According to the CBN’s e-payment statistics for January to December 2022, direct debit transactions hit a volume of 151,011,103 and a concurrent value of NGN 26,409,371,273,656.00.
This humongous figure dictates the popularity of direct debit as a payment method. But it seems like only a portion of the general population really knows what a direct debit system is and how it works.
If you fall into this category, you’ve come across the right article.
What is Direct Debit?
Direct debit refers to a payment that is initiated by the receiver rather than the sender. Weird right? Well, that’s not the only thing. These transactions are scheduled ahead of the actual payment time.
The idea behind this is that a business has access to a customer’s bank account and can “pull” payment for a product or service at a time when such payments are due. The business in question will set a transfer amount that corresponds to the customer’s bill. Next, it will proceed to trigger a payment.
The customer’s account is debited and the business’ account is credited; completing this transaction.
Direct Debit Use Case
The features of a direct debit are special and quite distinct from what we are accustomed to. A typical use case for the payment method is when making recurring product or service purchases through a subscription service.
Take for example, that you are making a monthly subscription on Netflix. This means that you are paying for a month’s worth of streaming at a time. As a result, your access to the service would expire after 31 days.
You would have to manually make a payment to get the service back up and running after it expires. It could be tiring for anyone to keep up with this.
Besides, one’s schedule and activities might get the better part of their attention leading them to unintentionally skip payments.
This is where direct debit comes in.
Instead of coming back over and over for months unend, you can simply resubscribe by inputting your debit card information on the platform and - with the click of a button - enable auto subscription.
By doing this, the user removes themselves from the payment process. However, they would be putting the subscription service in charge. This allows the businesses/service - which also doubles as the recipient or payee - to withdraw directly from the user’s bank account.
There’s no need to say that the system relies on trust and the existence of a sound relationship between both parties.
Transactions That Popularly Involve Direct Debit
Loan Collection:
Loan and Credit companies face a serious challenge of retrieving borrowed funds as debtors these days find it difficult to comply with repayment schedules. Late repayment could be due to delayed salary payments - for a debtor who is a salary earner, or some other unexpected incidents.
In any case, the application of direct debit on a debtors account ensures that they are not tempted to use debt repayment funds for anything else.
Business-to-Business (B2B) Settlements:
Businesses often enter into extended agreements with each other. For example, for the supply of raw materials, data, or other commodities. Paying for such arrangements is conveniently done with a direct debit.
Insurance Premiums:
An insurance policyholder might be allowed to pay premiums in installments. This could be monthly or semi-annually depending on what the insurance providers agree to. Customers making such payments could easily utilize a direct debit to simplify the process.
Utilities and Household Bills:
You would agree that countless utilities and household bills are recurring in nature. The problem is that some of them do not come at a fixed cost.
For a manual payment process, you would have to spend time confirming the new cost of each bill before making a payment. However, it is more of a walkover with direct debit since the biller can adjust the debit amount from their end.
Membership Subscriptions:
Are you a member of a social, academic, or political club? If yes, then you understand the concept of membership dues and meeting fees.
These payments help keep the light on. They are usually collected in small batches over a period of time, rather than as a one-time bulk payment. Of course, this suits the purpose of a direct debit.
How To Set Up Direct Debit
Before setting up a direct debit, you should call or visit the business you want to be making payments to.
This institution will be responsible for providing a Direct Debit Mandate. Ensure that you duly complete the form (whether online or in person) and that it is signed by both parties.
The Direct Debit Mandate serves as a reference and authorization document. It shows that you are in business with the biller and that you both consent to having a direct debit set up on your account.
With this document in hand, you can walk into a branch of any bank where you are an account holder to begin setting up your direct debit. Note that you must possess an active account with the said bank. This would be used as the paying account in the direct debit agreement.
Approach the counter and inform the attendant of your intent.
Once you’ve answered any clarification questions correctly, you will be requested to submit the Direct Debit Mandate Form.
Filling and submitting this form means that you as a customer instructs your bank to allow an organisation collect funds from your account.
A notice will be sent 14-days prior to every direct debit transaction. The transactions will take place as stipulated in the mandate and this will happen as long as the mandate remains valid. To end a direct debit agreement, you would need to go back to your bank and fill out a counter-mandate.
Benefits of a Direct Debit
Contrary to what you might think, direct debit presents substantial benefits to both parties.
Reduces Administration Time:
A direct debit arrangement helps to reduce administrative time.
Since payments are made automatically, the paying customer or business does not go through the process of initiating transactions.
Similarly, the receiving business is not concerned with sending any invoices, reminders, or notifications. They don’t even have to spend resources to call or reach out to customers about an approaching payment deadline or due date.
All they do is wait for the set due date and the direct debit system automatically initiates an outward payment from the customer’s account.
Resolves Late Payment Problems:
Sometimes, late payments are really a result of a busy schedule or forgetfulness on the part of the paying customer.
But the sad truth is that businesses don’t want to know all that. They’re rarely concerned about what caused a delay in payment. All that matters to them is that the “no-show” doesn’t repeat itself.
And what better way is there to resolve late payment problems than having a direct debit setup?
This system serves as a highly reliable option for prompt payments since it operates automatically and is available 24/7, eliminating both technical impediments and the need for human intervention in the payment process.
Fosters Trust:
A two-way expression of trust exists between paying and receiving parties. Guess what? The first of this comes from the customer.
Customers who agree to a direct debit are giving up control over their accounts and telling the business or service to enforce payments as at when due.
Such a customer will be trusting that the business does not misuse its access to their account.
Inversely, the business in a direct debit agreement trusts that the payer’s account will be well funded. An empty account means that a withdrawal would not be processed. This implies a waste of time and resources.
Difference Between Direct Debit and Standing Order
There are certain cases where you can’t say one thing without saying another. That’s precisely what’s happening here.
Talking about a direct debit will almost certainly require you to talk, at least, briefly about standing orders. This is due to the close similarity between both payment types.
- A direct debit involves fixed and variable amounts whereas a standing order only involves fixed amounts.
- A direct debit can be set up either as a one-time or recurring payment whereas a standing order strictly supports recurring payments.
- In a direct debit arrangement, the biller, the payer’s bank, or both the biller and the payer’s bank may be instructed to carry out the mandate. In a standing order, the mandate can only be executed by the payer’s bank.
- Incorrect direct debit transactions can be reversed. However, this is not achievable with a standing order. Transactions processed using this payment type are irreversible.
- Perhaps the most outstanding difference between a direct debit and a standing order is the type of transaction that takes place. For the direct debit, one would be making a debit transaction. Alternatively, the standing order is always a credit transaction.
Conclusion
If nothing else, the comparison between the direct debit and standing order payment methods shows just how unique the former is.
The first thing to bear in mind about this type of payment is that it involves giving access to an individual or business that you patronize to withdraw payments directly from your account. Other than that, you must remember to keep your direct debit account well-funded to prevent an error in transactions.
You should be fairly familiar with the direct debit system now and ready to apply it in fast-tracking your business or personal payments.