What’s the difference between a standing order and direct debit?

difference between standing order and direct debit

Understanding the difference between a standing order and direct debit can help you make an educated decision about which suits your business type and what you would like to offer your customers. 

Both payment types are fantastic ways of setting up regular payments, which help ensure you get your funds on time and regularly.

We will break down the differences between the two types of payment and list the pros and cons of each. 

Standing orders

In its most basic terms, a standing order is an instruction to the customer’s bank to make regular payments on a specific date. 

As the customer sets up the standing order, they are the ones in complete control over the amount and date.

Most banks now use faster payments to process Standing Orders, in which case payers may be able to make the first payment almost immediately, but worst case, it should allow the payment to arrive no later than the next working day.

The standing order can also be set up for a specific amount of time. For example, you can set up a monthly payment for a duration of six months. 

A standing order payment will remain the same. The amounts do not vary unless the customer sets up a new one for a different value. 

Because the payment amount doesn’t change, it can be an ideal way to take payments such as rent, as the amount will remain the same for a long period of time.

You can also use a standing order to make regular transfers to an alternative account. If you wish to make a payment to a savings account every month, you can set up a standing order to do this for you so that you don’t have to remember to make the transfer yourself.

To set up a standing order, the customer can usually just phone their bank, or if they have internet banking, they should be able to set it up online. If they would rather go to the bank in person, they will have a generic standing order form that the customer can fill in themselves. 

Remember, the customer is in complete control of the standing order, which means that only they can cancel it, or amend the amount. You will receive a separate payment into your account for each standing order customer, and if you are receiving payments from a large number of customers this could affect your bank charges. Also, for reconciliation purposes, you are reliant on the customer entering the correct reference. 

Direct debit

A direct debit is an instruction to the customer’s bank to permit a business to take money from their account. It allows you to take any amount that the customer owes, but you will have to provide advance notice (generally around ten working days).

Anyone with a basic bank account can set up a direct debit. It is usually one easy form, and all you will need to do is get the customer to sign it, and it is ready to begin. You can ask for paperless status which allows you to have customers sign-up via a web form, or over the ‘phone.

Banks do not charge customers for setting up a direct debit; however, should they have insufficient funds to meet a payment, there can be charges to them of between £5 and £25. 

If a direct debit is unpaid, there is a retry process to give you another attempt to take the payment later in the month, and allows you to contact the customer so they can ensure funds are in the account. 

A direct debit comes with a customer guarantee. This means that if a mistake is made and the wrong amount of money is debited or is debited on the wrong date, the customer’s bank will refund it on request. This will then be automatically deducted from your account, although there are situations where you may be able to challenge this. 

You will receive a single credit into your bank account for the total collected, and you can see immediately from the system report who has paid and whether any payments failed and why. The reports can be viewed or downloaded, greatly simplifying reconciliation.

If the amount is likely to vary regularly, then Direct Debit offers flexibility. You can upload a file of collections each month, or other period. You can set an advance schedule, or you can have the system make collections of regular fixed amounts automatically.

As you set the amount, in the event of bulk price changes, for example following a VAT rate change, you can easily amend the amount to be collected. You aren’t reliant on the customer making any changes.

Let’s break down the main differences.

Direct Debit

  • Set up by the business
  • Amount can change
  • Has a retry process
  • It comes with a guarantee

Standing Order

  • Set up by the customer
  • Amount is static
  • Only attempts to take the payment once
  • If an error is made, you may lose money

Conclusion

Both payment variations have their pros and cons, but with this information, we hope that we have made your decision a little easier. If, however, you are still unsure about which is going to be your best option, why not contact us for a chat.

More To Explore