Direct Debit: we all know it, and most of us use it to pay our bills on autopilot. But for businesses, it’s not quite as simple. Direct debit schemes have a strict set of rules to keep the payments network running smoothly, and keep customers happy.
Learn about the rules of the scheme, including the refund guarantee, and why it’s imperative for businesses to validate account and payment details with a platform like Trustpair before beginning.
What Is a Direct Debit and How Does It Work?
A Direct Debit is a type of online payment that enables customers to directly authorise businesses to collect funds from their bank account. It’s most commonly used for recurring payments like subscriptions, bills, and memberships.
It runs on the BACS system, which stands for the Bankers’ Automated Clearing Services. This system offers a secure, reliable, and low-cost way for businesses to manage recurring payments and improve cash flow.
Businesses must give customers at least 10 working days under the Direct Debit notice period before their first collection, and funds typically take three days to clear between accounts.
Why Companies Use Direct Debit
Companies use Direct Debit because it’s a reliable, cost-effective way to collect recurring payments. It automates billing for services, which can reduce both manual admin and the risk of late payments.
Businesses using direct debit have greater control over cash flow, knowing when funds will be collected. It’s also cheaper than card payments, with lower transaction fees and fewer payment failures due to expired or cancelled cards.
Direct Debit also reduces customer churn rate, bringing the average payment churn rate down from 10-25% per month down to just 3%.
UK Direct Debit Scheme Rules for Businesses
Businesses that take direct debit payments from their customers must abide by the rules of the scheme. It’s important to note that these are updated on a fairly regular basis, but less than 15% of users feel they are up to date with the latest Direct Debit Scheme rules. Here are some of the key rules for businesses:
- Payment confirmation
- Mandate management
- Reporting and record-keeping
- Error management
Payment confirmation
Because customers authorise their payments in advance, the scheme requires verification of details like the payment amount, date of payment and frequency. This helps ensure that payments are accurate.
A minimum of 10 days notice must be given to help customers organise their funds, especially in case they need to move money around to make the payment. If there is a change in details, though, the direct debit scheme asks that firms revalidate the information.
When a request for a change in bank details comes in, confirming this with the payee will ensure that requests are legitimate. This leaves no space for payment fraudsters to operate, confirming that payments are secure and is in compliance with the Fraud Act.
Mandate management
Businesses are required to keep records of all direct debit instructions from customers. Again, these mandate records must be validated to ensure that they are legitimate requests from the person they are claiming to be.
Reporting and record-keeping
Under the direct debit scheme, companies also have obligations to keep records of all their customer communications, including complaints, and records of all transactions.
This is because it holds providers accountable, enabling auditors and regulators to search through the records and check for compliance with the rules. It will also provide evidence in case of a customer complaint.
Error management
One of the most advantageous customer rules under the Direct Debit scheme is the refund guarantee. For businesses, the Direct Debit refund loophole means giving full and immediate refunds in the case of any error, typically processed by banks on the same day.
How to Set Up Direct Debit for Your Business
Setting up Direct Debit for your business in the UK allows you to collect recurring payments efficiently and securely. It’s ideal for subscriptions, memberships, and ongoing services. Here’s a step-by-step guide to get started:
- Choose your collection method
- Set up your systems
- Verify account details
Choose your collection method
There are two main ways to collect Direct Debits:
- Through a bank directly: larger businesses with high transaction volumes may apply for their own Service User Number (SUN) from their bank. This gives more control but involves strict vetting and compliance obligations.
- Via a Direct Debit bureau or provider: most small to medium businesses opt to use a third-party bureau. These providers handle the technical setup, compliance, and communication with the banking system, making it much faster and easier to start collecting payments.
Set up your systems
Whether you work with a bureau or manage your own SUN, you’ll need the ability to:
- Collect and store customers’ bank account details securely
- Issue and manage Direct Debit Instructions to customers
- Submit payment files through the BACS system Monitor and reconcile payments and rejections
Verify account details
To minimise failed payments and fraud risk, it’s vital to verify customer bank account details before initiating Direct Debits. Trustpair’s account verification can validate sort codes, account numbers, and account ownership in real-time, helping you comply with scheme rules and reduce payment errors.
Common Challenges and Best Practices for Managing Direct Debit Payments
Businesses operating within the Direct Debit Scheme are contending with challenges to data security, accuracy and compliance.
Prioritise Data Security
Direct Debit involves handling sensitive customer information, including bank account details. Protecting this data is not only vital for customer confidence but is also a legal requirement under UK GDPR. Here are some data security tips:
- Use encrypted systems to store and transmit payment data
- Implement access controls so that only authorised staff can handle sensitive information
- Regularly audit and update your data protection measures to defend against evolving cyber threats
If you’re using a third-party Direct Debit provider, ensure they are FCA-regulated and compliant with PCI DSS (Payment Card Industry Data Security Standard).
Verify Account Details Before Setup
One of the most common causes of failed Direct Debit payments is incorrect bank details, but integrating account verification software into your onboarding process can prevent this.
Software like Trustpair can verify sort codes and account numbers in real time, confirms a match to the owner and that the account accepts direct debits.
By focusing on accurate data entry and verification, organisations can reduce payment failures and enhance customer experience.
Stay Compliant
Although there are no formal fines under the scheme, failures to comply could lead to GDPR violations or penalties under the Consumer Protection scheme.
Therefore, businesses should ensure that all customer communications, especially advance notices, are compliant with BACS scheme rules and the Direct Debit Guarantee statement. Following the records storage rules should also mean that companies are ready in case a claim is made.
An overview of the Direct Debit rules UK for companies
Businesses that want to issue direct debits, likely due to their convenience and low failiure rates, must comply with the BACS rules. These include getting permission from the customer, confirming payment details with the payee, and storing records in case of disputes. Trustpair can help verify account details to prevent the risk of direct debit fraud.
