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BreadcrumbResourcesDirect Debit: A Beginner's Guide

What is Direct Debit? A guide for payers

Direct Debit - also known as ACH Debit or bank debit - is the simplest, safest and most convenient way to make regular or recurring payments. That’s why it’s often used for things like utility bills.

Direct Debit - also known as ACH debit or bank debit - is a common payment method, but many people remain unsure what exactly Direct Debit is or when it should be used.

If you’re looking to set up a regular payment - such as a subscription - read this guide to find out what Direct Debit is, and if it’s right for you.

What is Direct Debit?

A Direct Debit is an instruction from you to your bank.

A Direct Debit authorizes someone to collect payments from your account when they are due - for example, an accountant collecting a regular fee from you, or even Netflix collecting your monthly subscription.

You give this authorization by completing a Direct Debit mandate form - also known as an ACH authorization form in the US. This can be a paper form or a web page that you complete online.

Once you authorize a company, they can automatically take payments from you (provided that they comply with certain rules).

Direct Debit can be used for nearly everything

Direct Debit can be used for most payments but it’s most often used to pay:

  • Regular bills for variable amounts - With Direct Debit, you know all your important bills will be paid on time each month.

  • Fixed subscriptions or memberships - Direct Debit is a safe and easy way to make recurring payments like magazine subscriptions or gym memberships.

  • Paying on account – Some companies will provide Direct Debit as an option for spreading your costs or paying on account.

Direct Debit can be used for one-off payments

While Direct Debit is usually associated with regular and recurring payments, it can also be used for one-off payments.

Direct Debit should not be used for one-off payments where instant transfer of funds is needed, like e-commerce. However, if the company you're paying doesn't need the money immediately, Direct Debit can be a great option.

Important Direct Debit rules you should know

  • Authorization - You must provide specific authorization to a company before they can begin collecting Direct Debit payments from you.

  • Notifications - When there are changes to your payment amount or frequency, the company collecting payment from you should warn you of these changes in advance.

  • Customer protection - You are entitled to a refund for any payments that shouldn’t have been taken (subject to some rules about ACH payments).

Direct Debit is safe, convenient, and cost effective for customers

There are three benefits to making payments using Direct Debit:

  • Convenience - Payments are automatic, so bills are never forgotten, lost or delayed.

  • Cost - Businesses may offer incentives for paying by Direct Debit, such as a discount.

  • Customer protection – Direct Debit is a highly safe payment method for consumers.

Direct Debit vs. standing order

People often confuse Direct Debits and standing orders. That’s understandable - the differences are subtle but important.

We’ve set out a summary of these differences for you below:

Standing order Direct Debit
What is it? An instruction to your bank to make payments to a person/company. An authorization for a person/company to take payments from your account when they are due.
What is it used for? Regular, fixed payments like rent payments, monthly charity donations or regular payments into a savings account. Regular payments of variable or fixed amounts like mortgage payments, utility bills or other bills based on usage.
How do you set one up? You instruct your bank. You decide when and how much to pay, and tell your bank to do this. You complete an instruction form, then you won’t need to do anything else.
Customer protection None. Once you pay, you can't get it back. High. Refunds from your bank in the event of an incorrect payment (subject to certain rules).

In short: Standing orders give you control. Direct Debit gives you flexibility and safety.

Standing orders are good for regular payments of a fixed amount. However, if you want to pay variable amounts, or might need to change payment amounts, then standing orders are not the most practical option.

Direct Debit lets you pay variable amounts or at varying intervals without needing to do anything more. This makes it great for paying bills where you are charged depending on what you have spent that month.

Direct Debit is one of the safest ways to make payments. The ACH scheme rules (as well as federal regulations) give you protections for payments which shouldn't have been taken from you.

Direct Debit and GoCardless

GoCardless is made for recurring payments. We're a specialist Direct Debit provider, used by over 50,000 companies around the world.

Switching to Direct Debit with GoCardless will save you the hassle of paying each month. You’ll be notified of any upcoming payments, and you can cancel them whenever you want. What’s more, ACH scheme rules and federal regulations protecting customers makes Direct Debit one of the safest ways to pay.

If you would like to find out more about GoCardless, click here.

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