How to take customer payments by Direct Debit

Once a business has received a Direct Debit Instruction from their customer, payments can be collected at any time. To collect a customer payment, the business needs to follow a few simple steps.

Notify the customer

Although the customer has given permission for the Direct Debit scheme to take payments from them, businesses still have to give “Advance Notice”. This is usually 10 working before a payment is to be taken but shorter notice periods can be arranged with the customer. Whether given physically or electronically, notices need to be clear and be signed off by the business’ sponsor bank. Depending on the type of payment that you are taking, the procedure for sending advance notice varies:

Taking regular payments of a fixed amount

If taking regular payments where the amount collected does not change, the business can send a single payment notification. This must contain details of the frequency of payment and the amount that will be taken. This is applicable to businesses like gyms and magazines, or any business that has a fixed membership or subscription fee.

Taking payments which vary in frequency and/or amount

If your payments vary depending on set circumstances, then advance notice is needed for each payment and must have all details of payment amount and amount. This is applicable to any business where the payment is not fixed, for example, agreements where the customer pays for what they use in a particular month.

Taking an immediate payment

If a customer explicitly states that they want a specific payment to be taken immediately, then the business does not need to provide advance notice.

Submit payment requests to the banks

This is an automated process with the Direct Debit, not something that the business should have to manually do. Payment requests are submitted to the banks via Bacs, which means that each request is sent to the customer’s bank and the business’ sponsor bank. When the payment is due to be taken, the customer’s bank debits their account whilst the business’ bank credits theirs.

What is Bacs?

Bacs is an electronic network operated by the 16 major banks and building societies in the UK. The system is used to make payments directly from one bank account to another and is the cheapest and most efficient way to transfer recurring customer payments to the service provider.

Follow up the submission

It often takes several working days to know if a payment has gone through after it’s been submitted. Direct Debit payments are often processed using the Bacs three day cycle, after which a payment can only be considered successful if no failure report is produced after several days.

Day 1

A payment request is submitted to Bacs between 7:00am and 10:30pm, which is then sent to the relevant banks overnight.

Day 2

The relevant banks receive the message at 6:00am. The banks then prepare to respond. The customer’s bank would prepare to debit their account whilst the business’ bank would prepare to credit theirs.

Day 3

The banks action the request. The business’ bank credits their account and the customer’s bank debits theirs at the same time. If the payment is successful, this should be the last step. If the customer’s bank thinks that payment should not have occurred then they will notify the business’ bank to try to get the payment reversed.

Day 4

The business receives the payment failure notification. This is to warn that the payment did not pass and that the customer’s bank wants to reverse the payment.

Day 5

The payment to the business is set to be reversed.

Know what happens if a payment fails

Most people never have to experience any issue with Direct Debit payments. In fact, less than 0.2% of all Direct Debit payments are refunded with the Direct Debit Guarantee. However, if a payment does encounter an issue, it’sn important to know what happens next.

If a payment fails, it’s likely to be because the customer’s bank thinks that the payment was requested in error, or even fraudulently.

With the Direct Debit Guarantee, the customer’s right to a refund is paramount. Customers can raise an indemnity claim (request for a refund) at any time and for any Direct Debit payment, and, if the bank approves their claim, will receive a full and immediate refund.

The definition of an “erroneous payment” is broad, and can range from payment being taken on the wrong date to dispute over the actual amount taken.

What is the Direct Debit Guarantee?

Otherwise known as the Direct Debit Indemnity, the Direct Debit Guarantee is customer protection for all customers on the Direct Debit scheme. The Guarantee protects customers from fraudulent or incorrect payments and is offered by all banks and building societies that accept instructions to pay Direct Debits.

Notifications Customers must be notified before payments
Refunds Customers are entitled to an immediate full refund of any payment taken in error
Cancellations Customers can cancel a Direct Debit Instruction at any point by informing their bank

How to dispute an indemnity claim

There are very few grounds to dispute an indemnity claim. However, there are a few scenarios in which the claim may be disputed.

The customer’s bank has made an error

For example, if the customer’s bank has sent the same indemnity claim twice.

The customer denies ever signing a Direct Debit Instruction but the service provider has proof

If the business can provide a signed paper Direct Debit Instruction and the customer accepts this, then the claim could be settled.

The customer’s bank failed to inform the service provider that the customer cancelled their Direct Debit Instruction

If the customer has cancelled their Direct Debit but the bank does not inform the service provider and allows the payment to be taken, the customer’s bank may be liable as they are responsible for the error.

If you are disputing an indemnity claim, you must give your sponsor bank within 14 days:

  1. The date and amount of the claim
  2. Your account details, SUN and reference number
  3. A copy of the indemnity claim

Know what happens if a payment is successful

If the Direct Debit payment is successful, then you won’t need to take any action. You will be paid the amount that you requested.

About DFC

At DFC, we offer a full service approach to collecting Direct Debit membership payments for gyms, leisure centres and other health & fitness operators.

We are focused on making running your business easier. Reducing time spent on admin work, and helping you take control of your entire member journey to increase retention and revenue.

DFC is brought to you by Xplor, the first global platform integrating software, payments, and commerce-enabling services to help businesses thrive.

Click here to get in touch today to find out how we can help your business.

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