What is a direct debit mandate?

Direct Debits are a simple, secure, and convenient way for businesses to take regular payments directly from their customers’ bank accounts in exchange for a product or service.

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September 8, 2023
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What is a direct debit mandate?

Direct Debits are a simple, secure, and convenient way for businesses to take regular payments directly from their customers’ bank accounts in exchange for a product or service. 

Once a Direct Debit has been agreed, you are authorized to take a certain amount on a particular date without any further action from the customer, unless you need to change the date or amount taken. 

This saves your customer time, and helps you strategize effectively by giving you a steady and predictable cash flow. 

But without a Direct Debit mandate, the agreement that authorizes you to deduct payments from their account, there can be no Direct Debit. 

In this article, we explain what a Direct Debit mandate is, how they work, and how you can set them up. 

What is a Direct Debit mandate?

A Direct Debit mandate, sometimes called a Direct Debit instruction (DDI), is when a customer authorizes you to collect future payments from their account on a predetermined schedule. 

Without setting up a Direct Debit mandate with your customer, you cannot take Direct Debit payments. 

Direct Debit mandates are standardized in three ways:

  1. Your business is authorized to collect payments of any amount and at any time from your customer
  2. You must notify your customer of each payment before it is collected 
  3. These payments are covered by the Direct Debit Guarantee, which means that, in the event that an incorrect or fraudulent payment is taken, the customer is entitled to a full and immediate refund

How do Direct Debit mandates work?

To set up a Direct Debit mandate, your customer needs to complete a mandate form, which requires them to provide their banking details. This form can be completed in three ways: online, over the phone, or by completing a paper application form. 

Once you’ve received all the necessary payment information from your customer, you must submit it to the banks, which informs your customer’s bank of the DDI, and allows you to collect future payments. 

This submission must be conducted through a clearing service, which facilitates the electronic transfer of funds between bank accounts. Which clearing service you use depends on the country you operate in. 

ACH Direct Debit mandate

ACH (Automated Clearing House) is the computer-based network that enables electronic funds transfers in the US. For ACH Direct Debits, you must be a US-registered business entity. 

An ACH Direct Debit mandate can be presented to your customer at checkout. This mandate should include text that details the customer’s name and banking information and the terms for a one-time or recurring payment. 

Once approved, ACH Direct Debit payments can be taken and the funds should appear in your account within 2-4 working days. 

Bacs Direct Debit mandate

Bacs (Bankers’ Automated Clearing System) is a payment scheme that’s responsible for clearing and settling bank-to-bank transfers in the UK. 

If you’re a UK business, once you’ve collected the relevant customer details, you will submit your Direct Debit instruction to Bacs by uploading an Input File through Bacs approved software. Bacs will then create an Input Report, which it will send to you to confirm that it has received your DDI File. The request should be approved within three working days, after which you’ll be authorized to start taking payments from your customer. 

Once the DDI is set up, both you and your customer can cancel the Direct Debit by submitting a cancellation message to the banks via Bacs.  

SEPA Direct Debit mandate

Single Euro Payments Area (SEPA) facilitates electronic credit or debit transfers between countries in the EU and a number of other non-EU countries (including the UK). Businesses whose customers use Euro-denominated bank accounts need to submit SEPA-compliant mandate forms

SEPA Direct Debit mandate forms can be completed by your customer online, over the phone, or by filling in a paper form. These mandates must include mandatory legal text and additional information about the merchant, the customer, and the nature of the payment. These are then submitted to the banks and should be stored as future evidence of the authorization. The wording for B2B and B2C SEPA Direct Debit mandates varies. 

The SEPA Direct Debit scheme also permits e-mandates, which are completed through the customer’s online banking when they attempt a payment on your website. However, there are not currently very few e-mandate services available. 

What Does A Direct Debit Mandate Contain?

The text and required information for Direct Debit mandates vary depending on your jurisdiction. Generally speaking, however, they should include the following:

  • Banking details for your customer:
  • Name of the account holder
  • Account number
  • Branch sort code
  • Name and full postal address of the bank
  • A payment reference
  • Your or your payment provider’s Service User Number (SUN), a unique six-digit number that identifies any business collecting Direct Debits
  • The date of instruction
  • Wording for the Instruction to the bank from the account holder authorizing the setup, which could look something like this:
  • “Please pay [your company’s name] Direct debris from the account detailed in this Instruction subject to the safeguards assured by the Direct Debit Guarantee…” 
  • Finally, it should also include the Direct Debit Guarantee wording.

Many payment service providers provide support for Direct Debit mandates, including templates and the option to submit mandates to the relevant system or authority on your behalf. 

What are the benefits of Direct Debit mandates?

Here are the key benefits of Direct Debit mandates:

  • Recurring revenue is great for cash flow - as Direct Debits are taken on the same day and for the same amount each month, you have a predictable source of recurring revenue that’s great for your cash flow and for forward planning. While a customer could still cancel their Direct Debit, this near guarantee is more reliable than only taking one-off payments   
  • Reduces payment declines and delays - as the Direct Debit mandate pre-authorizes the payment and verifies the customer, you know that future payments have a high chance of being quickly accepted, minimizing the chance of declines and delays that can impact your revenue 
  • Combats fraud risk - likewise, you can rest assured that future payments are coming from already verified customers who are unlikely to be fraudsters 
  • Reduces chargebacks - as the customer has had to to authorize Direct Debit payments in advance, there’s a very low chance that they will claim not to recognize the charge and initiate a chargeback.

What is the difference between a standing order and a Direct Debit mandate?

Direct Debit mandates and Standing Orders are both automatic methods of taking payments directly from a bank account, but there are some key differences.

Firstly, a Direct Debit is initiated by the business, which needs the customer’s approval for future payments. A Standing Order is initiated by the customer and set up through their bank. 

Secondly, the business can make changes to the date, amount, or frequency of a Direct Debit but must inform the customer in advance. In contrast, you have no control over a Standing Order - only the customer can amend the payment terms.

Finally, while Direct Debits are protected by the Direct Debit Guarantee, Standing Orders have no such protection. If a payment is taken by mistake or there is an error, the customer must work it out with you or their bank directly. 

How Checkout.com can help you with Direct Debit mandates

Checkout.com can help you to set up online Direct Debit mandates wherever you operate. 

Through our global suite of connected payment methods, you can offer dozens of payment options to your customers to ensure they can choose the one that best meets their needs and preferences, including ACH, SEPA, and more.

Drive conversions and expand your global reach with Checkout.com’s payments API

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September 8, 2023 16:28
September 8, 2023 16:28