Standing Order VS Direct Debit. Explained Simply
Late payments are frustrating. Chasing late payments can be even more infuriating, forcing international merchants to perform unnecessary, mundane tasks that could easily be performed by a machine — a waste of time when they could be adding real value to their businesses.
Global SMEs need to find simple ways of collecting payments from their customers automatically. Standing orders and direct debit change the ballgame for many international merchants — because when payments are collected on time, it ensures that your business’s liquidity levels remains stable.
Standing order versus direct debit — who wins?
In this article, you’ll find out all you need to know about these two automated payment methods.
This article at a glance:
Standing orders and direct debits are often confused because they are both automated payment methods. However, they are not the same. The difference lies in who controls the payment process — you or your customer. Choosing the right one depends on the size of your business.
What is a standing order?
A standing order lets you collect regular, fixed payments from your customers' bank accounts.
Remember, when you set up a standing order:
- You cannot change the date of payment deduction
- You cannot shorten or lengthen the duration of recurring payments
- Your customer is required to set up the standing order and decide payment amounts
- Your customer must submit a form to their bank to set up the standing order
Thus, you have to ensure that your customer enters all the correct information. It can be a hassle to cancel and go through the entire setup process with the bank again.
What is a direct debit?
A direct debit allows you to take payments directly from your customers' bank account.
Direct debit payments are a convenient and reliable way for businesses to collect recurring payments from customers.
Even after setting up a direct debit, you can still:
- Change the frequency of payment
- Edit the amount of payment
To set up a direct debit, your customer will need to sign a Direct Debit Mandate, an instruction that gives you permission to take funds out of your customer’s account.
There are three ways to set up a direct debit instruction: secure online banking, over the phone, and physical paper Direct Debit Instruction form. See this example from GoCardless.
What is the difference between a standing order and a direct debit?
We’ve made a nifty guide for you. The main differences between a standing order and a direct debit are as follows:
The advantages and disadvantages of standing orders
Advantages of standing orders
1. Standing orders are a convenient and efficient way to ensure regular payments like rent, mortgage, insurance and utility bills, among others, are made on time.
2. Standing orders provide assurance that bills will be paid in full each month regardless of the user’s availability or ability to remember the payment date.
3. Standing orders help customers manage their money as they know when payment is due and can adjust their budget accordingly.
4. They also save customers from worrying about missed payments or late fees due to forgetting the bill date or unexpectedly not having enough funds in their account on that date.
5. Standing orders are secure payments since there’s no need for providing personal details such as card numbers or passwords every time a payment is made — all information required for the transaction is stored securely by your bank or building society before making a payment
Disadvantages of standing orders
1. It can be difficult to cancel or modify a standing order once it has been set up, so mistakes may occur if you forget to update the payment details or if there are changes in the amount due each month.
2. If there is insufficient money in your account when the payment is due, it might get delayed or even bounced back — resulting in additional fees and time wasted dealing with the problem.
3. There is a risk that unscrupulous companies could take advantage of standing orders to bill customers more than once without their knowledge or consent — this is why it’s important to keep records of all your transactions and check them regularly against your bank statement.
The advantages and disadvantages of direct debit
1. Faster payments — Direct debits can be executed almost immediately after authentication making them one of the fastest available payment methods. This helps to reduce delays caused by manual entry discrepancies or paper-based cheques that require extra processing time.
2. Improved cash flow — Direct debits allow businesses to easily manage their cash flow and predict expected income each month.
3. Lower costs — Compared to standard Credit/Debit Card payments, direct debit’s transaction fees are much lower, meaning you keep more of your hard-earned money for reinvestment elsewhere in the business.
4. Automation — Once everything is set up correctly, direct debits can run on auto-pilot with the need for no further input from the customer or business owner other than the occasional review of transaction details and any necessary reconciliation to take place.
5. Security — Direct debits transactions are often protected with 3D secure and encryption technologies that help to enhance data security and reduce fraud opportunities, thereby increasing trust amongst customers when it comes to regular payments such as mortgage installments and utility bills.
1. Missed payments — The downside is if a customer fails to maintain an appropriate account balance then they may default on their obligations leading to missed or late payments which could have a detrimental effect on your own cash flow needs or budgeting plans.
2. Fixed payment deadlines — Since direct debits don’t offer flexibility when it comes to payment timing, customers may find this burdensome if their own finances are also restricted by fixed dates for expenses such as rent and loan repayments at certain intervals throughout the year (e.g quarterly).
3. Costly setup fees — Setting up a new direct debit mandate often means you have to cough up additional admin costs or charges associated with setting up each new customer’s details which eats into profit margins if done in bulk or over multiple accounts each month, so beware before committing too heavily without establishing an exact cost structure beforehand!
Standing Orders vs Direct Debits — who is in control?
When it comes to managing payments, Standing Orders and Direct Debits have a significant difference in terms of control. With Standing Orders, the customer has complete autonomy to set up the order with their bank and can only change the value of the order through direct communication with the bank.
On the other hand, Direct Debit Mandates require the customer to grant permission to the business to withdraw an unspecified amount of money from their bank account when necessary. This may seem daunting since the control lies entirely with the business, but most Direct Debit Mandates are set for a specific amount and date.
Although businesses control the Direct Debit process, customers are protected by the Direct Debit Guarantee that covers them if the wrong amount is taken or if money is taken at the wrong time. Thus, customers can trust that they are safeguarded even if they are not in complete control of the process.
Which is better for your business, standing order or Direct Debit?
It depends on your company size
Standing orders are rigid and give you or your customer no room for inaccuracies. Therefore, you have to be vigilant as to whether your payments are getting through to you and that your customers have enough money in their accounts to make the payments on time.
A standing order is good if you only collect fixed amounts at a time — you can’t change the payment amount once a standing order is confirmed. To do so, you’ll need to ask your customer to cancel and repeat the process.
Small companies with a small number of regular customers making fixed payments at fixed times are best suited to standing orders.
If you’re looking for flexibility, going for a direct debit should be a no-brainer
You free yourself from tedious administrative tasks by getting notified whenever a payment fails. Ultimately, the ball is in your court — you have the upper hand in controlling when you want to collect payments, and you’re not bound to a fixed payment amount.
Want to live a hassle-free life? Ensure you receive payments on time.
Those with Standing Orders have authority over the transfer time and amount.
Those with Direct Debits cede control to the creditor for debiting the debtor’s account. Yet, the creditor must obtain permission from the debtor first. If the debtor denies permission, the creditor cannot debit the account.
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