What Is A Direct Debit? : A Complete Guide

Direct debit is when you give instruction to your bank to allow a third party such as a utility company, to collect varying amounts of payments from your bank account. All this is initiated by the organization with your consent.

There is however a condition that that organization or company should notify you in advance of the amount and date of collection.

What Is A Direct Debit? : A Complete Guide

How do I set up a direct debit?

In order to set up a Direct Debit, the organization that you are paying will initiate it by sending you a form to fill. Or it can also be done by phone or online.

In the setting up you will be required to provide your personal details and also your bank account details. You will also agree on the date the direct debit will come out of your bank account.

It is that organization (payee) that will contact your bank to finalize the setting of the direct debit. Not any organization can set up a direct debit as they have to be vetted before being accepted into this scheme.

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What information do you need to set up a direct debit?

The Direct Debit is set up by the organization that will collect the payment. And the information they will require from you is the following:

  • The name or names on your bank account
  • Your bank account number
  • Bank account sort code
  • Your name and address.

How does a direct debit work?

Once a direct debit is set up, the organization (payee) will send you notification on the amount to be collected and the date the payment will occur. The organization (payee) will then request their bank to process the payment from your bank account.

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What is the difference between a standing order and direct debit?

The main difference between a standing order and a direct debit is that in the case of a direct debit it is the payee who controls what to collect from your bank account and when.

Whereas in the case of a standing order, it is you the payer that is in control of the amount and timing of the payments.

The other difference is that a direct debit is set up the organization you will be paying whereas you the account holder are the one who sets up a standing order.

What are the advantages of direct debit?

What Is Direct Debit

The following are some of the advantages of a direct debit.

  • It reduces the risk that you will miss a payment as it is the payee who controls when and how much to collect from your bank account. If for whatever reason they fail to collect the payment then you can never be penalized. After all, the processing of the payments is in their hands.
  • You can get a discount on your bill. Most companies that encourage consumers to pay by direct debit will offer discounts to customers who pay by direct debit. On a monthly basis, it might seem as peanuts but it adds up by the end of the year.
  • You can agree on a convenient date for the organization to collect the payment. During the set up of the direct debit, you can agree with the organization the most convenient dates for them to collect the payment.
  • It is a guaranteed form of payment. If there is a mistake in the payment you can easily get your refund. For example, if the company collects more than the agreed amount or the notified amount, then you are at liberty to cancel it. You can also cancel if they collect on a date other than the agreed date.
  • You are free to cancel at any time. if you are not happy with anything you can cancel the direct debit online or by phone or visiting any branch of your bank.
  • It is safe: All the organizations participating in the Direct debit scheme are thoroughly vetted and monitored. Because of this, you can rest easy and when there is a mistake you can get a guaranteed refund.

What are the disadvantages of direct debit?

Below are some of the disadvantages of direct debit.

  • Lack of control: the direct debit is controlled by the organization you are paying. Other forms of payment such as a standing order are controlled by you the account holder.
  • You can miss the overpayments. Since the payment is done by the organization collecting it, one can easily miss overpayments. This is because the processing of the payment is done without you knowing it. You are only notified in advance of the amount to be paid and the date of payment.
  • The payments may continue even at the end of the contract. I have been in situations where my phone contract ended but the company was still collecting the payments. They somehow assume that you still need the service if you haven’t canceled it or asked for a new contract. You, therefore, need to keep an eye on your contracts end periods to avoid such circumstances.

Can I cancel a Direct Debit without telling the company?

Yes, you can cancel a direct debit without telling the company collecting the payments. However, it is good manners to inform them first before you do.

It is also important that you check the terms and conditions of your contract as this could attract penalties from the company.

And in doing this you also need to consider whether you still need the services or goods offered. This is because unless you have other alternative ways of making payments, the service or good contract will be terminated.

Can an individual set up a direct debit?

A Direct Debit can only be set up by an organization that will be collecting the payment. Individuals cannot set up direct debits.

The direct debit scheme is not for any organization as the organizations in this scheme are vetted and monitored by the regulatory authorities.

Is direct debit the same as a bank transfer?

Yes and No. Here are my reasons. A direct debit is under the control of the organization you are paying whereas a normal bank transfer is controlled by you the account holder. However, we can still say they are both bank transfers in the sense that money is transferring from one bank account to another.