With modern-day life becoming increasingly cashless, everything from your household bills and TV streaming to charity payments can be made via an automated payment straight from your bank account, with direct debits and standing orders being the most common.
According to GoCardless, an automated payment service, 90pc of British adults have at least one direct debit, and the average person has six.
But there are also standing orders, which differ from direct debits in a few ways – and it’s important to know how each works, and the protections it offers.
Here, Telegraph Money explains how each payment option works, and what to watch out for.
A direct debit is an automated payment method where a business takes payment from your bank account. It is most commonly used to pay for regular services – for example, most households will pay their energy and phone bills with a direct debit.
When you agree to a direct debit you give the business or merchant permission to collect an agreed amount of money from your bank account on a set date. This is best described as a pull payment, as the organisation takes the money from your account.
A standing order is an automated payment method established by an individual, used to pay another person, or business – for example, paying rent to a landlord, or donating regularly to a charity.
Setting up a standing order dictates that a fixed amount of money will be paid from your account in regular intervals. This is best described as a push payment, as you have created the order to pay money out of your account.
While an individual can set up a standing order, a direct debit is set up by a business or organisation.
“An individual sets up a standing order and is responsible for setting the amount, and frequency. You can do that in your banking app, or through ringing up or going in person to your bank,” said Rebecca Baldwin, of Money Wellness, a money advice service.
In comparison, direct debits are established through “giving the business or organisation permission to take money directly from your bank account”, said Ms Baldwin.
“These are used often when you have a contract for a provided service, such as council tax, or phone bills. The organisation responsible for the service will take the fee continuously from your account using your sort code and account number.”
Andrew Johnson, senior advice manager with the Money and Pensions Service, said it’s not possible to set up a direct debit between individuals.
“A direct debit will be established between you and an organisation, because in order for a company to set up a direct debit, they need to fill in a direct debit mandate, which they would then pass on to the bank,” he said.
“In order for them to be able to do that, they need to pass certain credit checks and fraud checks that the bank will conduct on them.”
To set up a regular payment to another individual, you’d need to set up a standing order.
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The amount paid in a direct debit is decided by the business that is taking the payment, and it can with each payment.
“Direct debit payments can change depending on the service you’re paying for. If it is something like your gas bill, where you likely have a varied charge each month, the business can change the payment – although they would have to notify you that it was going to change, ideally within 10 working days,” said Ms Baldwin.
In setting up a standing order, an individual dictates how much will be paid. Ms Baldwin explained: “If you want to change the amount, or the frequency of a standing order, you can cancel your current one and create a new one.”
Therefore, standing orders can offer more flexibility in payment amounts.
Mr Johnson added: “Because you initiate the payments, you can choose whether you want to change the amount paid. For instance, if you were paying your mortgage with a standing order, you can change your regular payments to make smaller or larger contributions.”
This could be beneficial if you wanted to occasionally overpay your mortgage.
“An individual will not have that same flexibility with a direct debit, as the flexibility to decide the amount is on the side of the organisation authorised to take the money.”
If an automated payment fails for a household bill or mortgage payment, for example, you could be left with a default on your credit report, which could affect your credit score and ability to borrow.
If you don’t have the required funds in your account, it will depend on your bank or building society as to whether the payment is processed regardless.
Some banks won’t process the payment, but will do it automatically once you have enough money in your account.
If the money is processed regardless, there could be a danger of an automated payment being taken and potentially leaving you in an expensive unarranged overdraft.
Ms Baldwin said: “Typically. if you don’t have enough money in the account your provider will let you know that a payment is due to go out.
“If a direct debit has failed, the bank will give you a deadline and the company will retry the payment, but the bank might still let the payment go through, putting you in an unarranged overdraft.”
She added that the organisation expecting the payment may charge you for late or failed payments if they see that the payment has not arrived.
Similarly, if a standing order cannot be sent, the bank may retry the payment – typically on the same day – but it comes down to the individual to make sure it goes through.
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Standing orders are actioned with the Faster Payments Service (FPS). This means the payment will be sent to the intended account instantaneously.
This is advantageous as it also means you are able to make changes to the amount and frequency of a standing order, within a day of the automated payment.
“In direct debits on the other hand, the payment gets initiated a couple of days before the money is due to be taken from the account, so if you are looking to cancel a direct debit, you should check that it is not already a pending transaction,” said Mr Johnson.
A direct debit will run until the end of the service that you are paying for, but if you want to cancel it before the end of that term, you can do it one of two ways.
You can cancel it directly with your bank, or through the organisation the direct debit is set up with. Given that direct debits take slightly longer to process, you have to cancel the payment with a few days’ notice of the debit date, or the money may still be taken.
Mr Johnson recommended the route of cancelling through the organisation, as if you cancel it through your bank without informing the organisation first, they may still try to take the payment and you could then incur late payment charges.
“You should always cancel it with the organisation that has your direct debit mandate, and then you can confirm with your bank that it has been cancelled. Alternatively, you can cancel it with your bank, but inform the organisation that you have cancelled it,” said Mr Johnson.
When it comes to standing orders, you are the person who established the payment and it is therefore much easier to cancel. You can do this by ringing up your bank, using your banking app, or visiting a branch.
One instance in which direct debits have an advantage over standing orders is that the payments are protected by the Direct Debit Guarantee.
Mr Johnson explained: “If a direct debit comes through that you’re not expecting, or you dispute the amount taken, the bank or building society is obliged to credit your account.
“It will then go to the organisation and let them know that you’ve requested the payment to be reversed under the Direct Debit Guarantee.”
This then triggers an investigation into whether the payment was justified, and whether the individual was given enough notice of changed amounts or frequency.
Mr Johnson recommended going through official complaint processes with the organisation involved, rather than just cancelling your direct debit, in the instance of what you believe to be an incorrect charge.
“They’ll put it down as a late payment or missing payment, and eventually that could impede your ability to be able to get credit in the future” he said.
“But, they can’t put a black mark against your credit file if you have disputed an attempted payment, and it is recorded as being under investigation, so I would advise querying or complaining if you think you’ve been charged incorrectly.”
Standing orders do not offer the same protection, if you forget to cancel a payment the money will still go out and there is no guarantee that you can get it back.
Similarly, it is an individual’s responsibility to ensure that a standing order payment is sent to the correct bank account.
Mr Johnson added: “As you would be inputting the details yourself, there’s a risk for human error in getting the numbers mixed around or incorrect, so ensure you’re double checking that your money will be sent to the intended recipient.”
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Another common method of automated payments is a continuous payment authority (CPA), also known as recurring card payments.
These kinds of payments are most commonly used for subscription based services, such as a monthly Spotify or Netflix account.
CPAs are actioned by an organisation using an individual’s card details – rather than bank details.
“Similar to the direct debit, with a continuous payment authority, it is the organisation you’ve set up the CPA with that is determining how and when money is being debited from your bank card,” said Mr Johnson.
CPAs do not offer the same protections as direct debits, yet offer the companies taking the money more flexibility about how much they can take for each payment.
These can be cancelled by contacting the company, and you also have the right to cancel the payment with your bank or card issuer. However, you’ll be liable to pay any money you still owe.
If a CPA is not cancelled after your request, it will be considered an unauthorised transaction and should be refunded. You can contact your bank to request a refund, and if it fails to do so you have options to complain, and take any unresolved complaints to the Financial Ombudsman Service (FOS).
No automated payment method is better overall, but one might be better for the kind of payment you’re trying to make.
Direct debits work best for the payment of regular services that are likely to fluctuate in price – for example, your utility bills, phone bill, or insurance payments.
“If you’re paying electricity or utility bills, setting up a standing order to pay would mean that you would have to remember to set that standing order at the exact amount of your electricity costs each month. It would be a real pain to have to remember to do that,” explained Mr Johnson.
He added: “With a direct debit you can just forget about it; whatever your bill is that month they’ll take it and if you have a problem with it, just make a claim under the Direct Debit Guarantee.”
A standing order works better for payments where you want to be in control of how much is paid, and when, such as for making credit card repayments, or transferring money to a savings account regularly.
However, you have to double check the details of the payee when setting up a standing order, as you won’t have the same protections as you do in a direct debit if the payment ends up with the wrong person, or as the wrong amount.
2024-09-20T15:02:50Z dg43tfdfdgfd