Direct debit: what is it and how does it compare to other payment methods?

CAROLYN BREEZE

Bank-to-bank direct debit, sometimes referred to simply as a direct debit or bank debit, is a way of pulling money directly from one bank account to another. It has been around for decades, having originated in the UK as a paper-based system in the 1960s.

Direct debit payments are bank-to-bank – there are no card networks involved in the direct debit scheme. However, in Australia, direct debit may also refer to the automatic transfer of money from your credit card.

Applications for direct debits have broadened in the past decade and its popularity continues to increase – the latest Reserve Bank of Australia (RBA) data showed around a 5% year-on-year increase in the total number of debit transfers in December 2020. In fact, GoCardless’ Payment Preferences report found that 46% of Australians were likely to choose bank debit for household bills.

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What can I use a direct debit for?

You can use a direct debit to make a number of different payments, particularly regular or recurring ones. For example, you might use a direct debit to pay for your energy, phone or internet bills, your children’s school fees or your insurance premiums. Many real estate agents also allow you to choose it as a way to pay your rent. 

Additionally, you can opt to use direct debit to pay for subscriptions — anything from gym memberships or a newspaper subscription to other subscriptions such as Netflix. 

Finally, direct debits may be an option for paying things off in installments, such as when paying off a loan or making repayments on a credit card or buy now pay later account. Financial regulator ASIC notes on its Moneysmart website that in some cases, a service provider may require you to pay for its services by direct debit. Moneysmart also suggests that if possible, it could be a good idea to set up direct debits to come out of your account the day after you get paid, to help ensure there is always enough money in your account. 

How do I set up a direct debit payment?

Setting up a bank debit involves an agreement between you, your bank and the recipient. The exact process for doing so can vary depending on your preferences and the provider you choose. In some cases, direct debit can be set up in a few minutes online, or on paper via a direct debit request form provided by the merchant, which then goes to your bank and authorises the third party to take payments from your account. 

In other instances, you may be asked to provide your bank account details upon signing up for a service, or when setting up your repayments for a credit card or loan. In these scenarios, your loan contract, credit card or service agreement will generally include a clause that nominates direct debit as the preferred or required payment method for your periodic payments. It is a good idea to carefully read the contract to understand the requirements and any potential fees that may apply, including any dishonour or overdraft fees if there are insufficient funds when the payee attempts to withdraw the agreed money from your account.

What do I do if I want to cancel a direct debit payment?

Generally speaking, there are two ways to cancel a direct debit: you can request a cancellation through the recipient or contact your bank directly. It may be a good idea to do both if you have the time. You can cancel a direct debit at any time, but do remember that your financial institution or service provider may need a few days’ notice. 

If you’re cancelling a direct debit but want to continue using the membership, subscription or service it is paying for, make sure you’ve arranged an alternative mode of payment, otherwise, you could incur a missed payment fee or lose access to the service. You may also want to keep a copy of any emails or letters you send, in case you need to prove that you asked for the direct debits to be cancelled. 

Key considerations before setting up a direct debit

Direct debits can be convenient and low cost, however, there are a few things to look out for, such as fees if you do not have enough in your account when the debit is due. They may assist in keeping on top of payments, as once you’ve finalised a direct debit request, it will automatically make payments for you. That said, it is a good idea to keep an eye on these and to check the amounts debited are correct, rather than ‘setting and forgetting’ them. 

In Australia, the Bulk Electronic Clearing System (BECS) that enables bank debits to occur protects consumers by providing protections for cancellation requests and refunds. For example, if a customer’s bank receives a request for a direct debit cancellation, it must stop taking further payments from the customer’s account. The bank can’t charge any overdraft fees to cover a cancelled direct debit, and if a customer is wrongly charged after cancelling a direct debit, the bank must refund them. The system also requires any merchants to adhere to strict compliance obligations.  

Opting to make a payment via direct debit means you’re using money from your own savings, rather than relying on credit, so as long as there’s enough money in your account, it eliminates the risk of not paying the debt on a credit card off on time and accruing interest. 

There are a few things you should consider both before and after initiating a direct debit agreement. 

  1. Think how much and how frequently your account will be debited and ensure that these recurring withdrawals will fit into your budget. 
  2. Make sure you’ve got enough money in your account. If a direct debit payment fails to process due to a lack of funds, there is a risk that your credit rating could be affected and you may have to pay a direct debit dishonour fee – which costs an average of about $13.33 each time, according to a Canstar survey.
  3. Once you’ve set up a direct debit, you may want to check back periodically to make sure the provider is taking out the correct amount of money each time. If you’re unsure about a payment or want a list of what direct debits you have set up, contact your bank. It is also a good idea to review your subscriptions regularly to determine if you feel you are still getting value from them, rather than using a set-and-forget mentality.
  4. Check whether the provider charges a fee for direct debit and compare this with the costs of other payment methods.

The comparison table below shows some of the savings accounts on Canstar’s database for a regular saver in NSW. The results shown are based on an investment of $100,000 in a personal savings account and are sorted by Star Rating (highest to lowest), then provider name (alphabetically). For more information and to confirm whether a particular product will be suitable for you, check upfront with your provider and read the Product Disclosure Statement or other terms and conditions before making a decision.

Other payment options and how direct debit compares

When making payments, direct debits are just one of a number of options you may consider. Depending on your circumstances and your service provider’s requirements, some alternative payment methods could include:

  • Electronic Funds Transfer (EFT), such as Pay Anyone or BPAY
  • Transfer via online payment platforms, such as PayPal
  • One-off or recurring payments using a credit card or debit card
  • Bank cheque
  • Money orders

EFTs are also cost-effective and secure and come with the same protections that payments made through bank debit include. However, these payments are processed manually – via online banking, for example – and require you to enter them yourself or set up a recurring payment. 

Online transfer options like PayPal work similarly to EFTs. Depending on whether you use your credit/debit cards, a bank account or real-time payments, there are usually varying fees associated with the use of an online payment platform. You will need to manually make the payment as and when bills are due. 

Credit or debit cards may offer a safe and convenient way to pay for bills, whether it’s once-off or recurring. However, many service providers charge fees for debit/credit card payments and, if you have your credit card stored, you will have to update your details manually once it expires. As an additional caution, it can pay to note the scheduling of recurring payments from your credit card to avoid missing the card balance repayment and end up paying interest.

Finally, on the more traditional end of the payments spectrum, bank cheques and money orders are another way to pay. Only the nominated ‘payee’ listed on a money order or cheque is able to cash it, reducing the risk of fraud. Additionally, money orders can be tracked and replaced if they go missing. They do, however, come with the disadvantage of fees – money orders can cost around $11, while bank cheque fees will vary from bank to bank.   

It’s important to carefully weigh up your payment options to ensure you choose the one that suits your financial needs. Keep in mind, there may be processing times and fees associated with every mode of payment, so you may want to check with the provider or contact your bank before signing up for any of them.

While direct debits can be a convenient option to help you keep on top of regular and recurring expenses, it’s important to weigh up your options carefully to decide what the right payment method is for you. 

Main image source: GaudiLab/Shutterstock.com

This article was reviewed by our Sub Editor Tom Letts and Finance and Lifestyle Editor Shay Waraker before it was published as part of our fact-checking process.

Carolyn BreezeAbout Carolyn Breeze

Carolyn Breeze is the ANZ General Manager at recurring payments platform GoCardless. She has more than 15 years of experience in the technology sector, including international experience within the fintech, e-commerce and telecommunications sectors. She was awarded one of CEO Magazine’s IT and Telecommunications Executive of the Year awards in 2018 and has been recognised as one of the top 20 Women in Fintech by Business Insider. You can find her on LinkedIn.

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