Direct Debit Explained: How To Set It Up for Customers (2024)

For years, people had to pay their bills manually, every month. You would write a check, find an envelope, add postage, address it, and send it off in the mail. Every time, for every bill. It was a time-consuming and inconvenient process that allowed for human error at every step. 

Direct debit, first developed in the 1960s, revolutionized digital payment methods by allowing you to automatically pay your bills when they’re due. Find out how direct debit payments work and the best way to set them up for your business.

What is direct debit?

Direct debit is an automated method tocollect payments from your customers. With direct debit, your business pulls (or “debits”) funds directly from a customer’s bank account. With other recurring payment methods, you either manually charge the customer’s credit card when a payment is due, or your customer triggers the payment on their end.

Businesses often accept direct debit when customers need to make regular payments at set intervals, even if the amount varies from one payment to the next. 

Direct debit transfers are typically a good choice for businesses that work with these common types of recurring payments:

Customers who want to set up direct debit payments fill out an authorization form allowing you to automatically debit from their bank account, rather than having to pay manually for each billing period. The form includes the customer’s bank account information, details about the recurring payment such as the date and amount, and consent to have the fundsdebited. 

Direct debit payments flow through the Automated Clearing House (ACH) network, a system that electronically moves money between financial institutions. The ACH network reaches every US bank and credit union, allowing your customers to use it wherever they are.

Direct debit vs. standing order vs. recurring payment

“Recurring payment” is an umbrella term that encompasses direct debit, credit card payments, and standing order payments. Generally, a business has control over the timing and value of a direct debitpayment, while the customer chooses the amount and frequency of a standing order. Here’s a quick breakdown of how these payment methods differ:

Recurring payment

In all recurring payments, a customer (the payer) gives a business (the payee) permission to take money from their bank account regularly or charge their credit card whenever a payment is due. 

Standing order

When a customer sets up a standing order, they instruct their bank to send money to a business on a regular basis. This payment amount is usually fixed, and the customer can change or cancel the payment without notifying the business. The customer’s bank handles the transaction.

Direct debit

With direct debit, a business regularly collects money from the customer’s bank account after getting their written authorization. The business can decide how much and how often to charge the customer without further permission (although the customer may cancel future payments). Businesses usually contract with a payment processor to facilitate the transaction.

Benefits of using direct debit

Collecting direct debit payments can be advantageous for both sides of the transaction. Here are some reasons it’s a preferred payment method:

Convenience 

Once authorized, direct debit transactions are automatic, allowing your company to focus on other areas of the business instead of chasing late payments. Customers also benefit because they won’t need to remember to pay their bills or re-enter payment details every month.

Cost savings

The fees and administrative costs associated with direct debit payments are much lower than other methods, such as credit card payments. An ACH transaction typically costs less than 20¢, while a credit card swipe fee can total up to 2.5% of the transaction value. You can even pass the savings on to your customers by offering incentives for paying via direct debit.

Reliability

Collecting direct debits on the same day and for the same amount each month provides subscription businesses with a predictable source of recurring revenue. This feature makes direct debit great for your cash flow management.

Reduced errors

When a customer sets up direct debit, you can preauthorize the payment details and verify the customer. Preauthorization minimizes the chance of late or missed payments, which negatively impact your revenue. Plus, direct debit can simplify the accounting process and remove the chance of human error since each payment transaction is automated and clearly documented. 

Security 

Direct debitpayments flow through the ACH network, which has the lowest fraud rate of any payment method by value. The ACH network encrypts all payments, which offers a layer of protection on both ends of the transaction. Customers can also easily dispute transactions they didn’t authorize.

Availability

The ACH network is connected to all US banks and credit unions. That means any customer with a bank account automatically has access to this payment method without needing to sign up for a new service.

Speed

Direct debitpayments are processed quickly; about 80% of ACH network transactions settle within one business day, as long as the customer has sufficient funds in their bank account. You may also request an expedited transfer for a fee. 

How to set up direct debit for customers

1. Choose a bank and payment service provider
2. Get in touch with your customers
3. Start accepting direct debit payments

Here are the steps you can follow when adding direct debit for customers:

1. Choose a bank and payment service provider

Contact your financial institution and confirm you have a merchant account, a type of bank account that allows you to accept and process electronic payments. 

Then you can choose a payment service provider—such as Shopify Payments, Stripe, or PayPal—which handles the merchant account functionality on your behalf. These providers help authorizecustomerbanking details and facilitate each funds transfer. 

2. Get in touch with your customers

Contact your existing customers to let them know you accept direct debit payments. Attach a direct debit mandate, also known as a direct debit instruction, to the message. This form allows your business to automatically collect money from a customer’s bank account on a regular basis. Include the following information to get ahead of any questions:

• Direct debit registration instructions
• Form submission deadline
• Start date for direct debit payments 
• Channels for customer questions or feedback 
• Notification methods for upcoming payments 
• Payment calculation methodology 
• Direct debit cancellation procedure

Your payment platform may have an ACH debit form that you can give customers, or you can create one. Include space for the customer’s name, bank name, bank account number, routing number, and signature.

3. Start accepting direct debit payments

You can set up recurring direct debit payments as soon as you receive an ACH authorization form from a customer. You’ll need to give advance notice each time you collect a payment. 

Include information and instructions on how to use direct debit on your website, invoices, and any other customer-facing literature. Help customers use this feature by adding a check box to authorize ACH at checkout or a Pay Now button on your invoices.