Direct Debit: Analyses, Advantages and Disadvantages

Direct debit as an article topic

The term "direct debit" is usually applied in financial institutions. It is used frequently by banks and insurance companies. Also, other companies still make use of the term. Sometimes people mistake direct debit with standing oder but they are quite different. Though the two terms require debits from bank accounts, direct debit is initiated by companies to banks while standing orders are initiated by banks to individuals account numbers.


In a clearer way, in direct debit, a person fills a direct debit form with a company and signs for his or her account to be debited on a particular day of the month or a particular time in a month. The company forwards the form to the bank for approval and once approval is given the person's account gets debited at that given interval. But in standing order, an individual fills standing order form with the bank and gives order with the bank that certain amount of money be debited from his account to an individual or company's account at a particular interval.

What is Direct Debit?

A direct debit or direct withdrawal is a financial transaction in which one person (or company) withdraws funds from another person's bank account with that persons approval. Before the direct debit starts, the account holder or the payer signs what is called direct debit mandate form. Direct debit mandate form is a document. It is also called DDM form and it contains basic information of the payer.

What are the Contents of Direct Debit Mandate Form?

The major contents of a direct debit mandate form are as follow:

• The full name of the payer (the account holder in a bank that wants to be making the payment to a particular company at certain intervals)
• The contact address of the payer
• The office or work address of the payer if any
• Amount to be debited
• The bank account details of the payer
• Signature of the payer and date
• The date of debit
• The start up month
• The signature and name of officers of the payee's company and date

When and Why does Direct Debit fails

Sometimes people that signed up for direct debit from their bank accounts are not always happy when they find out that they are not always debited. In insurance for instance, customers that signed up for direct debit are not happy when not debited for some reasons. One of the reasons is because it can make them to not being able to pay their premiums as of when due. 

Why direct debit fails are:

• Irregular signature
• Late approval from the bank
• Insufficient fund
• Employees error and laziness 

Irregular Signature

This is one of the major reasons direct debit mandate fails. Sometimes bank customers do not sign properly when filling direct debit mandate forms with any company they want to be debiting money from their bank accounts at a particular time. This makes banks to reject such instruction as what is in the direct debit form does not match with what the banks have in their signature specimen. Sometimes account holders feel angry as they are not debited as instructed until they found out they were the cause due to their irregular signature.

Late Approval from the Bank

Some times direct debit takes time to be approved by the bank of the payer. This is one of the major reasons direct debit fails. Sometimes the account holder in a bank feels angry on why the payee has not started debiting from his bank account.

He may visit the company or the individual payee and create scene because the direct debit he filled has not been working. He may not know the fault is not from the company (the payee) until he is told that the fault is from his own bank. Some banks delay debit to start leaving their bank account to another account. This is not good because some customers are not happy it.

Understanding direct debit by Uzochukwu Mike

Insufficient Fund

Some customers may expect their direct debit to work without having idea that they are having low account balance. Sometimes they may not be aware that their balance is low as this may be as a result of monthly account maintenance charges. Some organizations or individuals cannot debit from the payers account once the account balance of the payers are below the minimum withdrawable balance.

Customers on direct debit should do well to check their account balance frequently to avoid their direct debit from failing on the due debit date. They can regularly check their account balances using their banks mobile applications or USSD code. Also, their accounts should be properly funded beyond the amount the payee usually debit at a particular interval to avoid any failure in debit.

Employees Error and Laziness

Any company that wants to do well and excel in the market have to employ capable hands. Doing this will make the activities of the company sound and have good record. It will also make customers of the company happy and will make them to do more businesses with the company. But when the workers do not do their jobs well, it brings down the record of the company and make the customers unhappy.

One of the reasons direct debit do not work is because the officers or employees that suppose to treat direct debit mandates did not do their jobs. Some employees are so lazy that they did not treat customers request as supposed. Some customers have filled direct debit mandate forms with insurance companies and the employees in charge did not forward the forms to the individual banks for immediate action. Some later forwarded the forms but did that late. This is one of the reasons people's direct debit do not work or work late.

Advantages of direct debit

Advantages of Direct Debit

• Direct debit makes customers to pay their bills on time
• It makes policyholders in insurance companies to pay their premiums as of when due
• Direct debit saves payers the time and stress of going to banks to make payments or sign cheques
• It makes business transactions to be carried out fast as payment is automatic 
• It helps companies and individuals to plan ahead as they estimates the amount of money they will receive at a particular interval 

Disadvantages of using Direct Debit

The disadvantages of using direct debit are as follow:

Unable to carryout other important transaction

Maybe you are planning to make an important payment at a particular point it time and you forgot that that particular date is you direct debit date, you can feel angry at that point when you check and find out that the company you set up the debit with has debited from your account. You may feel bad at that point but you have to keep going because it was an agreement between you and the company. 

Charges

Sometimes, customers on direct debit are being charged anytime some money is debited from their accounts. The charges can be SMS charges or service charges. These charges usually make the account balance of the payee to be irregular. This irregularity can make customers to be unable to carryout some other transactions because of the cut on the main balance.