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A Comparison of Direct Debits and Standing Orders Most people who have bills, rent or mortgages to pay will likely either have Direct Debits and/or Standing Orders set up to meet their payments. However, they may not have ever taken the time to actually familiarise themselves with what each payment method is, how they work and what the differences are between them. The following article therefore aims to cover these aspects and highlight the uses of each.

What is a Direct Debit In short a Direct Debit is a payment made from one bank account to another where the payee’s bank is authorised to pull the money from the payer’s account. The mandate to take the money can be supplied by the payer in the form of a pro-forma completed by the payee, a record of a telephone instruction or an online form. This instruction must be passed to the payee to pass to their bank in turn and needs to contain the payee’s bank details - sort code, account number and bank name - as well as the frequency of the payments (e.g., monthly, quarterly, annually) and their timing. As an example, it could instruct that a mortgage payment can be taken from account 123456789 at Best Bank plc, sort code 11-22-33 on 1st of every month. The payer must however be notified of each payment, how much will be taken and when, before it is taken out of their account and can instruct their own bank to withdraw the authority at any time. As further safeguards, each bank involved (payor’s and payee’s) must offer the Direct Debit facility and the payee must be an organisation that is approved by the bank before it can use the facility. The process is then backed up by the Direct Debit Guarantee which all banks must sign up to and which ensures that the payee is notified of any changes to how much payments and when the payments are going to be taken and that they are entitled to a full refund straight away if a mistake is made. The two key characteristics of a Direct Debit are therefore that each payment is requested

© 2012 Stuart Mitchell

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by the payee rather than sent by the payer, and that, in the case of regular payments the amount of each payment can vary. These characteristics mean that the payment method is ideal for making regular bill payments that are set to vary but which are due at on a schedule, such as utility bills. The payee organisation benefits from the fact that the payment is less likely to be delayed that if they were relying on the payee to initiate the payment. The payer can sometimes benefit from discounts passed to them from the payee as a result, plus they avoid the hassle of arranging each payment themselves. The actual Direct Debit payments are underpinned by the Bacs money transfer mechanisms which are an inter-bank transfer system. First set up back in the 1960s Bacs was until recently the primary method of making any free inter bank transfer.

What is a Standing Order A Standing Order is an instruction to make a scheduled payment on a set date for a fixed amount, usually on a repeating basis. Essentially, it is no different to a one off payment except that it is scheduled. Once set up, it is therefore similar in nature to a direct debit in that it offers a scheduled payment system, however it does differ on its two fundamental characteristics. Firstly, that it can only be used where the payment amount does not change, and secondly, that the instruction must be made by the payer to their bank to send the specified payments to the payee’s account (rather than requested by the payee). These differences remove a number of the complexities and restrictions of Direct Debits. For example, the payments can be made to any bank account because the payee’s bank does not need to facilitate and approve the process as would be the case with a Direct Debit. As a result it opens up the possibility for payments to also be scheduled to go to an individual’s account not just that of an organisation; in turn allowing Standing Orders to be set up between friends and family and even between one’s own separate accounts. However, as the instruction comes from the payer, Standing Orders do place more importance on the payer ensuring that the payee’s details are correct. If the money is paid to the wrong account there is less recourse for the money to be reclaimed (in contrast to Direct Debits where the request is made from the payee’s bank anyway and is backed by the Direct Debit Guarantee). Because it schedules the payment of a fixed amount a Standing Order is ideal for paying bills which do not fluctuate, e.g., fixed rate mortgage payments, or for making regular

© 2012 Stuart Mitchell

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transfers where the payer specifies the sum, such as charity donations or transfers to savings accounts. As an example a standing order could be used to transfer £20 on the 20th of every month to a particular charity’s account, or to put £100 into a savings account the day after the payor’s salary hits their account. By becoming familiar with the answers to the question “what is a direct debit” and “what is a standing order”, these two payment options and their respective mechanisms and benefits when making regular scheduled payments, people and organisations can make sure that they cover their payments using the most appropriate method; make the best use of their money, reducing the risk of missed or incorrect payments and minimising the effort required to do so.

© 2012 Stuart Mitchell

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A comparison of direct debits and standing orders