Direct Debit - also known as ACH Debit or bank debit - and Standing Order are both automatic payment methods. But they have some important differences.
A standing order is an automated payment method set up between a customer and a bank, to send payments to other people or organizations.
A Direct Debit follows the same method, but it is authorized by a customer and managed by an organization. A Direct Debit is set up by an organization, and they manage the frequency and amount.
This is also the case for a standing order, but the difference is that the customer is in control of the frequency and amount.
What are standing orders and Direct Debit?
Direct Debit and standing orders are both automatic payment methods.
A standing order is an instruction your customer gives to their bank to pay you a fixed amount at regular intervals. For example, weekly, monthly, quarterly, or yearly.
With Direct Debit, your customer authorizes you to collect money directly from their bank account whenever a payment is due. Direct Debit payments can vary in frequency and amount.
You control a Direct Debit. Customers control a standing order.
A standing order is set up by customers. They choose the amount and frequency, and can change or cancel it without notifying you.
In contrast, you have full control over the payments you take by Direct Debit. You decide how much and how often you collect from customers. You can vary the amount and frequency of collections without further authorization from the customer, and are notified automatically by the Direct Debit system of any cancellations or failures.
Direct Debit vs. Standing Order - A comparison
Here’s a quick comparison of the two payment methods for you:
|Standing order||Direct Debit|
|Set up||No provider needed. Your customer controls the set up. You are dependent on them. This is unfeasible if you have > 25 customers.||Bank/provider needed. You control the set up and the amount and date of payments.|
|Cost per payment||Ostensibly free. You may incur a small charge from your bank for each payment.||Low. Depends on your provider. (See our pricing)|
|Failure rates and notifications||Vary by industry. No notifications. It can take more than a month to find out about failures then you’ll need to chase the customer to set up another payment.||Very Low. < 1% with GoCardless. Automatic notification. You are notified automatically of failures and can re-submit the payment when you want to.|
|Flexibility of payments||Fixed payments at regular intervals only. If you need to amend the amount or date of a payment, the standing order will need to be cancelled and a new one set up. You will need to convince customers to change the standing orders themselves.||High. You can collect variable amounts or change the amount or date of payments without asking customers for further authorization.|
|Risk of late payment||Medium - high. Once set up, low risk, but many businesses struggle to get customers to set up their standing order quickly, or to amend it as required.||Low. You can charge customers when a payment is due.|
- Check bank statement daily to see what payments
- No notification when a payment fails
- Manually update your accounts
- Automatically submit 1000s of payments at once
- Automatically update your accounts
- Instant notifications when payments fail
- Easily track payments without checking bank statements
|Customer protection||Low. No customer protection once payments are made. This gives merchants greater protection.||High. Customer can get refund from their bank in the event of an incorrect payment.|
Should I use standing order or Direct Debit?
The right option for you depends on:
Your organization size.
Your customer base.
1) Standing orders are great for very small organisations
If you have less than 25 customers, standing order may be a good option for you. Standing orders are great for smaller organizations or clubs with close relationships with their members.
However, if you have more than 25 customers, Direct Debit is likely a better option for you. With a standing order, you need to check your bank account when a payment is due to find out whether it has actually been made, or if a payment has failed.
On the other hand, with Direct Debit you set up the payments so you'll know that everything's in place. You'll be notified of any failures straight away so you'll always know when you have and haven’t been paid, without needing to trawl through your accounts.
2) Standing order is good if you are close to your customers
If you have less than 25 customers who you can trust to set up a standing order when asked, and continue to make the payments, this could be a great option for you as your customer does all the hard work for you.
However, if you aren’t sure whether you can trust your customers to set up or maintain a standing order, then Direct Debit could be a better option for you.
3) Standing order is only suited to regular, fixed payments
Both Direct Debit and standing order are great for regular, fixed payments like rent or subscriptions. However, standing order isn’t great for paying bills with variable amounts or frequencies, such as utility bills or credit card bills. Or where you may want to increase fees or upgrade subscriptions in the future.
One of the greatest benefits of Direct Debit is its flexibility. You are in control so you can adjust the amount or frequency of payments whenever you need to (as long as you give your customer advanced notice).
Both standing order and Direct Debit could be used to make one-off payments, although their strengths aren't leveraged well for them.
Direct Debit means you control the payment, so you know that the payment has been set up, as well as when you’ll receive it. With standing orders, your customer could forget to set it up, set it up incorrectly, or forget to amend it when the situation changes - resulting in you being paid too little, too late, or not at all.
Direct Debit with GoCardless
GoCardless can help you to make your payments process cheaper and easier. Click here to learn how.