The Direct Debit Guarantee is a consumer protection measure in the United Kingdom meant for individuals and businesses that use direct debit as a payment method. This scheme requires any direct debit transaction made in error or without proper authorisation to be refunded immediately by the payer’s bank. Under the Direct Debit Guarantee, the payer receives advance notice of any changes to the amount, date, or frequency of payments. If any mistakes occur – for example, the business withdraws the incorrect amount or processes the payment on the wrong date – the scheme guarantees the customer a full, prompt refund.

In 2023, the UK’s direct debit clearing system, Bacs, processed more than 4.8 billion direct debit transactions. The guarantee covers all of them. Below, we’ll explain what businesses need to know about the Direct Debit Guarantee: how it works, how to establish a direct debit with guarantee protections, and common misconceptions.

What’s in this article?

• How the Direct Debit Guarantee works
  
• How to establish a direct debit with guarantee protections
  
• Common misconceptions about the Direct Debit Guarantee
  

How the Direct Debit Guarantee works

A direct debit mandate, also known as a Direct Debit Instruction (DDI), is the authorisation that allows a business to collect payments directly from a payer’s bank account. The mandate must contain the following elements to be valid under the Direct Debit Guarantee:

• Payer’s details: The payer’s full name, address, and bank account details (account number and sort code). These details identify the payer’s bank and the account from which payments will be collected.

• Service user’s details: The business’s or service provider’s name, address, and service user number (SUN). The SUN is a unique identifier that Bacs issues to businesses to process direct debits.

• Authorisation statement: The payer’s explicit authorisation for the service provider to collect payments from their account. The wording must follow the Bacs guidelines.

• Guarantee statement: A mandated statement that outlines the payer’s rights under the Direct Debit Guarantee, including the right to an immediate refund for any incorrect or unauthorised payments.

• Advance notice clause: A statement of the requirement to provide advance notice (usually 10 working days) before any changes are made to the direct debit amount, frequency, or date.

• Signature (for paper-based mandates): The payer’s signature, to validate the authorisation.

Companies can implement direct debit mandates through paper-based methods or digitally with online forms or electronic authorisation. Each method has specific requirements and considerations.

Paper-based mandates

• Mandate creation: A paper-based mandate must include all the key elements outlined above. The form must be clearly printed and follow the layout and design standards set by Bacs to ensure that it is legible and compliant.

• Storage: Businesses are responsible for storing the signed paper mandates for at least as long as the agreement lasts.

• Processing: After the payer completes and signs the mandate, the company must submit the form to Bacs and then forward it to the payer’s bank. The bank manually verifies the details and stores the mandate.

Digital mandates (paperless direct debit)

• Mandate creation: Businesses can create digital mandates via secure online portals, telephone, or other electronic channels. The payer provides authorisation by completing an online form or giving consent over the phone. This mandate must capture all the required information, just as with a paper form, but doesn’t require a physical signature.

• Storage: Companies store digital mandates electronically. These records are easier to manage, update, validate, and retrieve for auditing and compliance purposes.

• Processing: Digital mandates are processed in real time. Once the payer provides authorisation online, Bacs or another payment network transmits their information to the payer’s bank. Businesses can automate early notifications to the payer if there are changes in payment amounts, dates, or frequencies.

• Security: Digital mandates must adhere to strict security standards to prevent fraud and unauthorised access. This often involves using two-factor authentication (2FA), secure login processes, or unique verification codes sent to the payer’s mobile device or email. These security measures ensure that the authorisation is genuine and complies with regulatory requirements such as the UK General Data Protection Regulation (GDPR).

How to establish a direct debit with guarantee protections

When your business implements a direct deposit, you must follow several important steps to ensure compliance, maintain customer trust, and manage security. Here’s a step-by-step guide.

Get a SUN

To submit directly to Bacs and start collecting payments via direct debit, you need a SUN. You can skip this step if you plan to submit indirectly through a third party.

Choose paper or digital mandates

Decide whether you’ll use paper-based mandates or go digital with paperless direct debit options. Both need to meet the same guarantee standards, but paper-based mandates involve physical forms that the customer fills in and signs while digital mandates are electronic forms filled in online or over the phone.

Create a compliant mandate form

Your direct debit instruction (or DDI) is the form that customers use to authorise you to collect payments. To be compliant under the Direct Debit Guarantee, the form needs to include the payer’s details, your business details, clear authorisation wording, a Direct Debit Guarantee statement, and early notice information, as outlined earlier in this guide.

Secure customer authorisation

For paper mandates, the customer must in out and sign a physical form. You then send it to the banks through Bacs. For digital mandates, the customer must complete an online form or provide their details over the phone. To confirm their authorisation, use secure methods such as 2FA.

Submit the mandate to the customer’s bank

Once you have the signed mandate or digital authorisation, submit it to the customer’s bank through the Bacs system. The customer’s bank receives the details, checks the information, and confirms the setup. For paper mandates, there might be additional manual checks such as verification of the customer’s signature.

Send advance notice to the customer

To meet the Direct Debit Guarantee requirements, you must send advance notice to your customers about the first payment and any changes to the amount, date, or frequency. The notice period is usually 10 working days before the payment is taken, but you can negotiate a different period with the customer.

Keep mandates up-to-date

Review and update direct debit mandates regularly, especially if there are changes to a customer’s details or payment schedule. This helps prevent errors and disputes and can ensure compliance with the Direct Debit Guarantee.

Handle indemnity claims

If a customer claims a refund under the Direct Debit Guarantee and their bank finds the claim legitimate, the bank must give them a refund. It will then raise an indemnity claim against the business. Be prepared to manage these indemnity claims by keeping records of all authorisations and any changes. If you think a refund claim is unfair, you typically have nine days to dispute it by providing proof of the customer’s authorisation and correct transaction handling.

Common misconceptions about the Direct Debit Guarantee

It’s important for anyone sending or receiving direct debits to understand how the guarantee works. Here are some common misconceptions about the Direct Debit Guarantee:

• Misconception: The Direct Debit Guarantee applies only to errors made by the business, such as withdrawing the incorrect amount or processing a payment on the wrong date.

  • In fact, the guarantee also covers unauthorised payments, even if the business followed the mandate correctly.
    

• Misconception: Claiming a refund under the Direct Debit Guarantee is a complex, time-consuming process.

  • In fact, the process is usually straightforward, and customers can usually request a refund directly from their bank.
    

• Misconception: The guarantee covers refunds only up to a certain amount.

  • In fact, there’s no upper limit on the amount that can be refunded under the guarantee, and customers are entitled to a full refund of any incorrect or unauthorised payment.
    

• Misconception: The Direct Debit Guarantee and chargebacks are the same thing.

  • In fact, they are distinct mechanisms. Chargebacks are a card payment protection scheme, while the Direct Debit Guarantee is specific to direct debit payments.
    

• Misconception: Businesses have the right to refuse a refund requested under the Direct Debit Guarantee.

  • In fact, the guarantee is a legal right for customers, requiring banks to provide refunds in eligible cases.
    

• Misconception: The Direct Debit Guarantee applies to all payment types.

  • In fact, it applies only to payments made through the direct debit scheme. It doesn’t cover other payment types such as standing orders and card payments.