Direct debit - What is direct debit?

Direct debit is a payment method in which a third party is granted permission to take payments from a bank account.

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In setting up a direct debit transaction, authorisation must be given in order to permit the party seeking payments to make the withdrawals from your account. Essentially, you give a company permission to take an amount at a time specified by that organisation.

Once you have set up the authorisation, the amount is taken automatically (as opposed to you needing to take additional action to make the payment, such as entering credit card details or initiating a bank transfer).

When is direct debit used?

Direct debit has become a common form of transaction in many countries around the world. It can be used in a variety of different transaction situations and is considered convenient, cost-effective, and secure.

Direct debit for recurring payments

Direct debit is perhaps most often used for recurring payments. You likely have had a direct debit set up for recurring costs that you prefer to automate (or that the business providing the product or service prefers) such as:

  • Subscription payments (to magazines, mobile service providers, etc.)

  • Utility bills

  • Rent payments

  • Software such as MS Word or cloud storage

  • And many more

By automating the payments through direct debit, you decrease the chance of late payments or payment errors. You also avoid the hassle of manually processing the payment each month or however frequently you make the payment.

Direct debit for single payments

Not only can direct debit be used for recurring payments but it can also easily be used for one-off payments. However, while it’s considered a relatively quick way to make a payment, it’s not as fast as using a credit card, for example, where the transaction is instantaneous. So if you’re looking to use it for a one-off payment, make sure your supplier is alright waiting just a bit.

This, in addition to being considered a highly secure form of transaction, as well as being fast, it has become a popular option for payments. Many banks offer protection in case a direct debit is taken incorrectly.

Direct debit vs. standing order

While they’re quite similar, there are some clear distinctions between a direct debit and a standing order. It mainly has to do with who is initiating the payment.

How direct debit works

When a direct debit is set up, the account holder authorises the business to take the payments, but it’s the business that controls the date and the amount taken.

How a standing order works

When a standing order is set up, it’s the account holder who’s creating a payment of a specified amount to be made in the future on a specified date to a business. It also often involves recurring expenses. 

Standing orders often don’t come with the same protection as those found with direct debits. This is because you are responsible for setting up the payment properly.

Essentially, the main difference is who is initiating the transaction. With direct debit, it’s the organisation that you have authorised, and with a standing order, it’s you who have set up a regular transfer of payment.