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Don’t fear the Direct Debit Guarantee: A guide for merchants

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Last editedJun 20243 min read

Direct Debit is the UK’s most popular payment method, and has been for many years, ever since it was introduced in 1970. In 2016, the number of UK payments taken by Direct Debit grew by a record-breaking 4.9%, according to data from Bacs. But have you ever wondered exactly why this old favourite just keeps on winning, well into the 21st century?

One major reason is the Direct Debit Guarantee, which protects customers against payments taken fraudulently or in error. If a customer using Direct Debit is unsure about a payment taken from their bank account, they can submit what’s called an indemnity claim, meaning the bank must immediately refund the payment to the customer, no questions asked. This makes Direct Debit one of the UK’s most secure payment methods.

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That’s great news for customers, but what does it mean for you as the merchant? You may be worried that customers will start making indemnity claims, which could be problematic for you as a merchant.

In this article, we’ll put your fears to rest. We’ll explain exactly why you don’t need to worry about indemnity claims, and why taking payments via Direct Debit is actually an excellent option for both you and your customers.

Firstly, let’s take a look at what the Direct Debit Guarantee offers for customers. There are three main rules for customers that are important for you to keep in mind too:

  • Advance notice - Customers must be told about any changes to the amount, date or frequency of a payment in advance. They can agree any notice period with you (according to your terms and conditions), but if no other time period is agreed it will be 10 working days (although with GoCardless, it’s a period of 3 working days). If customers don’t receive correct notice of a payment then they’re entitled to claim a refund.

  • Immediate refunds - Customers can get a full and immediate refund from their bank (also known as an ‘indemnity claim’) for any payment taken fraudulently or in error.

  • Instant cancellations - A customer can cancel a Direct Debit payment at any time before the payment is due to be made. If you take a payment after the customer has cancelled it, they will be entitled to an immediate refund.

Although the Direct Debit Guarantee is designed to protect the customer, it doesn't pose a risk to your cash flow. Here are three important points to keep in mind:

  • Legal issues - Firstly, it would be fraudulent for customers to charge back payments when they're properly due, especially if under contract (for example, with an annual gym membership). As the merchant, you would be able to reclaim the payment via legal processes. The Direct Debit Guarantee makes this very clear to all customers.

  • Trust in Direct Debit - in reality, only a very small proportion of payments are actually charged back; at GoCardless it’s just 0.07% of all the payments we process in the UK. People generally trust Direct Debit, with 85% of consumers having a ‘positive attitude’ towards it (according to research from Bacs).

  • PayPal and credit cards - Other payment methods carry a similar (low) risk of chargebacks. Credit card chargebacks happen when a customer contacts their card issuing company to dispute a charge. If the issuer decides the customer’s dispute is valid, then your merchant account will be debited for a credit card charge that had previously cleared. Plus there’s the risk of an additional chargeback fee from the credit card issuer.

At GoCardless, unlike many other Direct Debit providers, we don’t charge you any additional fees for indemnity claims. Using Direct Debit with GoCardless also helps you reduce the possibility of claims occurring in the first place in a number of ways:

  • Enhanced flexibility - Your customers can choose the payment date and frequency that suits them best.

  • Less advance notice - This is typically 10 working days, but with GoCardless, you can inform your customers of any changes to their payments within just 3 working days.

  • Fully automated - Once authorised, you can take payments from your customer’s account without them having to do anything. If you’re collecting fixed amounts at regular intervals, using Direct Debit via GoCardless lets you set and forget payments, which will automatically be taken when due.

  • Real-time notifications - Find out right away about failed or charged back payments, then take the appropriate action to resolve issues promptly.

At GoCardless, we recognise that certain industries carry a higher risk of indemnity claims than others, for example payday lenders, gambling, high value transactions. That’s why we don’t work with these industries at all, preferring to mitigate risk by restricting our business activity only to well-suited industries.

Feeling reassured about Direct Debit? Find out more about how Direct Debit GoCardless can revolutionise your business payments payments for your business.

GoCardless makes it easy to accept Direct Debit. Automate payment collection. Reduce manual admin. Get paid on time, every time.

Interested in automating the way you get paid? GoCardless can help
Interested in automating the way you get paid? GoCardless can help

Interested in automating the way you get paid? GoCardless can help

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