Direct debit, also referred to as direct withdrawal, electronic checks, and direct payments is a type of payment system that allows businesses to debit funds directly from customers’ bank accounts. The debits are made utilizing an electronic funds transfer method. Direct debit is widely used by organizations worldwide and is recognized as one of the most efficient methods for collecting payments.
All types of organizations can utilize direct debits and today, many insurance companies, utility companies, banks, local authorities, telecommunication suppliers, and charities utilize direct debiting. Direct debt processing is much the same as credit card processing. Authorization and bank information is typically required, received by fax, phone or internet, and then submitted to the bank or payment processor where the payments are to be processed.
Direct debits are generally set up in one of two ways. The first method requires the consumer to provide an authorization to one’s bank allowing the debit note to be withdrawn from one’s bank account. The second method requires the consumer to provide authorization to the organization that is to make the debit from one’s bank account. The types of methods used by organizations vary worldwide and the rules that govern direct debit do vary from country to country. Depending on the country the consumer lives in and the form of authorization provided, direct debit can be utilized to arrange for recurring payments, to prepay orders, or to pay a particular invoiced amount.
Benefits of Direct Debit
- Ensures timely payment(s)
- Eliminates need for checks
- Reduces administrative costs
- Enables auto-recurring billing
- Reduces customer attrition and increases renewals
- Allows for payment to be received by phone or online
The Process
If using a direct debit provider, an agreement is made between both
organizations. Bank account information is then collected from
customers by fax, mail, telephone, or Internet, and then submitted for
proper authorization and processing. Once the processing is complete
with proper authorization, then the bank is allowed to debit consumers’
accounts accordingly. In most countries, it is necessary to include a
direct debit permission (authorization) or mandate.
United States
In the United States, typically an Automated Clearing House (ACH) will
be utilized to transfer monies from a consumer’s bank account to a
collector (billing) organization. The ACH is an electronic network that
processes large volumes of both debit and credit transactions. The ACH
network is governed by the Federal Reserve and the NACH-The Electronic
Payments Association, which formerly was known as the National Automated
Clearing House Association.
United Kingdom and Republic of Ireland
The United Kingdom caters to almost 40 million direct debit users;
however, it has a much more rigorous set of requirements compared to
other countries for merchants seeking to process direct debits.
Organizations seeking to utilize direct debits in order to collect
payments from consumers must have an Originators Identification Number
(OIN). If an organization wishes to utilize direct debiting online, the
United Kingdom mandates the utilization of a CyberSource processor.
Furthermore, before direct debits can be set up, the consumer must
complete a Direct Debit Instruction to his or her bank, which then must
be properly vetted by the bank. This is required in order to avoid the
defrauding of consumers and to ensure that proper protocols are in place
that follow governing regulations.
Germany
In Germany, direct debiting (Lastschrift, Bankeinzug) is provided by
banks after a direct debit authorization is obtained. In Germany, two
methods are used for direct debits. The most common method is known as
“Einzugsermächtigung.” It authorizes the organization to debit the
consumer’s account either for a fixed amount, for a future invoice, or
for recurring payments. Authorization is obtained from the consumer who
then sends it to the organization that is collecting the payment.
Before authorization is given, the organization must sign an agreement
that it will only process direct debits where it has obtained the
appropriate authorization.
The second method, “Abbuchungsauftrag,” is rarely utilized by private consumers, but on occasion is used between businesses. The difference with this method is that the payer provides authorization to his or her bank to honor direct debit requests from a particular organization. The bank then checks for incoming direct debits that are flagged as “Abbuchungsauftrag” and verifies that there is a matching authorization held on file. If such an authorization is not on file, then the direct debit is returned.
Australia
In Australia, direct debits can be authorized when the consumer provides
such an authorization to the organization that is seeking to collect
payment(s). Notification to the consumer’s bank is not required.
The Netherlands
As with Germany and Australia, in the Netherlands consumers do not need
to notify their banks, but simply provide authorization of the direct
debit to the payee. Authorization may be for a one-time charge or a
recurring charge.
Japan
In Japan, direct debit services are offered on the basis of a tri-party
agreement and authorization between the consumer, the payee, and the
consumer’s bank. The payee sends the authorization obtained, along with
instructions to the bank on a paper basis, on magnetic tape, or through
online transmission.