A brief introduction to direct debits

Payments
Payments

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  1. Introduktion
  2. What is a direct debit?
  3. How have direct debits changed over the years?
  4. What are the benefits of direct debits?
  5. What is the difference between a direct debit and a bank transfer?
  6. How long does a customer have to refund a direct debit?
  7. What happens if a direct debit cannot be collected?

A direct debit is a popular cashless payment method that simplifies payment transactions. In 2021, nearly 12 million cashless payment transactions were completed using direct debit in Germany, and this number continues to rise. In this article, you will learn what exactly a direct debit is, how they have changed over the years, how they’re different from bank transfers, and more.

What’s in this article?

  • What is a direct debit?
  • How have direct debits changed over the years?
  • What are the benefits of direct debits?
  • What is the difference between a direct debit and a bank transfer?
  • How long does a customer have to refund a direct debit?
  • What happens if a direct debit cannot be collected?

What is a direct debit?

A direct debit is a secure, cashless payment method that businesses can use to process payments. People often use the term “direct debit” to refer to SEPA Direct Debit payments.

Direct debits allow businesses to collect the amount from the customer’s bank account on the payment due date. This requires a mandate, also referred to as the SEPA Direct Debit mandate, which represents the customer’s written consent for the amounts to be debited from the account. Direct debits give businesses the security that payments will be received on time, and they will not incur any costs.

This payment method is particularly beneficial for recurring payments such as subscriptions or memberships. Automating direct debits speeds up the billing process and makes the entire payment process more efficient.

How have direct debits changed over the years?

Before the SEPA Direct Debit scheme was introduced in 2009, direct debits were made by direct debit authority and debiting. SEPA Direct Debits enabled direct debits to be made internationally for the first time. Direct debit authorization and debiting were still in use until February 1, 2014, at which point the SEPA Direct Debit Scheme replaced them completely. As part of this switch, the direct debit authorizations previously issued in writing automatically became SEPA direct debit mandates, which, like the direct debit authorizations before them, allow companies and merchants to debit the customer’s account.

What are the benefits of direct debits?

There are many ways businesses can receive payments from their customers. One of the most efficient and cost-effective is by direct debit. Since no separate payment processing is required, the business does not have to worry about posting payments or sending invoices, which saves time and money. It also reduces the risk of late or missed payments since the automatic direct debit process settles the invoice on the due date, as well as simplifying the associated accounting, as all payment transactions are clearly documented and there is no chance of errors during manual inputting. Businesses no longer have to spend time writing payment orders or sending out reminder fees.

Direct debit also allows businesses to optimize their cash flow since payments are received on time. It also has the advantage of being compatible with all major credit and debit cards, as well as online banking services.

Direct debits also offer many benefits to customers: because they can pay immediately, there is no need to worry about when bank transfers are due. Plus, they do not have to re-enter transfer details for recurring payments each time, or store or memorize the information. Direct debits also offer customers additional protection against unauthorized debits or fraud, as all transactions are accurately logged. Another advantage for customers is that data transfer is encrypted and it is easy to request a chargeback if problems arise.

What is the difference between a direct debit and a bank transfer?

The biggest difference between a bank transfer and a direct debit is that bank transfers are carried out by the payer themselves. They have to initiate the transfer by entering the payment information in their online banking system and then transfer the amount manually. By contrast, the direct debit process involves no action on the part of the payer. Instead, they grant the business the necessary written permission, in the form of the mandate, enabling the business to collect the money directly from the payer's account.

How long does a customer have to refund a direct debit?

For a direct debit between a private individual and a company, which is referred to as a “core direct debit,” the deadline is eight weeks after the debit date. After that, a direct debit can no longer be refunded. However, this period can be extended to up to 13 months if the customer did not receive any information on the collection of the direct debit, the account data was incorrect, or if the customer suspects fraud.

In the case of a direct debit between companies or self-employed individuals, a direct debit for business, the customer is not entitled to a refund, assuming that the mandate for collecting the payment was in effect at the time. But again, if the customer suspects an unauthorized debit, they have 13 months to refund the payment.

To avoid any problems, businesses should ensure that all information is correct for each debit and that they provide advance notice to the customer. This can prevent customers from refunding a direct debit without any reason. After all, chargebacks incur substantial costs for businesses. In addition to the financial cost, chargebacks can also affect a company’s reputation.

What happens if a direct debit cannot be collected?

There may be several reasons why a direct debit was not successful. For example, there could be insufficient funds in the customer’s account, errors during the transfer, or the customer’s bank could have rejected the direct debit for other reasons. In such cases, businesses should act quickly and contact the customer to solve the problem. It may also be possible to arrange payment by bank transfer or other payment method.

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