Advantages and disadvantages of direct debits for businesses in the UK

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  1. Introduction
  2. What are the pros and cons of direct debits?
  3. How do direct debits compare to other payment methods?
    1. Direct debits
    2. Card payments
    3. Standing orders
    4. Bank transfers
    5. Digital wallets
    6. Buy now, pay later (BNPL) options
  4. What types of businesses benefit most from direct debits?
    1. Subscription businesses
    2. Membership organisations
    3. Utilities and telecom companies
    4. Education and childcare providers
    5. Property and rental businesses
    6. Health and wellness services
    7. Charities and non-profits
    8. Financial services
    9. Insurance providers
    10. Retailers that offer instalment plans
    11. B2B services
    12. Managed service providers
  5. How can businesses reduce risks associated with direct debits?
    1. Set clear expectations from the start
    2. Notify customers of changes
    3. Monitor payment failures
    4. Invest in a trusted payment provider
    5. Stay compliant with Bacs rules
    6. Protect customer data
    7. Have a process for refunds and disputes
    8. Communicate clearly and proactively
    9. Build in flexibility for customers

A direct debit is an automated payment method that allows a business to collect money directly from a customer’s bank account. It’s widely used in the United Kingdom for recurring payments such as subscriptions, memberships, utility bills, and instalment plans, and it’s one of the easiest ways for businesses to get paid. In 2023, the UK’s direct debit clearing system facilitated more than 1.8 billion direct debits for utilities and household bills alone.

Unlike with standing orders, in which the customer sets up the payment, direct debits are set up by the business. This arrangement is especially useful for payments that change in amount, such as energy bills that fluctuate each month and subscription services where customers might change plans. Below, we’ll explain the potential advantages and disadvantages of this payment method for UK businesses, which businesses benefit the most, how it compares to payment alternatives, and how to mitigate common risks.

What’s in this article?

  • What are the pros and cons of direct debits?
  • How do direct debits compare to other payment methods?
  • What types of businesses benefit most from direct debits?
  • How can businesses reduce risks associated with direct debits?

What are the pros and cons of direct debits?

Like any payment method, direct debits come with pros and cons. The main advantages of direct debits include the following:

  • Reliability: Once customers authorise the setup, payments are collected automatically on pre-agreed dates. This provides your business with a reliable income stream and makes it easier to plan for expenses such as payroll and vendor payments.

  • Convenience: For businesses, direct debits can eliminate the need for manual invoicing, reminders, or chasing late payments. For customers, direct debits eliminate the need to make one-off payments.

  • Flexibility: Direct debits allow you to adjust the amount you collect, if needed. This is useful for businesses with variable bills, such as utility companies and tiered subscription services.

  • Low fees: Direct debits typically have lower transaction fees than credit card payments so they can save businesses money.

  • Consumer protection: If a mistake occurs – such as charging an incorrect amount or taking a payment on the wrong date – the customer is entitled to an immediate refund from their bank, in compliance with the Direct Debit Guarantee. This assurance can make customers more comfortable committing to direct debit arrangements.

  • Scalability: Direct debits can scale. Whether you have 10 customers or 10,000, the direct debit process doesn’t change or become more complicated as your business expands.

The disadvantages of direct debits include the following:

  • Setup: Getting started with direct debits can be a challenge. If you want to handle them yourself, you’ll need to meet strict requirements from your bank. Most smaller businesses rely on third-party providers, such as Stripe, to handle direct debits.

  • Speed: Direct debit payments take about three working days to process through Bacs, the UK’s direct debit clearing system. This delay means they’re not an ideal option if you need funds to be available immediately, such as for urgent expenses.

  • Potential for payment failures: If a customer doesn’t have enough money in their account, the direct debit will fail. You’ll need a system in place to handle retries or contact the customer to resolve the issue.

  • Customer resistance: Some customers are hesitant to hand over control of their payments, even with the safety net of the Direct Debit Guarantee. They might prefer methods where they have more immediate control, such as individual card payments.

  • Inefficiency: Direct debits are designed for recurring payments, not one-time transactions. If you occasionally need to collect one-off payments, this method is slower than other options such as bank transfers and credit cards.

How do direct debits compare to other payment methods?

Direct debits stand out from other payment methods due to their automation, reliability, and suitability for recurring payments, but they aren’t ideal for every situation. Here’s how they compare to other common payment methods.

Direct debits

Direct debits are ideal for recurring payments such as subscriptions and utilities and are suited for fluctuating charges (e.g., utilities, tiered subscriptions). They’re fully automated, with minimal administration required from customers or businesses, and managed by the business. That means you can adjust payment amounts or schedules as needed. Direct debits come with lower transaction costs compared to card payments and other payment methods.

Here are some disadvantages of direct debits:

  • Direct debits require customers to trust the business to manage withdrawals correctly, which can require education about safeguards such as the Direct Debit Guarantee.

  • Businesses need to obtain the customer’s consent, which might slow down the process initially.

  • Direct debits are not suitable for one-off or urgent payments due to processing delays. (Most payments take up to three working days to process through Bacs.)

  • Direct debits require customers to share bank details, which some might hesitate to do.

Card payments

Credit card payments are authorized almost instantly and are universally accepted and familiar to customers. They’re convenient for one-off and online payments but they come with higher fees. Credit card payments can fail due to card expiration, insufficient funds, or suspected fraud, and customers need to manually update their card details when this occurs, which can lead to potential interruptions.

Standing orders

Standing orders are simple for customers to implement through their banks and typically come with no transaction fees. But they have less flexibility as a payment method, because to make adjustments beyond the set amount, a customer typically needs to cancel their current order and create a new one. Standing orders are completely customer managed so businesses have no control if payments are missed.

Bank transfers

Bank transfers are a quick option for one-off payments, with funds typically arriving almost instantly. But they require customers to initiate each payment, which is inconvenient for recurring bills. Manual transfers can also lead to late or missed payments that disrupt your income stream.

Digital wallets

Digital wallets are easier for customers to use, particularly for online transactions. They provide another layer of security because customers don’t need to share bank details directly with the business. But they come with higher transaction fees (often a percentage of the transaction plus a flat fee) and are less suited for recurring payments, as customers typically need to manage subscriptions manually.

Buy now, pay later (BNPL) options

BNPL options automatically split payments out over time, which increases accessibility for higher-value purchases and provides flexible payment options at the point of sale. But these options come with higher fees for businesses.

What types of businesses benefit most from direct debits?

Direct debits are a good choice for businesses that need reliable recurring payments, whether they’re fixed or variable. Direct debits are especially useful for reducing administrative work, avoiding late payments, and maintaining a steady, predictable income. Here’s who benefits most and why.

Subscription businesses

If your business runs on subscriptions – whether it’s a streaming service, a subscription box, or software – direct debits are a good choice. Customers appreciate the convenience, and you benefit from knowing that payments will arrive automatically.

Membership organisations

Direct debits are a good fit for gyms, clubs, and associations. Membership dues can be collected effortlessly, month after month. Members appreciate the simplicity of automatic payments, and you avoid potentially awkward conversations about late payments.

Utilities and telecom companies

Direct debits are a great way to handle the fluctuating bills associated with utilities and telecom services. The flexibility to adjust payment amounts makes it easier to manage variable charges.

Education and childcare providers

Direct debits are also a good fit for schools, nurseries, and tutoring services that collect fees on a monthly or termly basis. Parents don’t have to remember to pay for each month or session, and your business can rely on consistent payments without the administrative hurdle of providing regular reminders.

Property and rental businesses

Direct debits can simplify rent collection for landlords and property management firms. Monthly payments occur on schedule, without tenants needing to take any action after the initial setup. This reduces stress for both sides.

Health and wellness services

Direct debits can be a good choice for private clinics, therapy services, yoga studios, and wellness apps, particularly if there are associated payment plans or ongoing subscriptions.

Charities and non-profits

Direct debits enable supporters to easily make regular donations to charities. Donors like the hassle-free process, and your organisation can spend more time focusing on its mission rather than managing contributions.

Financial services

Loan repayment plans and savings schemes often rely on direct debits. This method ensures that regular payments are made on time, which helps customers stay on track and offers your business predictability.

Insurance providers

Insurance premiums are a clear match for direct debits. Whether it’s car insurance, health insurance, or life coverage, direct debits provide a straightforward way to collect recurring payments and reduce the chance of policy lapses due to missed payments.

Retailers that offer instalment plans

For businesses that sell higher-value items such as furniture and appliances, direct debits are a great way to manage payment plans. Customers can spread the cost over time, and you don’t have to worry about handling one-off payments or late transactions.

B2B services

Direct debits can be a good way to process fees for a regular retainer for professional services such as marketing, IT, and consulting.

Managed service providers

Direct debits are a useful way to pay out contracts for IT support, cloud services, and security monitoring. This payment method is especially helpful when you’re managing multiple clients who all pay on different schedules.

How can businesses reduce risks associated with direct debits?

Direct debits are a reliable, efficient way to collect payments. But as with any system, they come with risks, which range from failed payments to customer disputes. Most of these risks can be managed with the right tactics and processes. Here’s how businesses can reduce the potential risks and make the most of direct debits.

Set clear expectations from the start

When you set up direct debits, explain exactly how they work to your customers. Ensure they understand:

  • What the payment is for

  • How much will be taken out of their accounts (or that the amount might vary, if applicable)

  • When payments will be collected

  • How much notice they’ll get before any changes

By being transparent, you minimise confusion and strengthen relationships with customers. This will make customers less likely to question or dispute payments later.

Notify customers of changes

If a payment amount changes or you’re introducing a new charge, notify customers well in advance. The Direct Debit Guarantee requires you to do so but beyond compliance, it’s good practice. A brief email or letter that explains the change can prevent misunderstandings and make customers feel in control.

Monitor payment failures

Not every payment will go through. Implement systems to track failed payments and contact the customer to resolve the issue. The faster you address failed payments, the less likely they are to escalate into bigger issues.

Invest in a trusted payment provider

If you’re not handling direct debits in-house, choose your payment provider carefully. Look for a partner with strong security protocols, reliable systems, and excellent customer support. Payment processors like Stripe accept direct debits and can take on much of the work and risk for you.

Stay compliant with Bacs rules

In the UK, direct debits run through Bacs, which has strict compliance standards. Whether you manage your own direct debit setup or use a third party, you’re responsible for following these rules. Regular audits, secure data handling, and proper notification practices can keep you compliant and reduce your exposure to disputes or penalties.

Protect customer data

Use encryption, secure storage, and access controls to keep customer data safe. These reassure your customers and can reduce the risk of fraud.

Have a process for refunds and disputes

Under the Direct Debit Guarantee, customers can claim a refund if something goes wrong. While this makes customers feel safer, it can also expose your business to disputes. Prepare for them by keeping clear records of mandates and communications, having a system to quickly verify claims and issue refunds when necessary, and educating your team about how to handle disputes professionally and promptly.

Communicate clearly and proactively

Misunderstandings are a common cause of disputes. Keep communication open and proactive by sending reminders before payments are taken – which makes it easier for customers to contact you if they have questions – and using plain, customer-friendly language in all your emails and notices. This shows customers you’re responsible and trustworthy.

Build in flexibility for customers

Be flexible when the unexpected happens (e.g., when a customer faces unexpected financial pressures or forgets to update their details after switching banks). Allow customers to change payment dates if needed, make it easy for them to update their bank information, and offer grace periods or alternative arrangements in special cases. This can reduce friction and strengthen relationships so customers are less likely to cancel their mandates.

The content in this article is for general information and education purposes only and should not be construed as legal or tax advice. Stripe does not warrant or guarantee the accuracy, completeness, adequacy, or currency of the information in the article. You should seek the advice of a competent lawyer or accountant licensed to practise in your jurisdiction for advice on your particular situation.

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