small business guide to Standing Orders and Direct Debits
What is a Standing Order?
A Standing Order is, is a regular payment which you instruct your bank to make on a regular basis. You decide how much you pay and the frequency with which payments are made.
Typically, Standing Orders are used, for example, to make rent payments, monthly charity contributions or regular payments into a savings account.
A Standing Order amount will never vary. It will never change unless you make a change.
Standing Orders also have an advantage of speed of transfer. By making use of the Faster Payment Scheme, payments will be processed on the same day. Some consider Standing Orders to be simpler than Direct Debits, mainly because the business is not involved in claiming payments.
As the customer, you ‘push’ the payments out of your account to the recipient, rather than a business ‘pulling’ them from your account.
At set times, your bank simply sends the money into the beneficiary’s bank account (the beneficiary can be anyone) and only you can alter the payments.
However, this inflexibility means that Standing Orders offer less consumer protection.
With a Standing Order, you decide how much, to whom and the amount will never change. You can use Standing Orders to pay anyone from your landlord to your children’s pocket money. Simplicity does sometimes come with a risk, so make sure you are in control.
If a payment does go out in error, you have no protection as the mistake will be yours.
What is a Direct Debit?
Direct Debits are a little different. When you agree to set up a Direct Debit you are authorising a company to take an agreed amount from your bank account at specified intervals – weekly, monthly or yearly for example. This relationship is created by signing a Direct Debit mandate.
Direct Debits are often used to pay regular bills such as rent or mortgages, mobile and household phones and energy and utility bills.
Direct Debits have built-in flexibility which means the amount and frequency with which they are collected can vary – unlike Standing Orders where the amount you ‘push’ out of your bank account remains the same.
This flexibility means that businesses can claim different amounts at different times. For example, your mobile phone bill is unlikely to be the same each month and the Direct Debit mandate allows your mobile phone provider to claim the money you owe.
Direct Debits also have valuable built-in protection as you, the customer, are covered by the Direct Debit Guarantee.
In order to be authorised to offer a customer a Direct Debit payment method, all companies are subject to a strict vetting process. Once approved, they are required to give indemnity guarantees through their bank.
If a bank or building society wants to offer its customers the benefits of paying by Direct Debit, they are obliged to accept the terms of the Direct Debit Guarantee. The guarantee states that your bank should refund disputed payments without question, pending further investigation. It says that:
- The customer must be notified in advance if there is to be a change to the amount to be collected.
- If a bank or building society makes an error, then you are guaranteed an immediate and full refund.
- Direct cost savings. Businesses can eliminate the use of cheques which saves money and postage costs.
- You can cancel a Direct Debit at any time by letting your bank or building society know. You may be asked to confirm the cancellation in writing and as a ‘belt and braces’ exercise you should also notify the organisation collecting the Direct Debit.
Remember that under the terms of the Direct Debit Guarantee, any disputed payments must be refunded in full by your bank of building society, without question until a further investigation is carried out.