Advantages and Disadvantages of Direct Debit

Direct Debit is a versatile payment method suited for specific contexts in the online payments landscape. As a prevalent form of payment in the UK, there several notable Direct Debit advantages and disadvantages. On the plus side, Direct Debit provides convenience and certainty. It automates recurring payments, ensuring they're made on time without the need for manual intervention, and comes with safeguards under the Direct Debit Guarantee, which offers customer protection. However, disadvantages exist too. For example, the set-up process can be cumbersome as it can often involve paperwork and can take a few days to become operational.

Direct Debit advantages and disadvantages

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 the customer. The benefits of Direct Debit include:

Flexibility

Direct Debit can collect both recurring and one-off payments. Recurring payments can be collected on a regular schedule for the same amount or for different amounts on an irregular basis. You can change the amount collected and the collection schedule without needing to get further authorisation from your customer. This makes Direct Debit suited to collecting irregular payments on invoices as well as regular recurring payments

Eliminates late payments

If a customer has set up a Direct Debit, you don’t need to worry about the possibility missed payments through human error or customers simply forgetting to make a payment. Once authorised payments will be automatically debited from your customer’s accounts and credited to yours, without any further action required by you or your customer. 

Payment success rates

There is a lower likelihood of payment failures. Card payments may fail due to expiry or cancellation, whereas Direct Debits are linked to bank accounts which do not get lost or stolen and therefore enjoy a much higher success rate.

Saves time

One of the biggest advantages of Direct Debit is that by automating the process, both merchant and customer can save time. Customers no longer need to take manual action to complete payments, and businesses reduce the amount of manual finance admin required.

Cost-effective

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%. Reducing failed and late payments further optimises your payment process, as resources no longer need to be diverted to credit control and manual finance admin.

Disadvantages of Direct Debit

As well as being an easy and convenient payment method, there are also some things about Direct Debit you should be aware of:

Payment timings

Direct Debit has set processing schedules that govern how long 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 Bank Pay, 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.

Payment failure

Even though the rates of failure for Direct Debit transactions are much lower than that for credit and debit cards, there is still a possibility that transactions will not go through. Ultimately, if a customer has insufficient funds in their account at the date of payment, it will fail. However, GoCardless collects 97.3% of payments on the first attempt and intelligent retry product Success+ delivers a payment success rates of up to 99.5%. 

Payer preference

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. However, with the Direct Debit guarantee, many consumers are comfortable with Direct Debit. Indeed, GoCardless research has found that 89% of payers in the UK trust bank payments, such as Direct Debit, as a payment method more than other options, such as card payments.

Direct Debit case study

Capital on Tap, a platform providing small businesses with quick access to funding, has used GoCardless Direct Debit to collect payments from customers for nine years. Having found card payments to be inefficient and expensive, with GoCardless they successfully collected $3 billion with minimal operational hassle, saved $20 million on card fees, and drastically reduced the cost of processing payments by 90%.

Damian Brychcy, Chief Operating Officer at Capital on Tap, recognised GoCardless as the ideal solution, citing its commitment to simplifying operations for small businesses. 

“As we grew and the number of repayments we were taking each month increased, it quickly became unscalable. We knew that taking payments by direct bank payment would be easier for our customers, and it was also clear that GoCardless shared our commitment to making life easier for small businesses.”

GoCardless allows Capital on Tap’s customers to set up their monthly payments just once. Then they can relax knowing their repayments will happen on time, every time, and they’ll never fall behind. Damian notes’

“Our small business customers know exactly how much they are paying back and when it comes out each month, while we can substantially reduce the overhead and cost of managing these repayments.”

Neel Sapat, Senior Growth Manager, credited GoCardless for helping Capital on Tap scale both domestically and internationally. 

“We've expanded our geographical base to the US, where we now have 13,000 new customers using our product, and we've increased our headcount in the UK. GoCardless has been a massive part of our journey and the way we support customers.”

Despite facing challenges around chargeback fraud, Capital on Tap has been able to recover £34,000 of chargebacks with the aid of GoCardless Protect+, Damian explains,

“Protect+ is a robust dispute and chargeback process. It finally feels like we have the same protections that we would with accepting a card payment from customers. It's going to be a real game changer for us to be able to dispute those chargebacks, fight that fraud and protect our company.”

We can help

GoCardless helps businesses of all sizes and industries automate payment collection processes. Whether you're a small start-up, a non-profit, or a large corporation, GoCardless provides an intuitive, simplified, and secure platform that focuses on ease of use, automating payment collection and reducing manual admin. With GoCardless setting up Direct Debits is a breeze. Create one-off or recurring payments in the user-friendly merchant dashboard or through one of our 350+ partner integrations, such as Xero or Quickbooks. 

GoCardless automates payment collection eliminating late payments and reducing failed payments and manual admin. Improve cash flow and remove stress with GoCardless Direct Debit.