A Direct Debit in the UK allows businesses to collect payments directly from a customer’s bank account. Direct Debit is used widely for managing recurring payments including utility bills, streaming services, gym memberships, and loan repayments. This system simplifies the payment process for businesses and customers by collecting payments automatically, without manual intervention.
Bacs, the UK’s Direct Debit clearing system, handled more than 4.8 billion Direct Debit transactions in 2023. Below, we’ll explain how businesses can set up Direct Debits, how to notify customers of Direct Debit changes, and how to handle failed Direct Debit payments.
What’s in this article?
- What rules must businesses follow to set up Direct Debits?
- What are the advantages of Direct Debits for businesses?
- How do businesses notify customers of Direct Debit changes?
- How do businesses handle failed Direct Debit payments?
What rules must businesses follow to set up Direct Debits?
Direct Debits in the UK have strong customer protection under the Direct Debit Guarantee. These safeguards set rules for participating businesses and banks to protect customers who use this payment method. These rules include:
Direct Debit mandates: Before any payments occur, customers must explicitly grant consent by signing a Direct Debit mandate outlining the details of the arrangement. This can be signed online, on paper, or done over the phone.
Advance notification: Businesses must inform customers of the amount, payment date, and frequency before processing payments. If there are changes – such as a new amount or schedule – businesses must notify customers, typically at least 10 business days in advance.
Refund guarantee: If a payment is taken incorrectly or without authorisation, customers are entitled to a full, immediate refund from their bank. This is often processed on the same day.
Bank accountability: Banks are responsible for enforcing the refund rules. If something goes wrong – such as a business failing to notify a customer or taking unauthorised payments – the bank must refund the customer promptly.
Bank approval: Businesses can’t set up Direct Debits on their own. A business’s bank has to vet and approve it as a Direct Debit originator before the business can submit directly to Bacs. The bank checks the business’s finances and systems to ensure reliability before granting approval. However, some businesses choose to skip this step and submit indirectly via a payment service provider (PSP).
Right to cancel at any time: Customers can cancel a Direct Debit at any time by contacting their bank or the business. The bank must stop payments immediately, and the business is notified to cease collection.
Data protection: Businesses that handle Direct Debit details must use secure systems and follow data protection laws such as the Data Protection Act 2018 to protect data from unauthorised access or misuse.
What are the advantages of Direct Debits for businesses?
Direct Debits simplify payment for businesses and their customers while cultivating trust. Here are some specific advantages of using Direct Debits.
Timely payments: Direct Debits ensure payments are made on time, every time, without depending on customers to remember due dates.
Less administrative work: With Direct Debits, the money appears when it’s supposed to, and businesses do not need to chase invoices, send reminders, or manually process individual payments.
Lower costs: Direct Debits are usually cheaper than card payments. Over time, those savings add up for businesses.
Less hassle for customers: Direct Debits mean customers don’t have to keep track of due dates or take any action to make a payment. Making it easier for customers to pay can help increase the likelihood that they will continue using your business.
Built-in trust: Customers know their money is safe thanks to the Direct Debit Guarantee. If anything goes wrong, they receive an immediate refund from their bank. That extra layer of trust can make customers more likely to sign up for the service.
Scalability: Direct Debits grow alongside your business. Whether you’re processing a hundred or a thousand payments every month – or more – the system works reliably.
How do businesses notify customers of Direct Debit changes?
When a company needs to make changes to a Direct Debit – such as adjusting the amount, payment date, or frequency – it is required to notify customers before the change takes effect. These notifications must include all details about the change (usually, a new payment amount, new payment date, or new payment schedule). The notice must also state when the change will take effect. Additionally, the company should explain why the change is happening (e.g. price increases, subscription upgrades, corrections).
Here’s how these notifications can be delivered:
Email: This is often the fastest way, and the most common, especially for companies that already communicate electronically.
Post: Some businesses still use traditional post for formal notifications. This method can help ensure all customers are reached, regardless of their digital access.
Online portals: Businesses might notify customers through their account on the business’s website or app. This type of notification is often accompanied by an email or text.
Text messages: For urgent updates, businesses might use SMS to ensure customers are informed.
Customers should be able to spot the notification easily. Those who are unhappy about the change can challenge it or cancel the Direct Debit. Businesses must remain responsive and offer clear next steps for these scenarios.
How do businesses handle failed Direct Debit payments?
When a Direct Debit payment fails, companies need to act quickly and communicate with their customers. Here are the steps they should take:
Determine why the payment failed: Payments might fail for various reasons, such as insufficient funds, incorrect account details, or if the customer cancelled the Direct Debit mandate. Bacs should assign a reason code for the payment failure.
Alert the customer of the failed payment: Send an email, SMS, or phone message explaining what happened and the amount due.
Give the customer options to resolve the failed payment: You can allow customers to instead make a manual payment with a card or bank transfer, set up a new Direct Debit mandate if the original was cancelled, or pay off the amount due with a payment plan.
Notify the customer of the date you will retry the payment: Let the customer know when you plan on retrying the payment, and then attempt to process it again. Give a reasonable grace period and avoid cutting off services or adding penalties without warning.
Create a plan in case failed payments keep happening: Contact the customer to understand the root cause of the issue and work with them to find a solution. If the problem remains unresolved, consider taking more formal steps, such as:
- Suspending services
- Reporting the debt to credit agencies (depending on the agreement terms)
- Passing the debt to a collection agency
- Suspending services
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.