Direct Debit | What does it mean for merchants?2023-02-20T17:10:51+00:00
Direct Debit: A guide for beginners, payers and merchants
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What one business model was responsible for $15bn of online merchants’ revenue in 2018? And no, it had nothing to do with spending more to acquire customers. Rather, it had everything to do with guaranteeing future payments from acquired customers, usually through direct debits. If you guessed ‘subscription models’, then you’re right on the money.
According to McKinsey, the subscription market saw a sales growth of over 100% each year, over the last 5 years. This growth reached an estimated $15bn, all without the help of the pandemic. With the influence of the pandemic, Mercator estimates the subscription growth to have reached $28.4bn in 2020. The question is: how can merchants today ride this wave and position themselves to receive a share of this $28.4bn windfall?
The obvious answer for merchants is to incorporate a subscription strategy. However, every merchant who wants to incorporate this needs the right tools to set up and bill customers on a recurring basis at the point of purchase intent. A direct debit (also called “bank debit” or “ACH debit”) is the easiest, most secure and most adaptable way to achieve this. The rest of this guide will attempt to explain direct debits – what they are, how to use them and when they can be applied. So if you want to reap the benefits of a recurring payment strategy, this guide will explain how a direct debit fits into your objectives and how you can apply this to your business strategy.
What exactly is a Direct Debit?
Simply put, a direct debit is a payment method where a customer (payer) gives consent to a business (recipient) to collect payment from the payer’s account at a future date. This process involves a payer (customer), a recipient (or business) and allows businesses to withdraw funds directly from the bank account of their customers. Funds are then deducted from or debited to the payer’s account and electronically transferred to the recipient.
In the United States, this permission to withdraw funds is given using a Direct Debit mandate form or an Automated Clearing House (ACH) authorization form. Automated Clearing Houses make up over 10,000 financial institutions connected by a computer-based electronic network that processes fund transfers. This network operates on a ‘net balance system’, netting out against each bank’s balance at the end of each day’s transactions.
When cansmall business merchants offer Direct Debit as an option?
Direct Debits can be used in more situations than most merchants realize such as:
Regular payments for fixed or fluctuating amounts such as product subscriptions, memberships, etc.
Ongoing services that do not require instant payment such as marketing services, driving tuition, etc.
Payment on account for customers who have ongoing relationships with merchants (e.g. wholesale customers)
One-off, large payments spread over installments
How to set up a Direct Debit
As a merchant, you have the power to initiate a direct debit, given the right tools. Following this, your customer would need to complete a debit mandate form with key details such as name, address, name and address of the bank, etc. This mandate usually presents as a paper form or a web-based (usually pre-filled) form, which would be then submitted and processed through the nominated bank.
Key Direct Debit terms to be aware of
Customer Protection: Banks are obliged to refund any payments which should not have been taken (subject to some rules about ACH payments)
Authorization: Customers must clearly and specifically give authorization to businesses that they wish to pay before they can start collecting Direct Debit payments.
Notification: If there is any cause to change the payment terms (frequency of payments, payment amount, payment date, etc), the payee business or merchant is obliged to give you notice of these changes in advance.
Why use Direct Debit payments?
Direct debit payments offer merchants and customers alike several outstanding benefits. Apart from offering the ideal gateway tool for merchants to increase their profitability, customers and merchants can enjoy the following benefits:
Ease: Because payments are automatically collected, customers’ bills are never forgotten, lost, or delayed.
Cost savings: Customers could benefit from discounts and incentives simply for choosing Direct Debit as a payment option.
Security: Direct Debit is a very safe and secure payment method for consumers.
Are Direct Debits and Standing Orders the same thing?
While direct debits may seem quite similar to standing orders, the differences between the two are subtle but significant. Here’s a summary of these differences:
Authorization process: A standing order directly instructs the customer’s bank to pay, while a direct debit authorizes the collection of payment from the customer’s account when due.
Usage: A standing order is used for regular, fixed payments (e.g. charity donations) while a direct debit is used for regular payments that are either variable or fixed (e.g. mortgage payments, utility bills, etc).
Set up: With standing orders, customers initiate payments while direct debit payments are initiated by merchants/payees using a direct debit mandate.
Customer Protection: Standing orders carry no protection and no refunds once paid. Direct debit on the other hand, offer a high level of protection and a refund guarantee in the event of incorrect payments (subject to certain rules).
How are Direct Debits different from Bank Transfers?
Bank transfers tend to involve lengthy processes with bureaucratic bottlenecks which can sometimes result in late payments. Added to this are higher costs per payment, low customer protection and low payment flexibility. Direct debits on the other hand come at a relatively low cost, with high payment flexibility, low administrative bottlenecks and high security.
What is a Direct Debit Guarantee?
A direct debit guarantee protects customers from accidental and fraudulent payments made by the bank, with customers being fully entitled to a refund.
Cancellation of Direct Debits
Because payees/businesses are required to notify payment providers/banks in advance of the payment due date, customers are well within their rights to cancel payments in response. It is important to note however that for administrative reasons, direct debits are not operational on Saturdays and Sundays.
How canTailoredPay help you start accepting direct debits quickly?
TailoredPay can help merchants who need to start accepting recurring payments – especially in niches rejected by most payment processors. We offer direct debit services used by a broad range of businesses around the United States, from e-commerce drop shippers to dating and CBD and everything in between. Boost your profits and save your customers the hassle of making manual payments each month by switching to Direct Debit with TailoredPay. We will remind your customers of upcoming payments, with the opportunity to cancel any time. With ACH scheme rules and federal regulations protecting your customers, direct debit is one of the safest and most seamless ways to accept payments.
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