Direct debit is a payment method that lets an authorized payee initiate collection from a payer’s bank account under a mandate. It is commonly used for recurring or invoice-based payments.
How does direct debit work?
The payer gives a mandate, the payee submits a collection through its bank or provider, the banking scheme processes it and funds settle subject to scheme timing and return rules.
Mandate versus payment authorization
The mandate establishes permission and scope for collections. Each debit still needs a valid amount, date and reference under the scheme and agreement.
What does it cost?
Pricing may be fixed per collection, percentage-based or combined with failure and refund fees. For example, a 0.8% fee capped at $5 on a $1,000 debit costs $5, not $8.
What happens when a debit fails?
Failures can result from insufficient funds, closed accounts, invalid mandates or bank rejection. Record the reason, retry rule, customer notice and outstanding balance.
What controls are needed?
Retain mandate evidence, secure account data, provide required notices, reconcile collections and returns, and stop debits promptly after cancellation.
