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Standing orders: A complete guide

GoCardless
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Last editedNov 20229 min read

Businesses that collect regular payments, including subscriptions and instalment payments, can do so via standing orders, though there are some drawbacks.

In this guide, we explain exactly how standing orders work, present the advantages (and disadvantages) and look at the alternatives.

What is a standing order?

A standing order is an automated method of making a payment, where a person or business instructs their bank to pay another person or business a fixed amount of money at regular, fixed intervals. The payer controls the standing order; they set it up themselves, and choose the amount and frequency. A standing order is created to cover a set period of time (e.g. every month for a year), or until it is cancelled.

Any person or company with a current account can set up a standing order, either online, over the phone or in person at a branch of their bank.

A standing order is different from a Direct Debit payment. A standing order is an instruction from the payer to their bank. It tells the bank to 'push' funds to another person or organisation. By contrast, with a Direct Debit, the person or organisation receiving payment asks permission from the payer to 'pull' funds from their account.

Some small businesses collect regular payments from customers by standing order. Receiving payment by standing order generally costs nothing. What’s more, once the order is up and running, you can rest assured that the payment is collected automatically, and hence on time. 

Standing orders do, however, have some drawbacks. In particular, a customer can change or cancel the payment without notifying you. This means that you are heavily reliant on your customer to engage and cooperate with you.

How does a standing order work?

The first step in setting up a standing order requires the payer to contact their bank to request it. With some banks and building societies, a standing order can be set up online or over the phone. With others, the payer needs to complete a standing order form on paper and give it to their bank. Either way, the payer needs to provide the account number and sort code of the person or organisation being paid.

Banks don’t usually charge anything to the payer or payee for setting up or using a standing order. It is important to keep in mind that the customer can cancel a standing order at any time. They can also change the amount or payment date. The standing order is created to push payments on a specified frequency (e.g. every month for a year) until it is cancelled.

Examples of standing orders

People typically use a standing order for making a regular payments, such as:

  • Rent payment

  • Mortgage payment

  • Magazine subscription

  • Monthly charity donation

  • Making a payment from a current account into a savings account

A standing order is particularly useful for making a regular payment from one individual to another. In some cases, it can be more straightforward than a Direct Debit.

A good example of this would be asking a tenant to set up a standing order as a method of collecting rent payments. The tenant’s bank automatically deduct the same amount at the agreed frequency (e.g. monthly). They then send this to the landlord’s bank account. This arrangement stays in place, without variation, unless it is actively cancelled.

What are the advantages of standing orders?

  • Usually free of charge for both payer and payee

  • Fairly quick for payer to set up

  • The payer gets to set the amount sent

  • The payer also gets to set how long the standing order is in place for

What are the disadvantages of standing orders?

  • No payment notifications

This means it could potentially take a payee weeks to find out that a payment has failed. If this happens, the payee needs to chase the payer to set up payment all over again. 

The two main reasons for payment failure are insufficient funds and cancellation of the order. For example, if a person changes their bank account, an old standing order is cancelled. The payer may forget to set up a new one.

  • Less flexibility

Changing the amount or date of a payment requires the payer to cancel the standing order and create a new one.

  • Risk of late payment

Many businesses struggle to get customers to set up or amend their standing orders. This increases the risk of late payment and potential cash-flow issues.

  • High administration

Businesses taking payments by standing order may end up constantly checking their bank to see if payment has arrived. They then have to update their accounts manually once it does. This is time and effort that could be better used elsewhere.

A standing order for business

This section guides you through the fine details of using a standing order. It covers when to use it, how to get access, set up, change and cancel it and its timings. You’ll also learn how it compares with other recurring payment methods. There’s even a handy quiz at the end, to help you decide if a standing order is right for your business.

When to use a standing order

First of all, think about how many customers you currently have. A standing order is generally a good fit for small businesses, organisations or clubs. This is because a certain level of trust is helpful when using a standing order. As a rule of thumb, a standing order works best when you have a maximum of 25 payers.

Secondly, think about whether you trust your customers to set up their standing orders promptly and accurately. If you do, a standing order could be a good option for you. This is because you can effectively delegate payment administration to your payers.

Finally, deciding whether or not to use a standing order also depends on your payment model. A standing order is only really useful for making a fixed, recurring payment. By contrast, a new technology such as Instant Bank Pay can be used for both fixed and variable recurring payments.

The main reason for this is that a standing order requires the customer to make changes. This means that actioning a change requires you to contact the customer to have them contact their bank to update the payment. Updating the payment requires the bank to cancel the old order and set up a new one. 

With a Direct Debit, by contrast, the customer just provides the initial authorisation. Then you take care of setting up the payment. You have to give the customer advance notice of any changes. If you are using GoCardless, this is automatic. The customer doesn’t have to take any action. This means that, in the real world, a Direct Debit is a much more flexible and convenient solution for most businesses.

Accessing and setting up a standing order

For you, there’s very little action needed to get a standing order up and running. The customer takes care of most of the necessary administration. All you have to do is inform the customer of the payment amount and due date. They then handle the access and set-up process via their usual bank.

Changes, cancellations and refunds

With a standing order, you have to rely on your customer to change the amount or date of a payment. To do this, your customer needs to cancel the standing order and then create a new one.

Customers can neither stop nor reverse (chargeback) a standing order once it has left their account. There is no equivalent of the Direct Debit Guarantee scheme for a standing order. Customers can ask merchants for refunds. Whether or not these are given depend on their contracts or the merchants’ policies.

By contrast, it is possible for a customer to cancel a standing order before the agreed end point is reached. They should inform you of this. If they do not, they risk incurring fees or penalties for non-payment. These could appear on their credit file and affect their credit rating. However, it’s generally advisable to use a standing order only with customers you trust.

Standing order payment timings

If your customer’s bank uses Faster Payments (which most now do), a standing order payment is likely to arrive in your account on the same day that the customer sends it. If the customer’s bank doesn’t use Faster Payments, it can take up to three working days for a standing order payment to move from one bank account to another.

It is important to note that if your regular payment is due to arrive on a non-working day, the bank may process it on the next working day. For example, if it’s due on a Saturday, it is usually processed on a Monday. Learn more about standing order timings here.

Unfortunately, there’s no notification function available for incoming standing order payments. This means that you have to keep checking your account to see if the payment has arrived.

Customer protection

Whenever your customer sets up a standing order, they must use the correct sort code and account number for your business account. Incorrect details can cause their money to end up in someone else’s account. If this happens, it can be difficult (or even impossible) to recover it.

A customer using a standing order does have a certain level of consumer protection. For example, if someone makes a fraudulent standing order from their account, then the bank must issue an immediate refund once they are informed of the problem.

That refund claim must be made within 13 months of the fraudulent transaction leaving the customer’s bank account. Your customer must authorise each standing order payment in advance. Their bank must help them trace any funds that go astray. It’s important to note that banks aren’t liable for helping people retrieve money that’s been lost.

Standing order alternatives compared

 

Standing order

Direct Debit

Credit or debit card

Cash or cheque

Set up

No provider needed. Customer controls set up. You depend on them.

Bank/provider needed. You control the set-up, payment amount and date.

Provider needed. 

You set up a merchant account.

None.

Cost

Free. (for both customer and business).

Typically low. Depends on the provider. GoCardless charges 1% +20p (+VAT) per UK domestic transaction.

High. Typically 2–3% per payment, plus monthly fees for merchant account.

Free.

Failure rates

Low. Failure rates vary by industry. No notifications if payment fails.

Very low. Less than 1% with GoCardless. Automatic notification informs you immediately of failures. You can then re-submit payment.

High. Failed payment rates typically >5% due to card expiration, cancellation or customers hitting spending limits.

Not applicable.

Flexibility

Low. Fixed payments at regular intervals only. Amending the amount or date requires the customer to cancel the standing order and set up a new one.

High. You can collect variable amounts, change payment amount or date without any further authorisation.

High. You can collect variable amounts, change payment amount or date without any further authorisation.

Low. You rely on the customer to make a payment, which can involve chasing.

Late payment risk

Medium. Once set up, low risk, but can be tricky to get customers to set up standing orders quickly, or to amend when required.

Low. You can automatically charge customers whenever payment is due.

Low. You can automatically charge customers’ cards whenever payment is due.

High. Not automated and the customer has full control.

Admin

High. Check the bank statement daily to see what payments have been made. No notification when a payment fails. Manually update your accounts

Low. Automatically submit multiple payments at once. Automatically update your accounts. Instant notifications when payments fail. Easily track payments without checking bank statements.

Low. Once the payment is set up, there’s nothing more to do.

High. All manual processes means a lot of admin time for your business.

Customer protection

Low. No customer protection once the payment is made. But greater protection for merchants.

High. Immediate refund from customer’s bank in the event of an incorrect payment, under the Direct Debit guarantee.

Medium to high. Payment card networks run their own consumer protection schemes. These apply to both debit and credit cards. Furthermore,under section 75 of the new Consumer Credit Act, credit card issuers must provide protection for purchases above £100 and below £30,000.

None.

 

Read more about the many business advantages of collecting payments via Direct Debit with GoCardless.

Learn More

Standing order for the customer (payer)

Customers like certainty and control, which a standing order provides. In this section, we look at paying by standing order from the customer’s perspective. This includes how to use it, what happens if it bounces, and whether it can be refunded. We also provide a quick-reference comparison of different recurring payment methods.

What can I pay for with a standing order?

If you’re new to standing orders, you’ll find a whole host of things you can use them for. Common examples include:

  • making payments from your current account into a savings account or buying premium bonds

  • paying bills that charge the same amount each month

  • paying fixed business costs (also known as overheads)

  • paying rent

  • paying for subscriptions e.g. for magazines, food boxes or software.

These all tend to be recurring payments for the same amount and with the same frequency (for example, monthly).

How to set up a standing order?

From the customer’s point of view, one of the major attractions of a standing order is the level of control it offers. As the customer, you are the only person who can either set up or cancel a standing order. 

You can do so at any time, either in branch, over the phone or via online banking. The payment is stopped immediately, and no further payment is taken unless you reinstate the standing order. Only you can do this.

It is important to inform the person or company due to receive the payment. Non-payment of owed payments could result in fees or penalties. What’s more, if you don’t pay your bills on time, it could affect your credit rating.

Can a standing order payment be refunded?

A standing order payment is similar to a cash or cheque payment. That means you can only get a refund if the person you’ve paid agrees to it. However, if the standing order has been set up fraudulently (i.e. without your authorisation), your bank is obliged to refund you. It must do this by the end of the business day on which it is informed of the fraud. If it doesn’t, you can make a formal complaint. If the result of your complaint is unsuccessful, you can refer it to the Financial Ombudsman..

Can a standing order payment bounce?

A standing order payment bounces if there isn't enough money in your account to cover it. This can cause your bank to charge you for going into an unauthorised overdraft. To avoid this happening, we recommend setting up a small interest-free overdraft to act as a ‘buffer zone’. 

Having this in place means your bank won’t charge you if a standing order puts you into a negative account balance. Alternatively, you could contact the recipient to ask if they’ll accept payment at a later date.

Some banks have an automated retry feature. This means that they automatically resend funds when you have money in your account. When this is the case, you may have a window to transfer funds to your account before the retry. Check with your bank or building society first.

How long does a standing order payment stay active?

When setting up a new standing order with your bank, you have the option to specify a frequency for the recurring payment. The standard options are weekly, monthly and annually. You may be able to set a custom frequency (e.g. quarterly). If you set an end date, the standing order stays active until that date. Alternatively, cancel it manually via your bank (at any time).

Standing order templates and forms

To give you a better idea of what typical standing order forms look like, here are some useful links for a selection of UK banks. Most banks also offer quick and easy set-up via their online banking platforms.

Standing order template for RBS

Standing order template for Natwest Bank

Standing order template for First Direct

Standing order template for Lloyds Bank

Standing order template for Santander

Standing order template for Barclays

Standing order template for Bank of Ireland

Standing order vs Direct Debit in brief

In principle, a standing order is a free and convenient way for you to receive a payment. In practice, using a standing order generally creates a lot of manual work for you. The cost of this often far outweighs the theoretical savings of taking a payment by standing order.

With a Direct Debit, you pay the transaction fee. With GoCardless, this is typically much lower than for alternative payment methods. What’s more, the cost is usually more than justified due to the reduced administrative burden. 

Simply ask your customer to set up an initial payment authorisation. Once this is in place, you take control of the payment. Smaller merchants often find that the GoCardless dashboard is more than sufficient for their needs. Larger ones can use GoCardless with a partner integration (e.g. Xero, Quickbooks or Sage). Alternatively, they can connect with the GoCardless API.

Whichever option you choose, you can benefit from a high degree of automation. For example, a payer is automatically notified of any action taken on their account. Likewise, you are notified of any significant event (e.g. a new mandate being set up). This can vastly reduce your administrative burden.

Direct Debit then may be a better option for most businesses because:

  • it's low cost

  • flexible

  • enjoys a low failure rate

  • can be automated to avoid manual admin

  • and crucially gives you control over your own payment process.

Dayle, an accountant and GoCardless customer, recommends GoCardless Direct Debit to all his clients, see below:

Read more about how you can take control of payment collection with Direct Debit via GoCardless, eliminate late payments, reduce time spent on financial admin, and get paid on time, every time.

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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.

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

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