Standing orders and direct debits
January 2010
The start of the year is the time when customers often sign up for new contracts with service providers, from gyms to phone companies. But what's the best way to pay these recurring bills?
While standing orders and direct debits do broadly similar things, many consumers are confused about key differences between them. If you don't understand these differences you could soon find debts mounting up.
Consumers may also be unaware of the Payment Services Directive. This came into force in Ireland in November 2009 and introduces a number of benefits and added protection for consumers.
These include a more regulated environment, and your right to a refund in relation to unauthorised and incorrectly executed payments. The Financial Regulator is the competent authority in terms of implementing the Directive.
The main differences
In a nutshell:
- A standing order is your instruction to your bank to pay a set amount to a named beneficiary (such as a savings account), at regular intervals
- A direct debit is where you give permission to a beneficiary (such as your electricity supplier) to claim payments from your bank account. The amount may vary, and the frequency too (though it's often monthly). As part of this process, you instruct your bank to allow these payments to be made
So a standing order is for a fixed amount. Any price increase must be notified to you, in writing, for your approval. Typically, a standing order might be used to pay a fixed sum to a savings account or to a local club at the beginning of each month.
A standing order can be set up to run for a set period of time (not indefinitely) or until you cancel it.
With a direct debit, the amount drawn from your account can vary from month to month. Typical examples are paying mortgage instalments or utility bills.
As well as the amount of the payment being flexible, with a direct debit the due payment date may also vary.
The main advantages of each
Standing orders are simpler than direct debits. At set times your bank sends the money to the beneficiary's bank, and only you can alter the payments. The beneficiary can be anyone.
By contrast, direct debits are flexible. Their day-to-day advantage in paying recurring bills is that if the payment amount keeps changing (such as with a gas or electricity bill), the beneficiary can claim the new amount automatically.
With a standing order, though, you would need to give your bank new instructions each time a change is needed. Because the amounts paid are fixed, a standing order is not usually suitable for paying variable bills such as a credit card or gas/electricity bills.
The main problems
The main advantage of direct debits - their flexibility - is also their main disadvantage. You could sign up for a service and face higher bills each month.
Once you sign the mandate form for a direct debit, you are giving a business your full permission to delve into your account and take as much as they like, whenever they like.
It is very convenient for the business concerned, but it means you can run up debts without fully realising what's happening.
There is also a potential risk that unscrupulous or inefficient beneficiaries might claim money that is not due to them.
What to do
If you agree to a direct debit, remember that you are giving the business or organisation your full permission to delve into your account and increase their charges whenever they like.
- Opt for the standing order payment option where possible.
- Even when major companies request a direct debit, insist on a standing order. If you don't, that monthly bill of €30 can soon become a €50 direct debit.
- Never set up a direct debit to someone you're not sure of - that might be a landlord, a charity, a loan provider or a new phone or cable TV company.
- Never ever set one up on your front door or on the street, no matter how pressure is put on you to do this.
- Don't set up a direct debit over the phone. Usually a customer has to sign a direct debit form, but some organisations are authorised to set up direct debits once you give them your permission and your bank details over the phone.
- A bit like a cheque, a payment can take several days to clear. Bear in mind that your bank can "bounce" a standing order or direct debit if there's not enough money in your account to cover it.
- If you cancel a direct debit instruction, this in itself does not alter any existing contract you have with the retailer or service provider. If you carry on receiving goods or a service, you will still need to make alternative arrangements for payment.
Disputed payments
In the past, consumers were wary of giving service providers open access to their bank accounts, because it could be difficult to get the money back if a bill was disputed.
Under the Payment Services Directive, banks and other payment service providers across the EU must:
- Provide you with all the information you need when you make a payment, including clear information about rates and charges
- Offer a consistent level of service, such as making sure all payments are completed within a predetermined timeframe
- Protect customers throughout the EU when payments aren't executed correctly or authorised by the customer
In most circumstances, a bank customer can cancel, or "stop", a direct debit up to and including one business day before the day of payment is due.
If a disputed payment has already been processed, you should advise your bank as soon as possible and seek a refund.
Learn more
Read our "switch and save" guide to banking services