Advantages and Disadvantages of Direct Debit

One of the most common payment methods for products and services of all kinds is direct debit. Put simply, this is an instruction and authorisation that the customer gives to their bank to indicate that they want to make repeated future payments. For this reason, Direct Debit can be useful for repeat purchases, subscriptions and regular expenses such as bills and utilities.

The terms of payment are fairly flexible and can be set according to the customer and merchant’s needs. For example, you can select to pay in weekly instalments, or on the same day of each month. An end date can also be set if necessary. Once the terms have been agreed, payments are automatically deducted until either the customer or merchant changes the arrangement. If the merchant wishes to change the payment amounts or terms, this must also be agreed to by the customer.

One of the key benefits of direct debit is that it offers a quick and convenient way to make payments. On the other hand, there are also a number of risks of direct debit. Keep reading to find out more about the advantages and disadvantages of direct debit.

Advantages of direct debit

Each payment method has its own unique advantages and disadvantages for both the merchant and customer. The benefits of direct debit include:

• Lower likelihood of missed payments. If a customer has set up a direct debit, you don’t need to worry about the possibility of human error and customers simply forgetting to make a payment. However, you can run into problems if the customer has insufficient funds in their account on the payment date.

• It saves time. One of the biggest advantages of direct debit is that by automating the process, both merchant and customer can save time. This means there’s no need to complete invoices or authorise payments, as funds automatically leave the customer’s account.

• Direct debit is a more cost-effective payment type. Whereas card networks tend to cost around 3-5% for transactions, direct debit tends to be much cheaper at around 1%.

• There is a lower likelihood of payment failures. Card payments may fail due to expiry or cancellation, whereas direct debits are linked to bank details and therefore remove this possibility.

Disadvantages of direct debit

As well as being an easy and convenient payment method, there are also some risks of direct debit:

• One of the major disadvantages of direct debit is the time that it takes to get paid for the first time. Since the payments work in set cycles, you may have to wait to receive the initial payment. However, you can get around this by using Instant Payments by PayTo, a solution which allows merchants to take an initial payment immediately, such as a joining fee for a gym or a deposit before paying instalments.

• Even though the rates of failure for Direct Debit transactions are lower than that for credit and debit cards, there is still a possibility that transactions will not go through. Particularly if a customer has a number of different recurring payments, they may end up with insufficient funds at the date of payment, which can cause a delay.

• Customers need to feel comfortable with the business. Authorising a company to collect automatic payments requires a certain level of trust, and many customers may prefer to make payments manually. In this case, forcing your customers to pay by Direct Debit may discourage them.

Overall, you should consider the advantages and disadvantages of Direct Debit before introducing this payment method for your company. For many businesses, using a mixture of payment types alongside one another is the best way to maximise convenience and time saved (for both you and your customers), and reduce the costs of card processing.

We can help

GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.