Direct debit
A direct debit or direct withdrawal is a mandated financial transaction whereby a payer authorizes a payee to draw varying recurring amounts directly from the payer's bank account, commonly used for billing utilities, loans, and subscriptions. Formally, the organisation that calls for the funds instructs their bank to collect an amount directly from another'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 they have authorized the payee to directly draw the funds. It is also called pre-authorized debit or pre-authorized payment. After the authorities are set up, the direct debit transactions are usually processed electronically.
Direct debits are typically used for recurring payments, such as credit card and utility bills, where the payment amounts vary from one payment to another. However, when the authorization is in place, the circumstances in which the funds are drawn as well as the dates and amounts are a matter of agreement between the payee and payer, with which the bankers are not concerned.
In countries where setting up authorization is easy enough, direct debits can also be used for irregular payments, such as for mail order transactions or at a point of sale. The payer can cancel the authorization for a direct debit at any time, and the banker can decline to carry out a debit if the transaction would breach the terms of the bank account out of which payment is to be made, for example if it were to cause the account to overdraw.
A direct debit instruction differs from a direct deposit and standing order instruction, which are initiated by the payer. A standing order involves fixed payment amounts paid periodically, while a direct debit can be of any amount and can be casual or periodic. They also should not be confused with a continuous payment authority, where the payee collects money whenever it feels it is owed.
Direct debits are available in a number of countries, including the United Kingdom, Brazil, Germany, Italy, Netherlands, South Africa, Spain, Sweden and Switzerland. Direct debits are made under each country's rules, and are usually restricted to domestic transactions in those countries. An exception in this respect is the Single Euro Payments Area which allows for Euro-denominated cross-border direct debits since November 2010. In the United States, direct debits are processed through the Automated Clearing House network.
Origins
, a British banker and maths graduate, found that traditional banking methods of paying in cheques were incredibly costly. His answer was to gain permission from customers to take payment directly from their bank account. After six years of campaigning, the high-street banks finally agreed in 1964. By the end of the decade, the savings made using this method meant that direct debit had come into general use in the UK.Authorization
A direct debit instruction must in all cases be supported by some sort of authorization for the payee to collect funds from the payer's account. There are generally two methods to set up the authorization:One method involves only the payer and the payee, with the payer authorizing the payee to collect amounts due on their account. However, the payer can instruct their bank to return any direct debit note without giving a reason. In that event, the payee has to pay all fees for the transaction and may eventually lose their ability to initiate direct debits if this occurs too often. However, it still requires all the account holders to watch statements and request returns if necessary, unless they have instructed their bank to block all direct debits.
The other method requires the payer to instruct their bank to honour direct debit notes from the payee. The payee is then notified that he or she is now authorised to initiate direct debit transfers from the payer. While this is more secure in theory, it can also mean for the payer that it is harder to return debit notes in the case of an error or dispute.
Fees
In all countries, fees for direct debits are much lower than for credit cards. Credit cards charge a percentage of the transaction and sometimes a per-transaction fee. In contrast, direct debit fees are $0.15 to $0.20 per transaction on the U.S.'s Automated Clearing House network, and £0.20 to £0.40 per transaction on the U.K.'s New Payment System Operator network. Fees vary between providers. Some offer flat rates while others have additional charges and monthly or yearly fees.Direct debit in different countries
The term direct debit and its implementation can vary by country and banking framework. While the underlying concept, authorising a third party to withdraw funds from a bank account, is generally consistent, the terminology, legal mandates, and scheme operators differ across jurisdictions:Europe
In Europe, the SEPA Direct Debit and SEPA Credit Transfer are the standardised payment schemes used for euro-denominated transactions within the Single Euro Payments Area country for payments within the Eurozone.These schemes are available across all SEPA member countries for cross-border and domestic payments in euros.
Initially, SEPA Direct Debit operated in parallel with national direct debit systems. However, as of 1 August 2014, SDD became the exclusive method for collecting euro-denominated payments within the EU, effectively replacing legacy domestic schemes.
From October 2016, the use of SEPA Direct Debit and the International Bank Account Number became mandatory for all euro transfers within the EU and European Economic Area. This requirement does not apply to payments in other currencies, which may still use local or alternative systems.
United Kingdom
Direct Debit is a payment method for recurring payments in the UK. It is the third most popular payment method in the UK, after cash and debit card, according to Payments UK. Bacs Payment Schemes Limited is the organisation with responsibility for the Direct Debit scheme.Direct Debit was invented by Alastair Hanton while he was working at Unilever as a way of collecting payments more efficiently. It commenced operation, as a paper-based system, in 1964.
Direct Debit accounts for the payment of 73% of household bills and almost nine out of ten British adults have at least one Direct Debit commitment. In 2015 nearly 3.9 billion Direct Debits were processed, representing a year-on-year increase of 239 million which surpasses the previous record for annual growth of 161 million, set in 2004. 4.07 billion Direct Debits were processed in 2016, an increase of 4.9% from 2015. Payments UK predicted the figure is expected to rise to 4.4 billion by 2026.
Authorisation
To set up payments by Direct Debit, the payer must complete a Direct Debit Instruction to the merchant. This instruction contains bank-approved wording that makes it clear the payer is setting up an ongoing authority for the merchant to debit their account. The interface for completing the Direct Debit Instruction is controlled by the merchant, who then sends the data from the form to the customer's bank, via Bacs.The UK Direct Debit scheme rules allow for Direct Debit Instructions to be completed in several ways:
- paper-based forms, which require a signature
- over the telephone using a formal script to collect all the required information
- online, using an online application form which has been approved by a bank
- through other interactive services, where the interface has been approved by a bank
Guarantee
Under the guarantee a payer is entitled to a full and immediate refund in the event of an error in the payment of a Direct Debit from their account. Where an error has occurred, refunds are paid immediately by the payer's bank, who will then attempt to recover the money from the merchant's bank, who in turn will attempt to recover the money charged back from the merchant.
Under the Direct Debit scheme rules, merchants have very few grounds to challenge a charge-back generated under the Direct Debit Guarantee. Instead, they can pursue any payments which they believe have been incorrectly refunded to the payer directly through the small claims court.
Access
Before a company or organisation can collect payment by Direct Debit they need to be approved by a bank, or use a commercial bureau to collect direct debit payments on their behalf. This approval process ensures the company will be able to operate within the direct debit scheme rules and maintain the integrity of the scheme.If a large number of customers complain about direct debits set up by a particular service user then the service user may lose its ability to set up direct debits.
Dormancy
Any direct debit instruction that has not been used to collect funds for over 13 months is automatically cancelled by the customer's bank. This can cause problems when the mandate is used infrequently, for instance, taking a payment to settle the bill for a seldom-used credit card. If the credit card company has not collected a payment using the Direct Debit mandate for over 13 months the mandate may have been cancelled as dormant without the customer's knowledge, and the direct debit claim will fail.Fraud
The problem of direct debit fraud is extensive according to research by Liverpool Victoria Insurance which reveals that over 97,000 Britons have fallen victim to criminals setting up fraudulent direct debits from their accounts. An average of £540 goes missing before the customer notices. Direct debit payment fraud in 2010 accounted for around 10.6% of all identity fraud cases. The extent of direct debit scamming is set to grow to 41,000 cases a year by 2013, equating to a 57% rise.However, the problem is exacerbated by some of the banks themselves for failing to implement any controls which prevent companies or fraudsters taking money from business and consumer accounts. The problem of cancelled and obsolete direct debits being wrongfully revived or re-implemented is estimated to cost UK consumers £385 million in 2010. For those customers who find out, it takes them on average four months to notice. Although no specific figures were collected it appears a substantial number of people lose considerable amounts of money annually because the obsolete direct debit is neither noticed nor recovered.
On 7 January 2008, Jeremy Clarkson found himself the subject of direct debit fraud after publishing his bank account and sort code details in his column in The Sun to make the point that public concern over the 2007 UK child benefit data scandal was unnecessary. He wrote, "All you'll be able to do with them is put money into my account. Not take it out. Honestly, I've never known such a palaver about nothing". Someone then used these details to set up a £500 direct debit to the charity Diabetes UK. In his next Sunday Times column, Clarkson wrote, "I was wrong and I have been punished for my mistake."