Direct Debit

Direct debit is used by many organizations to collect bills occasionally or periodically of varying amounts and dates. The customer needs to be given prior notification regarding the amounts and dates.

All organizations that are allowed to take direct debits from their customers are sponsored into the scheme by their banks. These organizations are then checked for integrity, robust financial standing, and managing competence before being accepted to present direct debit to their customers. Every organization that joins needs to sign a standard indemnity.

To set up a direct debit instruction, you would need to fill out a form or mandate for the organization you wish to make payment to and give it to them. Some organizations also have the facility to set up instructions over the telephone or the Internet. The instructions will be forwarded to the bank by the organizations authorizing them to debit your deposit account or current account.

Most current accounts allow this facility, as do some deposit accounts. Each country and bank has different guidelines. The information required to set up direct debit are:
name and address of the customer’s bank, the name of the bank account holder, customer’s back account number, and the branch sort code.

Once the direct debit is set up, all you need to do is to ensure that sufficient funds are available in your bank account on the specified dates of the debit.

Direct debit is an easy, secure, and fast way of paying your subscriptions and regular bills automatically from your bank account.

Utility payments can be made through direct debit. Customers need not go to collection centers and stand in line to make payments. As per agreements between utility companies and banks, payment can be made by direct debit. Standing orders can be given for these periodic payments.

Equated Monthly Installments (EMIs) for retail credit can be paid effortlessly by direct debit. Date of payment can be chosen just after the date when salary usually gets credited to the bank account.

Credit card payments can be made through direct debit too. The bank usually offers a flexible payment option. The customer can either pay the total amount due or the minimum amount due. In the first option, you can ask the credit card company to debit the entire outstanding bill amount from your bank account. In the latter case, you can assign a limit on the monthly debit. If the credit card bill exceeds this amount, the remaining amount can be paid by another mode. Setting a monthly limit will help you monitor the outflows from your bank account.

Direct debit also allows you to do money transfer using the Internet. It can be used for various other payments like insurance premium, mortgages, and subscriptions or occasional payments on purchases, etc.

Direct debit is becoming an increasingly popular method of payment because of its numerous advantages.

Paying by direct debit is more convenient. There is no need to make trips to various places and queue up to pay bills. Many organizations offer choice of payment dates, so you can choose when to pay depending on your other commitments. If you are busy, unwell, or out of town, you need not worry about unpaid bills, as what is due will be paid automatically even without your physical presence. You do not need to worry about payment dates, future dated cheques, or mailing your instructions to the bank.

Direct debit is safe due to the three main aspects of the direct debit guarantee: immediate money back guarantee from the bank in case of any error, advance notification from the organization in case there is any change in the amount or date, and most importantly, the right to cancel. It is a less expensive option. The cost of travel is eliminated, as is the cost of mailing or couriering cheques. Many organizations also offer direct debit discounts.

Paying regular bills will make it easier to know the exact amount of disposable income left for all other obligations.

Easy to cancel - In case a direct debit instruction needs to be cancelled, customers can just give written instructions to their banks and inform the organizations concerned.

The organizations requesting the money need to notify the customers, but it is impossible for banks to check whether the customers are informed, before honoring the direct debit. Customers can know only after the funds have left their deposit account or current account. In cases of lapse or incorrect amounts, customers realize the error only after they check their deposit account or current account statements.

If the customer detects any error, the bank should be immediately informed. The bank will provide a full refund, regardless of whether the error was made by the bank or the organization collecting the payment.

Recurring debits can be more easily contested than occasional payments. Even for occasional payments, the collecting organization must be able to produce a signed and dated authorization mentioning the amount to be debited.

The occurrence of fraudulent transactions is rare. The organizations that use the direct debit plan are thoroughly evaluated and closely observed by the banking industry.

The customer is liable if his deposit bank account does not have sufficient funds on the date of direct debit, and he or she may incur late payment charges. Since the date of direct debit can be chosen, penalties can be avoided by choosing a date nearest to when salary is credited into the bank account. Those dates can be avoided when the balances could be possibly low. Also, if there are changes in account details, the organization must be informed and alternative arrangements for payment should be made.

In cases of periodical payments where the amount does not vary, customers can prefer to give a standing instruction to their banks.

Real Time Gross Settlement (RTGS) is a system of settling financial transactions of banks and other institutions using an electronic payment system. The paying bank initiates the transaction. The central bank of the country regulates this system.

In the older net settlement system, transactions were settled at the end of the day. All inter-institutional transactions were accumulated during the day. In RTGS, transactions are settled across accounts held with the Central Bank on a gross and continuous basis. Payee banks and their customers receive the funds with certainty during the day, enabling them to use these funds without exposing themselves to risk. The RTGS system settles payments on a transaction by transaction basis as they enter the system.
This settlement system greatly improves the function of direct debit as each payment is settled in a short time and at a nominal cost. The improvement in settlement systems directly influences the progress of payment systems.

Because of its immediacy and convenience, RTGS payments along with direct debit, are expected to exceed other modes of payment in the near future.

This is a money back guarantee offered by all banks that are part of the direct debit scheme. The effectiveness and security of the scheme is supervised by the customer’s own bank. If the amount to be paid or the dates of payment change, the organization will notify the customer, usually in 10 working days, before the deposit account or current account is debited or as already agreed.

The customer is guaranteed to receive a full and immediate refund from his or her branch for the amount paid, in case any error is made by the organization or the bank.

The customer can cancel the direct debit instruction at any point in time by giving a written request to the bank and also informing the organization.

If a customer disputes a particular amount that has been debited to his or her account, they can contact their bank. This amount will be returned within 24 hours. It will then be the billing company’s responsibility to claim the money from the customer. The customer can exercise the option of claiming refund even if the amount is collected in advance of the agreed upon date. However, the billing companies will not be automatically liable for bank charges incurred due to errors made by them.

If you are a busy person with many payment commitments, then direct debit is for you. With numerous bills and payments to make every month, it is difficult to remember when each one falls due. Having a system to organize all your payments becomes all the more important when the debts fall on different dates. With direct debit, you no longer need be involved personally in each payment, meaning you do not need to sign each physical instrument. A single instruction to your bank or the collecting organization to debit your bank account will suffice.

Utility bills, subscriptions, and credit card bills all carry a penalty for late payment of the due amount. If a direct debit mandate is given, it is almost impossible to miss a payment.

Even as a small business owner you can find immense benefits of making payments using the direct debit facility. This will help you be more organized with your finances and serve as a good time management tool. It will free many hours for you and you can concentrate on how to improve your business by working on your core strengths.

Setting up a direct debit has many benefits. The one thing that must be done properly is checking the bank account statements periodically to safeguard oneself against manual error at the organization or bank’s end.

Direct debit is useful not just for paying household bills and payments. Businesses can pay their regular commitments this way and gain many benefits from it.
Regular payments made by direct debit helps spread the cost over an agreed period. Making payments this way can also reduce the paperwork and workload in the finance department and thereby reduce costs.

Vendor payments can be made using direct debit to the current account. This will reduce a lot of extra work involved and keep vendor relations hassle free.

Bulk upload of employee salaries can be done by instructing the bank to directly debit the current account of the business and credit the salary accounts of employees.

Collections made through direct debit can save you time and money, as you do not need to send reminders to customers who have not made payments on time.

The benefits of direct debit compared with traditional methods of payment are primarily relating to time and cost. Direct debit is much faster and the costs are also less.

However, since the time gap between payment made and funds received for disposal is so much less, this leaves no room for error. Rectifying such errors would take more time and effort and many more parties would need to be contacted.

The grace period available with methods like the cheque drop box method of payment is not available with direct debit. The onus is on the customer to ensure that funds are available in the bank account at the time the payments fall due. Thus, although one need not worry about remembering to send payments out, one does need to ensure that sufficient funds are available at all those points in time when various payments fall due. If a direct debit was returned due to lack of funds, the payment would need to be made through alternative methods.

As payment and settlement methods become more sophisticated, the customer has to be that much more competent to leave no room for error.