Direct debit vs recurring payment: What are the differences?
As a business, you likely have or will have a good number of long-term customers making payments to you. You’ll need a good, reliable method to receive these payments.
Two available options to you in Australia are direct debit payment and recurring card payments. There are several differences between the two methods and depending on the circumstances, one might suit your needs better than the other.
Here are some things you should consider when it comes to choosing direct debit vs recurring payment.
What is direct debit and its uses?
The direct debit payment system is a system where you as a business can directly pull money from your customers’ bank accounts. Of course, this is done with the consent of your customers.
Your customers will have to fill out a Direct Debit Mandate form before allowing you to directly debit from their accounts. Once that is done, you can directly pull from your customers’ accounts to settle their bills when payments are due. With this method, you can settle both one-time and recurring payments.
Direct debit payment can be used in a variety of different situations, but it is most commonly used when it comes to paying monthly utility bills, managing both online and offline subscriptions, and making one-time payments to businesses.
What are recurring payments and its uses?
Just like direct debit, recurring card payments also only can happen with authorization from your customers. The difference is that, unlike direct debit, you don’t pull directly from your customers’ bank accounts.
Instead, your customers will provide their debit or credit card information. You will then pull the amount according to their bills from their debit or credit card. The recurring payment method can also be used for both one-off and repeat payments.
When it comes to direct debit vs recurring payment, recurring payments are often used for subscription services that need to be cleared quickly, payments in foreign currencies, and purchasing goods of higher value.
Differences between direct debit vs recurring payment
While it may seem like the only difference when choosing direct debit vs recurring payment is where you’re pulling money from for customer payments, there are actually more differences.
Here are some things to consider before you decide on the best choice out of direct debit vs recurring payment for your business.
1. Source of funds
Both direct debit payments and recurring card payments require you to have the customer’s full authorization before they can happen.
Direct debit pulls funds straight from your customer’s bank account to settle their bill after they authorize you to do so.
On the other hand, recurring payment charges your customer’s debit or credit card the amount that they owe you.
2. Timing of payment
Recurring payments clear faster than direct debit. Typically recurring payments happen immediately or arrive the next day. Direct debit, however, can take a few business days to arrive.
This is a factor in why some people prefer recurring card payments over direct debit payment.
Subscriptions that need to be paid immediately before usage, for example, will often charge from their customers’ cards instead of their bank accounts for faster clearance.
3. Cancellation
One difference that can be a factor in the direct debit vs recurring payment decision is the ease of cancellation for your customers. As a business, you don’t want your customers to cancel their payments.
If you have a subscription model, you would of course want your customers to stay subscribed to you. However, a way to gain your customer's trust is to give them autonomy.
Direct debit allows customers to cancel their payments through the bank while recurring payments only allow you as the business to cancel transactions.
4. Safety & security
When a direct debit payment fails and the money doesn’t go through, the bank or direct debit facilitator will provide a full refund to your customer.
You don’t have to worry about settling customer disputes over failed payments. On the other hand, recurring card payments are trickier to resolve.
In the case of failed payments, you might have to refund your customer’s money and it could cost your business more than it should.
5. Fees & other charges
When it comes to deciding direct debit vs recurring payment for your business, you should consider the fees. Not only is the amount that you pay for each choice different, but the way the costs are calculated is different. Recurring payment fees are a little more straightforward to calculate.
You are charged a certain amount on a monthly basis when you opt for the recurring payment method. The direct debit payment system fees are small but are charged based on a per-transaction rate.
6. Failure rates
Out of the two, direct debit payment is more stable and has a lower failure rate. This is because recurring payments rely on cards, and there’s always the danger that card payments may fail.
As direct debit draws directly from your customer's bank accounts, you come across less risk of failure.
If you are considering direct debit vs recurring payment as the suitable payment method, the difference in failure rates might tip the scales for you.
You should consider whether you are looking for faster payments or more reliable payments. Recurring card payments may be faster but are riskier, while direct debit is the opposite.
Interesting read: 5 best expense management software in Australia
Which is a good option for your business?
The answer to whether direct debit vs recurring payment is better for your business depends on what it is that you’re looking for in terms of payments.
Overall, both payment methods are reliable ways to make sure that you have a steady cash flow. They both help you sort out your payments from long-term customers.
As a general rule, however, if you’re looking for faster clearance for payments, then recurring card payments will be the best option for your business.
But if you don’t mind waiting for your payments to clear, direct debit might have the edge over recurring payments. Direct debit boasts lower fees than recurring payments.
You also don’t have to worry about having to refund your customers. Debiting straight from your customers’ accounts is the more reliable option.
FAQ's
Yes, in some ways. What automatic means, in this case, is that recurring card payments can’t be canceled by the bank. As a business that is paid by a customer, you’re the entity with the right and responsibility to cancel your customer’s recurring payment.
No. Subscriptions can be paid with both methods when it comes to direct debit vs recurring payment. If your business offers a subscription as a product, your customers will be able to regularly pay for that subscription using both direct debit and recurring payments.
Fees charged for direct debit differ from provider to provider. Popular and reputable providers won’t have hidden fees or charge for failed transactions. They often charge at a low percentage, with a sum cap so that you don’t take too big of a cut for larger transactions. Given the low rate, you can save a fair bit of money using direct debit, sometimes up to 6% or 7%.
It depends on what it is that your business is looking for. If you are looking for faster payment clearance, then recurring payments might be the better option. However, direct debit offers a lower fee and has the stability that comes with the fact that bank accounts can’t expire. If you want predictability when it comes to your payments, then direct debit might be the right choice for you.