Direct debit—especially the Single Euro Payments Area (SEPA) Direct Debit procedure—is one of the most common payment methods for businesses in Germany. In this article, we explain direct debit, including its advantages and disadvantages. We also explain how businesses in Germany can use direct debit and how it differs from standard debit.

What’s in this article?

• What is direct debit, and what is it used for?
  
• Different types of direct debit in Germany
  
• What are the advantages of direct debit?
  
• What are the disadvantages of direct debit?
  
• How can businesses in Germany use direct debit?
  
• What is the difference between debit and direct debit?
  

What is direct debit, and what is it used for?

Direct debit is the process of withdrawing money from a bank account as part of a direct debit procedure. The customer’s account is debited a certain amount, and that amount is transferred to the business’s account as a credit. This payment method is mainly used for recurring payments, such as rent, subscriptions, or installment payments. In addition, over half of German customers use direct debit when shopping online.

Direct debit is characterized by the following features:

• One-time authorization: A customer must authorize the direct debit. By completing a direct debit mandate, for example, they give the business permission to debit money from their account.

• Pull principle: The direct debit process works according to the pull principle, meaning businesses determine when to collect payments. In contrast, a push payment—such as a bank transfer—requires the customer to initiate payment.

• Direct transfer between banks: The money is transferred directly from the customer’s bank to the business’s bank without the involvement of credit card networks, such as Visa or Mastercard.

• Fixed or variable amounts: Payments can include both fixed and variable amounts and can be debited at regular or irregular intervals.

Different types of direct debit in Germany

Since 2014, SEPA Direct Debit has been the only valid direct debit procedure in Germany and throughout the SEPA area. There is an important distinction between SEPA Core Direct Debit and SEPA B2B Direct Debit.

SEPA Core Direct Debit is for transactions with private customers (i.e., B2C), while SEPA B2B Direct Debit is for transactions between businesses (i.e., B2B). Here’s another important difference: with SEPA Core Direct Debit, it is possible to reverse authorized payments within eight weeks. However, there is no such right of objection for SEPA B2B Direct Debit. In addition, if a debit is unauthorized, it can be reversed within 13 months using either method.

Before the introduction of SEPA, there were two national types of direct debit in Germany: direct debit instruction and direct debit order. The former largely corresponded to today’s SEPA Core Direct Debit but was limited to domestic German transactions. The direct debit order was submitted directly to the customer’s bank, which could then allow direct debits from third parties.

What are the advantages of direct debit?

Direct debit is important in Germany because of the advantages it offers both customers and businesses. Here is an overview of the most important advantages:

Benefits for customers

• Time savings
  Direct debit offers customers a high degree of convenience. Customers do not take an active role in the transaction, and they only have to give their consent once. This eliminates the need for them to make manual transfers, saving time and effort, especially with recurring payments.

• Worry-free payment deadlines
  With payment on invoice, customers must adhere to the payment deadline. Failure to pay can result in late payment fees or a negative entry with the General Credit Protection Agency (SCHUFA). However, when customers use direct debit, they no longer have to worry about missing deadlines. The procedure’s automation ensures stress-free processing with timely payments and no further action from the customer.

• Transparency and security
  With direct debit, each transaction is linked to a unique mandate. This enables the precise identification and traceability of each payment and ensures transparent documentation. It also significantly reduces the risk of unauthorized debits.

• Chargeback
  A major advantage of direct debit for customers is the possibility of chargeback. Unauthorized or incorrect debits can be reversed within a specified period without needing to provide a reason. The chargeback option ensures customers have the opportunity to get their money back in the event of errors or attempted fraud.

Benefits for businesses

• Predictable incoming payments
  Direct debit is particularly important for businesses because it makes incoming payments predictable. Since the money is collected on a fixed date, businesses can accurately predict when they will receive the payment. This reliability enables stable financial planning and can improve cash flow management.

• High payment security
  Direct debit offers businesses a high level of payment security, as the amount due is debited directly from the customer’s account. Businesses do not have to rely on customers settling their outstanding invoices by bank transfer. In rare cases, direct debits can be returned (e.g., insufficient funds, incorrect bank details, actively revoked debits). However, businesses have the option to request payment again or take alternative measures to collect the debt.

• Transparency and security
  Businesses also benefit from the high level of transparency and security of direct debit. The process provides open traceability of transactions, allowing potential discrepancies or payment debts to be quickly identified. The clear assignment of each transaction to a mandate reference also minimizes the risk of fraud. Moreover, businesses benefit from additional legal protections, including cancellation and chargeback regulations.

• Efficient payment processing
  Direct debit features a high degree of automation. This significantly reduces the administrative burden for businesses. Since payments are deducted directly from the customer’s account, businesses do not need to manually process invoices, incoming payments, or reminders. This saves time and human resources and ensures smooth and efficient payment processing. Direct debit is particularly important for recurring payments, such as subscriptions, membership fees, or installment payments.

What are the disadvantages of direct debit?

In addition to many advantages, paying by direct debit also has some disadvantages.

Disadvantages for customers

• Providing personal bank details
  When customers use direct debit for online purchases, they must provide bank details during the ordering process. Some customers might be reluctant to do so—especially with unfamiliar websites or online shops. Potential risks include the misuse of sensitive data by unauthorized third parties or fraudulent businesses that make unlawful debits.

• Limited control over the timing of payment
  Direct debits process automatically on the specified date. While this offers convenience, it limits the customer’s financial flexibility. Customers cannot delay or adjust payments on their own. This can be particularly challenging for customers with fluctuating incomes (e.g., if the account does not have sufficient funds at the time of the debit). In such cases, there is a risk of chargebacks, which can result in additional fees.

• Possible delays in refunds
  If a customer cancels an order or returns a product, the amount already collected must be refunded. Delays can occur under certain circumstances. Retailers’ internal processing procedures and bank processing times vary depending on the payment service provider. While direct debit payments are collected within a few seconds, chargebacks can take several business days.

• Risk of unwanted or incorrect debits
  Direct debits can result in unwanted or incorrect debits. Possible reasons include technical malfunctions, accounting errors, and attempted fraud. If such debits go unnoticed, they can lead to unexpected financial burdens. To minimize risk, customers should check their account statements regularly and report any suspicious debits immediately.

Disadvantages for businesses

• Required customer consent
  For businesses to use direct debit, they need the express consent of their customers. This usually comes in the form of a direct debit mandate. Obtaining and managing the mandate involves additional administrative steps for businesses.

• Risk of chargeback
  Businesses bear the risk of chargebacks when using direct debits. These can occur when, for example, a transaction cannot be carried out successfully or is subsequently contested by the customer. In such cases, the transaction must be requested again. This can lead to increased administrative costs, additional fees, and cash shortfalls.

• No option to contest returned direct debits
  If a direct debit is reversed, a business can’t directly contest or automatically restore it. Instead, the business must collect the amount again or seek alternative means of settlement. This means additional administrative work and delays in receiving payments. In some cases, it can be necessary to contact the customer directly to clarify the situation. If no agreement can be reached, a dunning procedure or debt collection agency can be involved as a last step. However, these come at a cost.

• Dependence on banking processes
  Payment collection depends on the bank’s processes. This means external factors—such as holidays, technical glitches, and system-related delays at financial institutions—can lead to a delayed debit. In these cases, businesses have little influence on the process and must rely on the correct and timely execution of banking processes.

How can businesses in Germany use direct debit?

To use SEPA Direct Debit, businesses in Germany must work with either a bank or a payment service provider. They have to open a business account with a bank and sign a contract that allows payment collection. The bank is responsible for collecting payments and managing mandates.

Alternatively, payment service providers such as Stripe offer an even simpler solution. Stripe can handle the entire payment process, direct debit mandate management, and chargeback processing for you. A direct connection to the bank is not required. In addition, with Stripe Payments, businesses can accept payments worldwide and offer their customers locally preferred payment methods. Direct debit is just one of more than a hundred possible payment methods.

Whether banks or service providers process the payments, businesses are required to retain received direct debit mandates for a period of 14 months after the last direct debit. In addition, they must comply with the requirements of the revised Payment Services Directive (PSD2) and the German Act implementing the second Payment Services Directive (ZDUG). These regulate the rights and obligations of customers and businesses, including mandate management, return deadlines, and authorization requirements.

What is the difference between debit and direct debit?

The difference between a regular debit and direct debit is the way the payment is initiated. In the case of a standard debit, a bank issues an order to debit an amount from a customer’s account. This can, for example, be a standing order initiated independently by the debtor. However, the term “debit” is often used as a generic term for all account charges—regardless of who initiates the payment.

In contrast, direct debit is based on a direct debit mandate. A bank does not directly initiate the associated transfer; the business does. In the case of a direct debit, the business must submit the payment request, and the bank will carry out the debit.