the amount and date. Also, with methods such as cheques, faster payments or credit cards, the organisation is reliant on the payer deciding to initiate the payment.

2. Flexibility. Because Direct Debits are set-up as an authority for the Service User to collect funds as required, the amount and the collecting date can change as required. Collections can be made on a regular interval – such as once a week or once a month. They could also be variable and collected on different days or dates depending on usage. This isn’t the case with standing orders for example that are for a set amount on a set date.

3. Feedback on failures. Service Users receive regular reports from Bacs advising of changes to the Direct Debit set-up and reasons why some collections may have failed. This is not the case with other payment methods. There are no reports for example to advise that a customer has not sent a cheque, has cancelled a standing order or won’t be making a credit card payment.

4. Reducing administration and mitigating the risk of human error. Direct Debits are ideal for bulk collections. Organisations upload a file containing multiple transactions. They process all these in one, automated approach. This allows validation at a total file level and saves time that would have been spent, for example, on processing individual card payments. This approach can also mitigate the risk of human error that can arise with multiple individual transactions and allows for split authorisation at a file level.

5. Saves time: Reconciliation of the bank account is much quicker due to the bulk submission approach. In addition, the provision of the Bacs reports means that transactions are only processed if there is a chance of them being successful. In turn, this means less need to chase customers for explanations around non-payment which can translate into significant time and resource savings for staff.

6. Cost-effective. Direct Debits can often be cheaper than other payment methods. Charges will vary but a bank may charge a small fee per submission file – or - it may charge a transactional fee which could be as low as a few pence. This can compare to a higher charge for other payment methods. With credit cards for example, the charge may be a % of the collected fee. If a large value is being collected, the fee paid can also be high. In addition, the reduced administrative workload and increased efficiency with Direct Debit contribute to lower operational costs.

7. Secure. Direct Debits offer a high level of security for both payers and recipients. All transactions are submitted via Bacs approved software which opens a secure channel to Bacs using a digital certificate. This makes Direct Debits a reliable and safe option, especially when compared to alternative methods that may be more susceptible to fraud or unauthorized access.

8. Predictable income:

• Helps cashflow. Direct Debit ensures receipt of cleared funds on a known date. This predictability facilitates better cashflow, budgeting and financial planning.
• Minimises Late Payments. Late payments can be a significant headache for organizations, leading to additional administrative tasks such as follow-up communications and manual interventions. Direct Debit mitigates this issue. Collections are deducted from the payer's account on the agreed-upon date, significantly reducing the likelihood of late or missed payments.

9. Benefits to customers paying by Direct Debit. It is not just the collecting organisation that can take advantage of the benefits offered by Direct Debit. For payers these include:

• Convenience. Once set up, there's no need for manual intervention with a Direct Debit. The customer doesn’t have to take an action to ensure the payment is made. They don’t have to initiate an online payment, or a credit card transaction and they don’t have to make any changes if the amount that is due, increases or decreases. The management of the payment is undertaken by the collecting organisation so it’s easier and less time consuming for the customer.
• By agreeing different payment dates with different organisations, the payer can help spread costs.
• Payers have the peace of mind that their payment is protected by the Direct Debit Guarantee. This means that if an error is made the payer will be entitled to a full and immediate refund.
• Expected and familiar. Bacs was first set-up in 1968 and most UK adults have a number of Direct Debits set up on their account so it’s a known and trusted payment method.

10. Improved Customer Relationships. The level of convenience offered by Direct Debits to customers can lead to increased customer satisfaction and loyalty. It can also have a positive impact on the company image of the organisation.

Considerations when using Direct Debit

Whilst offering significant benefits there are some considerations organisations should be aware of with Direct Debits. These include:

• Sponsorship. Organisations need to be sponsored by a bank to be able to collect Direct Debits. The bank will assess an organisation in terms of its contractual capacity, administrative processes, and financial stability. If the bank approves the organisation to use Direct Debits, they will issue a unique 6-digit identifier called a Service User Number. Not every organisation will gain approval, however. If this is the case, there are still ways to utilise Direct Debit. This would be via a third party that offers Facilities Management for example, though this may incur slightly higher charges.
• Validation checks. The organisation is responsible for ensuring that they have conducted adequate checks on the identity and details of the payer. These are often referred to as KYC or ‘Know your Customer’ checks. There are various options that organisations can use to achieve these checks and the sponsoring bank will need to approve these in advance.
• Software vs bureau. The organisation will need to decide whether they want to invest in Bacs Approved software to enable the processing of Direct Debits in-house, or whether they want to use a Bacs Approved Bureau to submit their transactions to Bacs. Both approaches offer different advantages and it will depend on the organisations set-up and requirements as to which is best.

Conclusion

For many organisations who are seeking to optimise and streamline their payment collections, Direct Debit is a valuable payment method. The advantages offered in terms of cost effectiveness, reduced administration time, control and flexibility means that organisations are increasingly choosing it to collect their income. Given the advantages it also offers for those paying by Direct Debit it is a payment method that is predicted to see steady growth in the future.

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