Direct Debit

Direct Debit, also known as direct withdrawal, pre-authorized payment (PAP) or pre-authorized debit (PAD) is an automatic payment collection system which can be used for both regular and occasional payments.

In order to start using this service the account holder has to contact his/her bank to sign a Direct Debit Mandate form, which is the instruction that authorizes the creditor (i.e. the merchant from which your are buying good or services) to collect the payment from the customer’s bank account.

It is important to keep in mind that direct debit payments are not immediate, since the account holder must be informed prior to the commencement of the fund collection. Indeed, it takes as a minimum of three working days until the payment can be cleared.

As its name clearly states, direct debit is a direct payment method for goods and services through which the merchant starts the collection process. In other words, its main feature is that it is pull based.

The second feature is that since it is “direct”, the card processing networks (i.e. Visa, MasterCard or American Express) are not implicated in the process and the interaction is exclusively between the customer’s and the merchant’s bank.

Direct Debit includes three main security measures:

• Cancellation can be done at any time
• It protects against errors committed by the bank through a Money Back Guarantee Policy
• Any changes in amounts or dates are previously notified to the account holder

Frequently bank accounts have a buffer zone, which means that in case there is not enough balance in the account to pay a direct debit, you are allowed to go slightly over your limit without having to pay a fine. However, if the buffer zone is exceeded it is highly probable that the bank will not pay the direct debit or that the account holder might be subject to a penalty fee.

Direct debit is subject to domestic law. Therefore, the rules for it might change from country to country. Likewise, it is territorially constrained as it usually only works for national transactions. The only exception is the Single Euro Payments Area (SEPA) Direct Debit scheme which operates along the SEPA countries in parallel to its national direct debit systems. The scheme allows to retailers operating in these countries to directly collect payment from their SEPA debtors’ accounts in Euros. Despite the fact that bank accounts in these countries might be held in another SEPA currency different than the Euro, the transfer of funds between banks always takes place in Euros.

In the United States, Automated Clearing House (ACH) is the national scheme for electronic funds transfer and it is in charge of processing direct debits in the country.