Direct Debit mandates in the UK: everything you need to know

Key takeaways

• A Direct Debit mandate is an agreement that lets a business take recurring payments from a customer’s bank account on a regular schedule. It saves time and admin compared to having to manually arrange payments each time.

• The scheme is orchestrated by Pay.UK and is safe, secure, and gives the customer freedom to cancel whenever they want.

• With Airwallex, you can originate direct debits in the UK and in dozens of other countries – making it easier to get paid all across the world.

Getting paid is the hardest part of some businesses operations. Organising purchase orders, chasing invoices, changing points of contact. It shouldn’t be this difficult to get paid for the work you do.

That’s where Direct Debits can help. For businesses that can use them, Direct Debits take all the manual work out of getting paid (after a little initial setup). One authorisation and you can take your regular payments without having to do any chasing, admin, or funny business.

We’ll talk you through some definitions and examples regarding Direct Debits. Plus, a few other options for recurring billing, if Direct Debits don’t work for your business. Let’s get started.

What is a Direct Debit mandate?

A Direct Debit mandate is a type of agreement between a customer and a supplier. The mandate authorises the supplier to take a recurring payment from the customer’s bank account.

Direct Debit mandates serve as a ‘once-and-for-all’ approval of future payments. Every time a payment is due, the Direct Debit process automatically – directly debiting the customer’s account. It saves both parties time and the stress of late payments.

In the UK, you’re likely familiar with utility companies using Direct Debit mandates to take your monthly bill payment. It’s used by lots of other businesses that provide ongoing services to their customers, too. 

How Direct Debit mandates work in the UK

The Direct Debit system is organised, orchestrated, and owned by Pay UK Limited (“the recognised operator and standards body for the UK’s interbank retail payment systems”). This is the same company responsible for the Current Account Switch Service.

It starts with the customer consenting to the Direct Debit mandate. They complete a form that the supplier submits to their and the customer’s bank.

The business has a duty to tell the customer in advance how much they will collect and on what date. If the customer disagrees with either point, they can contact the supplier and address the issue before the debit is made.

The supplier can collect the same amount every time or a variable amount.

All payments made via Direct Debit are protected by the Direct Debit Guarantee, which assurances several things:

• If the amount, date or frequency of a Direct Debit changes, the supplier will notify the customer (normally 10 working days) in advance.

• If there’s an error with a Direct Debit payment (either by the business or bank), the customer is entitled to a full and immediate refund.

• If a customer receives a refund they’re not entitled to, they must repay it when asked.

• Customers can cancel a Direct Debit at any time by contacting their bank. This often requires written confirmation. It’s recommended that they also inform the business.

How to set up a Direct Debit mandate

To be able to initiate a mandate, you first need a bank that’s part of the scheme to ‘sponsor’ you, a Service User Number (SUN) for the Direct Debit scheme, and access to Bankers' Automated Clearing Services (BACS)-approved payment software. 

The much simpler alternative is to use a payment processor that already has those permissions and systems in place. Platforms like GoCardless charge upwards of 1% + 0.20 GBP per transaction.

Here’s a clear, established process for setting up a Direct Debit in three simple steps:

1. The customer completes a digital or physical copy of the Direct Debit mandate form, containing their:

   1. Name and address

   2. Bank’s name and address

   3. Bank account number

   4. Bank’s branch sort code

   5. Name(s) on the account

   6. Signature and date

2. The business (or their payment processor) submits the mandate to both banks, via BACS.

   1. If using a paper form, the original copy is retained as proof of authorisation.

   2. If using a paperless form, there is no original copy with a wet signature.

3. The business gives the customer advance notice before taking any payment and continues to do so until the Direct Debit is cancelled.

Compliance and security considerations

The Direct Debit system is stringently monitored and protected by Pay UK (and its Bacs and Direct Debit subdivisions).

There are several rules to comply with if you wish to use (and continue using) the scheme, including:

• Giving advance notice of any debit

• Respecting customer’s rights and wishes

• Notifying of any changes to dates, amounts, or frequency of payments

And, as with all things related to payments, there are other important security factors to consider.

• Meeting FCA obligations and processes

• PSD2 compliance, including Strong Customer Authentication

• Data security compliance (i.e. GDPR)

Advantages of using Direct Debit mandates

Using Direct Debits is one of the easiest, most effective ways for a business in the UK to get paid. The combination of automation, one-time authorisation, and consumer trust makes it appealing to businesses from all industries and areas.

• The costs are lower compared to processing card payments (e.g. 1% + 0.20 GBP vs. 1.3% + 0.20 GBP).

• Fewer payment failures, as accounts don’t expire like cards do and any accounts switched with CASS carry over all Direct Debits to the new account.

• More predictable cash flow, with less time spent on accounts payable.

• The Direct Debit scheme is well-established and has strong trust among UK consumers. This might be because of its prevalence in high-value utilities and mortgage payments.

Limitations of Direct Debit mandates

As good as Direct Debits can be, they’re not faultless. In fact, there are some instances in which they’re a bad choice. The points below give a snapshot of some of the drawbacks of using Direct Debits.

• The time and initial administrative work spent on setting up a Direct Debit is much greater than taking a card payment or requesting a manual bank transfer.

• Slower settlement times – Direct Debits typically settle in 3–5 days vs. 1–3 days for card payments, and the instant settlement of cash and bank transfers.

• Direct Debits are a UK-specific product. If you have international customers, they can’t pay using Direct Debit. (There is a European version called SEPA, but that’s for another article.)

• If you’re looking to process a one-off payment, a Direct Debit is one of the worst options. The admin involved and lack of alternative payment methods means DDs just aren’t viable for, say, a retail store.

• As much as consumers trust the Direct Debit scheme, the act of signing up to a new Direct Debit requires a level of trust beyond a one-off card payment. A new Direct Debit is a promise that a creditor can take money from your account – not something you’d trust to just anyone, even with the Direct Debit Guarantee in place.

Direct Debit vs. other recurring payment methods

For all our talk of Direct Debit’s usefulness, it’s not your only option for taking regular payments from customers. 

How Airwallex helps with recurring payments and mandates

The headline story here is that Airwallex doesn’t just let you initiate Direct Debits with customers. We also let you process recurring card payments, subscription and usage-based billing, as well as other recurring methods – like SEPA Direct Debits.

You might ask: “How on earth is that possible?” We can explain.

Airwallex provides you with a global business account, through which you can open local accounts across the world. You can bill as if you’re local to all your customers, whether they’re in the UK, USA, or UAE.

Combining our global accounts with our payment processing, low-cost FX, and spend management tools and you get all the financial infrastructure you need to grow your business globally.

Direct Debits: dare to dream of easy payments

Hopefully it’s clear by now that Direct Debits are a great tool to have in your payments belt. They won’t work for every business, nor every customer, but the automation and efficiency they can offer make them hugely valuable to many.

Conventional wisdom says it’s best to use a payment processor to manage your Direct Debits, for both practical and technical reasons. It also says that Direct Debits have a great reputation among UK consumers.

If you want a platform that can help you create Direct Debit mandates – as well as processing other payments, managing your spend, and handling your FX at a great price – then we’d love for you to consider Airwallex.

You can request a live Airwallex demo here.

FAQs

What happens if a customer cancels their Direct Debit?

Your customer can cancel their Direct Debit at any point – it’s their right under the Direct Debit Guarantee. Ideally, they’ll tell you about the cancellation, but not everyone will.

Your product or service should be set up to stop working when payment isn’t made. If that can’t be automated, you’ll need to reconcile your payments every month and see which customers have cancelled.

Why are Direct Debits a good choice for billing?

After a customer signs up with their Direct Debit mandate, their payments run on autopilot. You don’t have to chase anything up and they don’t have to initiate a manual transfer. It’s helpful for both parties.

Processing Direct Debits tends to be cheaper than card payments (one-off or recurring), which is always welcome.

Are Direct Debits safe?

Direct Debits are a safe and secure way of processing payments.

For customers, you’re protected by the Direct Debit Guarantee (so your bank will repay any fraudulent payments and let you cancel at any time).

For businesses, you can process recurring payments automatically and reduce your work in chasing accounts receivable.

What businesses use Direct Debits?

Direct Debits are a great way to get paid for many businesses. Any regular or recurring service could use Direct Debits – from a window cleaner to a software company.

Businesses choose Direct Debits to save time on collecting payments from customers, as well as paying lower fees compared to card payments.

Sources

Much of the technical and process information in this article was sourced from the Direct Debit website.