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Direct Debit : A simple way to collect payments

Payments | 8 mins read

Small businesses in the UK are dearly in need of a reliable method of collecting payments. According to Bacs Payment Schemes Limited, a total of £14.2 billion worth of overdue payments were recorded in 2017 alone. Small and medium-sized enterprises (SMEs) make up almost 99% of the UK’s private business sector, and they’re uniquely vulnerable to problems stemming from late payments. These unpaid invoices or late payments lead to a reduced cashflow, especially for businesses that provide recurring services. Prolonged cashflow issues in turn reduce these businesses’ working capital. This may cause serious debts and in the worst cases can even lead to bankruptcy. One effective way to combat cashflow issues is to provide a payment method that puts you in control — a method where you define when you get paid and how often. This is where Direct Debit comes in. 

Direct Debit payments

What is Direct Debit?

The Direct Debit scheme is a popular payment method in the UK, in which customers authorise merchants or organisations to pull funds from their bank accounts. All Direct Debit payments are handled by Bacs (Bankers’ Automated Clearing Services), a central payment network that processes several different types of electronic payments. Direct Debit is usually used for making recurring payments like credit card bills, utility bills, instalment payments, rent, recurring retainer payments and subscriptions/memberships.

Direct Debit - Benefits

Let us look at some of the benefits that Direct Debit has to offer:

How does Direct Debit work?

To set up Direct Debit, you must get an authorisation from your customer to pull funds from their accounts. Once you get the authorisation, you can take recurring payments from the customer’s account. You’ll be required to send a notice to the customer 10 working days before the actual transaction, informing them of the amount and the date. The only thing the customers need to do is to ensure that they have sufficient funds in their account. 

Here’s an illustration explaining the bank-to-bank transfer in Direct Debit.

Direct Debit transaction

The business owner initiates the payment after setting up Direct Debit for their customer. The amount of payment and the date of the payment initiation should always match the advance notice you send to your customer. Funds from the customer’s bank account go through the Bacs cycle. For the first transaction, it takes five working days for the amount to settle in the business owner’s bank account, but subsequent transactions will be processed in three working days.

How to start taking payments using Direct Debit

To start taking funds from a customer’s account, you need to follow these steps.

You can collect these details by sending your customer a hard copy of the form or online form to fill out and send back to you. You can also use a telephone call for collecting your customer’s details, but the script has to be approved by a bank. 

Access to Direct Debit

Bacs provides different options for accessing the direct debit scheme. You can select the most suitable method based on your organisation’s financial standing, administrative capabilities and volume of transactions.

There are two methods of accessing the Direct Debit scheme:

Direct access via a bank:

Large businesses or organisations that can manage the Direct Debit process by themselves opt for the direct access method. The organisations using the direct access method are known as direct submitters. Direct access has the lowest transaction fees but the initial setup cost is very high. For businesses handling large volumes of recurring payments, the low transaction costs outweigh the initial overhead expenses.

The first step to become a direct submitter is to apply for a Service User Number (SUN). Obtaining a SUN is not a particularly swift or easy process — it can take months, and banks usually reject businesses that have a small turnover or don’t seem equipped enough to handle Direct Debit on their own. If your business meets the following criteria, then the bank might approve you and provide you with a SUN.

If you get approved for a SUN, you will have to build a system in-house to collect, store and submit the necessary information to Bacs. Bacs approved direct debit management software provides an integrated platform for accessing a range of Direct Debit schemes. 

Access via Direct Debit bureau:

If you don’t have the necessary turnover or just want to be free from all the extra work of handling Direct Debit in-house, you can use a Direct Debit bureau. Direct Debit bureaus are third-party organisations that handle direct debit payments and most of the work related to them on your behalf.

Traditional bureaus only handle the Bacs submission process, so you still have to collect the mandates yourself. The bureau procures your customers’ details from you and handles all the paperwork like Bacs submission and payment details.

When using a third-party bureau, you can use either your own SUN (Service User Number) or the bureau’s SUN to make payments. The best option is to use your own SUN, because only the name of your business is shown on your customer’s bank statements. But if you need the payments to start quickly and you don’t mind the bureau’s name on your customer’s transactions, you can opt for using the bureau’s SUN.

Depending on which bureau you choose, it might charge you for the setup of your account, for monthly usage, and for every transaction and submission. Some bureaus also charge a penalty for each failed payment. Traditional bureaus can be somewhat non-transparent about their costs, so you may want to use an online Direct Debit provider instead. Online Direct Debit providers generally offer better features at meagre costs for setup and transactions. Some online providers even send customer mandates for you. You just have to direct your customers to your online provider and they will take care of the rest.

Direct debit is a simple and sensible alternative that gives you complete control over your payments, including recurring payments. Its low failure rate and minimal need for manual intervention make it appealing to customers and businesses alike.

So if you are providing recurring services in the UK and are in search of the best payment method for your business, Direct Debit is an option that has potential to help you maintain a healthy cashflow. 

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