What is a direct debit?
Direct Debit Definition
We are often asked what a Direct Debit is, with organisations wanting to know how they can take payment using this method.
A direct debit is a type of bank-to-bank payment. It is unique as the only payment method that is ‘pulled’ rather than ‘pushed’.
This means that the organisation looking to receive the funds initiates the payment transaction.
There are different versions of direct debit schemes around the world with 2 schemes available in the UK. The biggest and by far the most commonly used direct debit scheme in the UK is run by Bacs (Now part of Pay.UK). There is also a European wide ‘SEPA’ (Single Euro Payments Area) direct debit scheme.
SEPA Direct Debit
Transactions under this scheme can only be collected in Euros and so is not so widely used in the UK. Some UK based companies collect Direct Debits from elsewhere in Europe. This is most often seen where collections are made in the republic of Ireland by UK companies. In order to access this scheme, you collect via your bank’s interfaces and you must open a euro account to do so.
Bacs Direct Debit
This is the payment method used widely in the UK and is run by Pay.UK. It is very different from the SEPA scheme in that you can connect to it directly rather than having to send files to your bank. You still need a Bank that participates in Bacs to sponsor or allow you onto the scheme.
Direct Debits under Bacs are extremely common in the UK and uptake of the scheme is greater than in most other countries around the world. Whilst card payments are more widely used if we look at the numbers of transactions, Direct Debit tends to be our preferred payment method for higher value and recurring transactions.
Taking Payments by Direct Debit
There are 2 main ways to access the Direct Debit scheme in the UK:
1. Standard sponsorship via a bank
Organisations may be able to become directly sponsored to collect direct debits via their bank. This is usually preferable and cheaper for organisations than using a Facilities Management company to collect on your behalf. Banks will want to check credit worthiness before allowing you on to the scheme.
If a bank agrees to allow you onto the scheme, they will provide you with your own six digit Bacs reference for collecting. This is called a Service User Number (SUN). You will then have to decide whether to send your direct debit information to Bacs:
indirectly – via your bank or a Bacs approved bureau.
directly – by getting your own Bacs software (Bacstel-IP) or
Direct Submission
Most major banks in the UK are Bacs participants so you would typically approach your own bank first. Once your bank agree in principle they may allow you to collect through their own platforms. Some examples:
- Barclays and HSBC have their own access through Barclays.net and HSBC.net respectively. Both systems offer low cost access to sending files to Bacs, however they are a bit clunky and restrictive with the file formats that you can use. This makes them harder to use with your own internal systems.
- NatWest use a third party system called Autopay online plus. It is reasonably good and inexpensive and has more flexibility in file formats. The service is run by Bottomline Technologies and you have to pay a monthly fee as well as the transaction fees.
Regardless of which bank you use it is also worth looking at the bank agnostic Bacs software providers. There is a definitive list on the Pay.UK website but the main players are Paygate, Accesspay, Bottomline, and Finastra.
Indirect Submission
Another option if you are bank sponsored would be to use a Bacs Approved bureau. These organisations can submit files to Bacs for you without you having to buy specialist software. They often have added value services such as out of the box paperless collection and are more service orientated. These would include companies like ClearDebit and Allpay.
2. Facilities Management
This is for companies and organisations with lower volumes that may not be able to get bank sponsorship. For these, the only option would be to work with an organisation that collects on your behalf and then transfers funds to you afterwards. You would not have your own SUN but may still be able to collect in your own name.
If looking at this option then you would expect to pay a higher amount per transaction but with the advantage of quicker access to the scheme and lower set up costs. GoCardless are the most well known and most expensive option. Their systems are easy to use and integrate with, however they are somewhat impersonal and hard to get hold of. Other well known providers such as London and Zurich and Access Paysuite are also worth looking at.
It is important that they are registered as Facilities Management providers with Bacs and they should also be FCA registered.
Getting Started
There is plenty of choice and it is sometimes difficult to understand the options and which are best suited to you. Movimo can help with assessing your set up and what would work best with your systems and customers.
If you are looking to collect or would like to see if you could improve your processes and or save money then get in touch and we can help you avoid costly mistakes.