Are Direct Debits as cheap as you think they are?

There’s a ‘party line’ about Direct Debit: that it’s a cheap way to guarantee your cashflow month to month. But if you’re a merchant using DD, you might have spotted the downside – in terms of customer satisfaction as well as direct costs.

Just to be clear, a Direct Debit is a regular variable payment that’s controlled by the merchant – as opposed to a Standing Order, where the customer instructs their own bank to debit a regular fixed amount. Customers can cancel Standing Orders with just a few clicks or a nod to a bank clerk...but once they’re on a Direct Debit, they’re effectively surrendering control of their own account.

It might be great for the merchant’s cashflow, but every debit that exceeds expectations is one nail in the coffin for the customer relationship.

And what about payment costs?
Of course, it’s true that Direct Debit is far cheaper than processing manual payments. Merchants benefit from direct invoice to payment reconciliation, and spend less on letters, phone calls and agencies to collect all those late payments. There’s also the major benefit of higher customer retention. So with an average cost of 20p per debit, it looks like the ideal solution for merchants.

But there’s a hidden cost
Not every Direct Debit leads to payment. Currently in the UK, reversals – unpaid debits – run at about 4%, giving merchants a serious headache.

Look at the impact on costs:

A merchant pays up to £30 to set up a new DD to replace the payment that’s failed. With 4 reversals in every 100 transactions, that’s an extra £120 added to payment costs, or an average of £1.20 per customer.

Add that to the 20p that you already pay for each debit, and the real cost of DD can be around £1.40. Much more than you might have expected.

There are other complications, too. A customer’s account could be closed or frozen due to fraud or other legal proceedings. If a customer changes banks, the merchant has to spend time and money setting up a new DD. And the merchant has to keep a record of every DD mandate for a period of 7 years. That’s a lot of archiving!

So what’s the alternative?
Dynamic Debit – a new electronic payment option, like the service offered at Payswyft.com. Dynamic Debit is set up by the customer, not the merchant – an immediate plus if you’re concerned with customer satisfaction. The payment is linked to a customer’s debit (or sometimes credit) card, and allows secure, variable and indefinite payments, just like a Direct Debit.

The difference is, the customer gets to stay in control.

They can set a payment limit, say a £50 maximum, and receive email or SMS alerts if the debit exceeds their threshold. Then they can approve the payment with just a few clicks, or query it with the merchant first.

For any business, it’s a strong message – you’re putting the needs of your customers first.

Cost-wise, Dynamic Debit works out at around 35 pence per transaction. And with virtually no risk of cancellation, reversal or chargeback, there’s no need to worry about the hidden extras that come with Direct Debit.

In other words, Dynamic Debit is a win-win for merchants and consumers: all the simplicity and security you get from Direct Debit, without the additional costs or built-in pressure on customer relations.