What is a Direct Debit?

Direct Debits (or DD's) provide organisations with a reliable, professional and secure method of collecting regular payments from customers. Direct Debits can be setup via telephone, paper forms or online.

The mechanism provides a high level of control, flexibility and reporting whilst automating tasks therefore keeping administration to a minimum.

In the UK, if you currently charge your customers a regular weekly or monthly fee, you are likely to be using one or more of Standing Order, Cash, Cheque or Cards as forms of payment.

Examples of Direct Debit benefits over the above forms of payment:

• You control the date money is collected, thereby improving your cash-flow
• Reduced invoicing, e.g. bill for the year and collect monthly via DD
• You can collect variable amounts on regular or irregular dates without needing further paperwork to be signed
• Use DD's to offer innovative payment options for your customers
• Reduce administrative overheads in setup, processing and reconciliation

Well, it gives the customer a bunch of benefits too:

• Bills paid on time so payment cannot be forgotten
• Spread payments and often better deals as a result

• Refunds can be made immediately to the customer whilst any disputes are resolved via the Direct Debit Guarantee

• Stringent vetting procedures and accreditation standards required for companies collecting Direct Debits

There are really three options open for businesses wanting to implement Direct Debit. Each one requires assignment of an Originators Identification Number (OIN):

1. In-House DD

Ask your Bank to sponsor your business to enable you to setup and manage your own DD facility. This can be quite a lengthy process (several months) as you will be subject to a rigorous application process and risk assessment. If successful, you will typically be required to lodge an indemnity bond in cash or equitable security with your sponsoring bank, and once this has been accepted you will be assigned your own OIN and can begin collections. This route can also be costly as you will need to invest in the necessary BACS & DD management software for payment processing and will incur all the related bank and BACS' ongoing costs. This option is usually suited to larger well established organisations who have the ability to integrate Direct Debit systems with their own financial and billing systems and have the financial administration staff to handle training, management and customer queries.

2. Partially Outsourced DD

Contact a Direct Debit Bureau Provider who will help you through 1. above, but they'll handle payment collection on your behalf using your OIN. This will save on software investment and administration costs associated with collection. Some great advantages but there is still an upfront investment in money and time for the application/risk assessment process and the requirement to lodge an indemnity bond. The disadvantages of this option are that you will incur costly setup charges and are likely be tied into a contract once setup. You will incur all related processing charges from the bank in addition to service charges from the Provider. On the plus-side, monies from the Direct Debits go immediately into your account as they do in 1. above.

3. Fully Outsourced DD

Contact a Direct Debit Bureau Provider who will use their own OIN to collect your payments eliminating any initial setup costs and implementation time. The advantages are quick implementation, potential for administrative savings by outsourcing all collection administration, however the slight disadvantage is that monies come to your business via the Bureau provider, so depending on reconciliation time payment generally arrives 5 or 10 days after point 2. above.

A thorough evaluation would be required before deciding the most appropriate solution for any business and is well worth a few days effort as it certainly is not a one size fits all solution.