What is Direct Debit?

A direct debit is an instruction that a beneficiary gives to sender’s bank to collect an amount directly from payer’s account. Once the instruction is processed, the amount is directly transferred from payer’s bank account to the beneficiary’s bank account.

How Direct Debit Works?

Direct Debit requires the beneficiary to be authorized for accepting payments. Hence, to conduct direct debit, the beneficiary requires authorization of collecting money from payer’s account. There are two methods to establish such authorization.

1. In first method, the payer gives permission to payee to collect payment from his account. The payer’s bank is not directly involved in this process.

• Bank cannot check payee’s authentication. So other safety precautions are required.
• Without any reasoning, payer can initiate the bank to restore any direct debit.
• In such cases payee is charged for restoration charges.
• In case of repeated restoration of direct debits, payee can lose his power of instructing direct debit.

2. In other method, payer’s bank also takes part in authorization process.

• Payer directs the bank to credit direct debit notes from the payee.
• The bank informs the payee that he is authorized to instruct the direct debit.
• For direct debits, this is more secure authorization process.
• But the disadvantage is that, in case of error, direct debit is difficult to restore back.

What are Uses of Direct Debit?

The main uses of direct debit are:

• To make regular payments like telephone bills, credit card bills.
• Can be used for debiting different amount each time which is unlike standing order.
• Also direct debit can be used for one time payment like in case of mail order business. But the authorization process is required to be simple in such cases.

Direct debit or direct withdrawal is present in banking systems of many countries like United Kingdom, South Africa, Germany and the Netherlands.