How to set up direct debit for customers
If you offer an ongoing service and flexible ways to pay, having a direct debit option can be good for you and your customers.
In this guide, you’ll learn what direct debit payments are, how they work, how long they take to process and how to set a direct debit option up for your customers. Plus, we’ll cover several frequently asked questions about direct debits.
What is direct debit?
Direct debit is a quick, safe and convenient way of collecting payments straight from your customers’ bank accounts without them having to approve every transaction.
It’s worth noting that not every type of bank account will allow direct debits.
In Australia, bank-to-bank direct debit payments are handled via a Bulk Electronic System (BECS) managed by AusPayNet.
How does direct debit work?
The direct debit process is straightforward and allows you to receive variable and one-off payments plus regular, fixed amounts. Here’s how it works:
the customer completes a direct debit form (also known as a mandate) authorising you to take payments from their bank
the customer receives a notification just before the direct debit payment is due, informing them when and how much money will be debited
funds are automatically transferred from the customer’s account to your business account on the due date.
What are the benefits of direct debit?
Direct debit payments help you get paid more efficiently, so if you don't accept this payment method, you could be missing out on additional revenue.
Here are some of the benefits of direct debit:
Save time
Direct debit saves you time in 2 ways:
payments are automated, so you spend less time chasing customers.
you can instantly reconcile payments instead of wasting hours checking bank statements manually using accounting software like MYOB Direct Debit.
Direct debit works seamlessly with your accounting software throughout the entire payment process, so you can spend less time on repetitive admin and chasing down payments.
Get paid faster
It can take 30 days or more for a customer to pay an invoice. Plus, if they don’t pay on time, your staff will have to follow up.
According to Illion, the average late payment time for Australian businesses in 2021 is 11.2 days after the invoice due date.
But with direct debit, payment is triggered as soon as you send the invoice, and bills get settled within a few days. Direct debit removes the stress of chasing up and processing payments, so you get paid faster every time.
Improve cashflow
Cashflow often determines the success or imminent failure of a business.
The Australian Securities and Insolvencies Commission (ASIC) found that almost half (47%) of insolvencies were due to inadequate cashflow or high cash use.
If your business has had challenges in achieving positive, steady cashflow, building direct debits into your offering could help turn things around.
Offer flexible payment options
Adding direct debit to your payments mix allows you to offer more flexible payment options to customers. For instance, breaking up lump sum payments into smaller instalments to help customers spread out the cost.
Direct debits also allow you to offer monthly subscriptions (think gym or sporting club memberships or even meal kit deliveries), regular service fees, monthly retainers or collect rent from tenants.
Reduce churn
Where direct debit is used to receive ongoing renewal payments for certain services, customers don’t necessarily need to take action to continue paying you. This reduces friction in the payment process and, as long as your customer is happy with your services rendered, they’re more likely to continue with you.
Forecast more confidently
Direct debit payments arrive automatically on a specific date, meaning there’s less chance you’ll need to chase missed payments. This gives you more surety when forecasting revenue, allowing you to plan your business and investment activities with confidence.
How long do direct debits take to process?
Direct debit payments are fast, but not instant and can take up to 5 working days to clear, provided there are no service interruptions.
The transfer isn’t as fast as other online payments because it’s a type of “pull” payment – you’re requesting funds from the customer – rather than a “push” payment when a customer sends funds to you.
How do you set up a direct debit?
Choose a direct debit provider
If possible, set up your direct debit provider account through your online accounting software to make the sign-up and bank reconciliation easier.
Alternatively, you can research the market and sign up via a direct debit provider’s website.
Connect your bank account
Enter the required identification and business info, as well as the bank account details where you want to collect direct debit payments.
Create a direct debit request
Send your customers a direct debit request form, or include a link on your website or invoice, which they can fill out online securely. Once they have authorised the mandate, you can start taking payments from them.
Choose the customer
You can request one-off or regular payments from your chosen customer via your direct debit provider’s software interface or your accounting or invoicing system.
Confirm payment schedule and details
You must notify your customer of the payment schedule and details in advance to ensure they have sufficient funds in their account. Again, this notification should happen automatically as it’s a regulation of the direct debit system.
Payment clears in your account
You’ll see the invoice payment in your account, minus a small transaction fee usually capped at a few dollars.
Additional direct debit FAQs
Can a direct debit be cancelled?
Yes, customers have the right to cancel a direct debit transaction and receive a refund, but the rules around cancellations vary depending on where your customers are based.
To maintain goodwill and your customers’ trust, it’s in your interest to be flexible with cancellations and refunds.
How much do direct debit payments cost?
Charges vary from one direct debit provider to another, so it pays to research first.
Many providers charge a low percentage flat rate, such as 1%, and then cap it so that you don’t pay excessive amounts for more significant transactions.
Reputable providers are unlikely to charge setup or cancellation fees and you should only be charged when you use the service.
When shouldn’t a business use direct debit?
Direct debit is a suitable payment method for many different transactions. However, there are a few cases when it’s unsuitable, such as:
instant clearing of funds, like in eCommerce sales, because payment can take a few days to clear
high-value physical goods due to transaction limits
transactions where the risk of high volumes of refund requests is high.
Set your customers up on direct debit today
Direct debit payments help you get paid quicker, improve your cashflow, reduce churn, forecast more confidently and offer flexible payment options to your customers. They provide a more efficient, safer, and convenient way of collecting customer payments directly from their bank accounts and automatically reconcile bank transactions in your accounting software.
MYOB lets you cut back on repetitive admin and chasing up payments so that you can open your business up to subscriptions, memberships and other types of regular payment plans.
Disclaimer: Information provided in this article is of a general nature and does not consider your personal situation. It does not constitute legal, financial, or other professional advice and should not be relied upon as a statement of law, policy or advice. You should consider whether this information is appropriate to your needs and, if necessary, seek independent advice. This information is only accurate at the time of publication. Although every effort has been made to verify the accuracy of the information contained on this webpage, MYOB disclaims, to the extent permitted by law, all liability for the information contained on this webpage or any loss or damage suffered by any person directly or indirectly through relying on this information.