What Are the Risks of Direct Debit?

Direct Debit is preferred by many for its convenience, but as with any payment method there are certain disadvantages or risks to be aware of. We’ll cover the potential risks of Direct Debit below so that you can be prepared, both as a customer and merchant.

How does Direct Debit work in Australia?

In Australia, banks use the Bulk Electronic Clearing System (BECS) to communicate with one another and facilitate bank-to-bank Direct Debit payments. First, the merchant must send a Direct Debit request to their customer. Once the customer fills out this request, it authorises merchants to take payments directly from the customer’s bank account. These payments are agreed upon in advance and are pull-based, without any further action needed.

What are the advantages of Direct Debit?

Direct Debit payments are convenient for both merchants and their customers when everything goes as planned. Businesses enjoy the benefit of being in control over payments with a pull-based approach. Payments are flexible, so you can adjust the payment taken and its frequency. It also gives you control over payment timings, for fewer late payments.

BECS offers strong customer protections. Customers initially grant access with their authorisation form, after which time no further action is needed. However, they’re still free to cancel the Direct Debit or ask for a refund at any time. The full payment process is automated for less admin and hassle.

What are the disadvantages of Direct Debit?

While overall, this payment method is safe, secure, and convenient, there are potential disadvantages of Direct Debit to be aware of.

• You can be charged overdraft or late fees: If there are insufficient funds in the buyer’s account, the Direct Debit might still go through with overdraft protection. However, they’ll be charged a fee by the bank – and potentially the biller.

• Payments are controlled by a third party: This carries some risk if you give billing details to an untrustworthy provider.

• The refund process takes time: The customer’s bank will need to send a claim over to the merchant’s bank and go through a dispute process for approval.

There are both fixed and variable Direct Debit amounts. It’s easiest to control and prepare for fixed rates. For example, you might arrange to pay your business electricity bill on the last day of each month. This is regular and predictable, with payments taken from a trusted provider. While variable payments can also be taken, these are more unpredictable. Disadvantages of variable payments include the potential for insufficient funds or incorrect amounts pulled from your account.

How to minimise Direct Debit risks

When using Direct Debit to pay your business’s bills, be sure that you are using a reputable service provider. Read reviews and carefully compare terms and conditions.

One of the best ways to prevent the most common Direct Debit risks is to keep a close eye on your bank statements. For example, you might sign up for a trial software subscription for your business and neglect to cancel the ongoing subscription. You’ll have authorised the payments, which will keep being pulled from your account until you remember to cancel.

By regularly reviewing all outgoings and accounts, you’ll be able to take advantage of BECS protections and cancel your payments. You can also sign up for bill monitoring and banking apps that send you an alert whenever a payment is withdrawn from your account.

It’s important to ensure you have sufficient funds within your business bank account to cover all outgoings, including regular Direct Debits. Of course, as with any ongoing financial plan, it’s vital for both consumers and merchants to go over the fine print carefully before entering into any Direct Debit agreements.

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.