Direct debit is a payment method that lets businesses withdraw funds directly from a customer’s bank account with their permission. This corresponds to ACH debit transactions in the US, processed as charges in the Straddle API. It’s the most cost-effective way to collect recurring payments, with failure rates below 1% and processing costs significantly lower than card payments.
Direct debit is ideal for subscriptions, utility bills, loan payments, and any recurring transactions where you need payment certainty.

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How direct debit works

Direct debit operates as a “pull” payment system where you initiate the withdrawal from your customer’s account. This is equivalent to ACH debit processing. Here’s how the process flows:
1

Customer authorizes payment

Your customer completes a Direct Debit Mandate (DDM) that includes their bank details and authorization for you to collect payments.
2

Bank verifies the mandate

The customer’s bank verifies and activates the mandate, typically within 1-3 business days.
3

You collect payments

Send payment instructions to your bank, which processes them through the clearing system (ACH, Bacs, or SEPA).
4

Funds settle in your account

Payments settle within 1-3 business days with automatic reconciliation and reporting.

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When to use direct debit

Direct debit works best for predictable, recurring payments where you need reliability and low costs.

Perfect for recurring payments

Subscriptions, memberships, utility bills, insurance premiums, and loan payments

Ideal for B2B transactions

Supplier payments, professional services, software licenses, and lease payments

Great for variable amounts

Utility bills and usage-based charges that change monthly

Excellent for high volume

Process thousands of payments efficiently with minimal manual work

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Benefits of direct debit

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For your business

Direct debit offers significant advantages over other payment methods:
  • Lower costs: Pay £0.15-£0.40 per transaction versus 2.5-3% for card payments
  • Better cash flow: Predictable payment timing with less than 1% failure rate
  • Less admin work: No chasing payments or processing invoices manually
  • Higher retention: Customers are less likely to churn when payments are automatic
  • Flexible amounts: Change payment amounts without re-authorization

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For your customers

Your customers benefit from:
  • Convenience: Never miss a payment or incur late fees
  • Protection: Comprehensive guarantee schemes protect against errors
  • Control: Can cancel anytime through their bank
  • Budgeting: Predictable payment schedules help financial planning
  • Discounts: Many businesses offer reduced rates for direct debit users

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Security and protection

Direct debit includes robust consumer protections that vary by region:
  • Immediate refund for any payment errors
  • Advance notice required before payment changes
  • No time limit on refund claims
  • Banks must refund first, investigate later
  • Customers can cancel anytime

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Setting up direct debit

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What you’ll need

Before you can accept direct debit payments, ensure you have:
  1. Business bank account with direct debit capabilities
  2. Service User Number (SUN) or equivalent identifier
  3. Compliant software for processing mandates and payments
  4. Data protection procedures that meet GDPR requirements
  5. Staff training on direct debit regulations

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Customer authorization options

The fastest and most convenient option:
  • Secure web forms with digital signatures
  • SMS or email verification
  • Processing within 24 hours
  • No paper storage required

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Direct debit vs other payment methods

Understanding how direct debit compares helps you choose the right payment method:
FeatureDirect debit (ACH debit)Credit cardsBank transfersStanding orders
Cost per transaction£0.15-£0.402.5-3% + fees£0.25-£5Free-£0.50
Failure rateLess than 1%3-5%2-3%1-2%
Variable amounts✓✓✓✗
Automatic recurring✓Limited✗✓
Customer controlMerchant-ledCustomer-ledCustomer-ledCustomer-led
Setup time1-5 daysImmediateImmediate1-2 days
Direct debit offers the best combination of low costs, high success rates, and flexibility for recurring payments.

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Managing direct debit payments

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Advance notifications

You must notify customers before collecting payments:
  • First payment: At least 10 working days’ notice
  • Amount changes: At least 10 working days’ notice
  • Regular collections: Annual schedule or before each payment
  • Date changes: Reasonable advance notice

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Handling failures

When a direct debit fails, follow these steps:
  1. Check the failure reason (insufficient funds, account closed, etc.)
  2. Retry the payment according to scheme rules (usually once)
  3. Contact the customer to resolve the issue
  4. Update payment details if the account has changed
  5. Consider alternative collection if direct debit isn’t suitable
Never attempt to collect payments after a customer cancels their mandate. This violates direct debit rules and can result in penalties.

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Cancellations and disputes

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Customer rights

Customers can cancel direct debit arrangements:
  • Through their bank: Takes effect immediately
  • Through your business: Should also update bank records
  • No penalties: Cancellation rights are protected by law
  • Future payments only: Doesn’t affect past transactions

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Dispute resolution process

1

Customer reports issue

Customer contacts their bank about an incorrect or unauthorized payment.
2

Bank issues refund

Under guarantee schemes, banks refund immediately while investigating.
3

Investigation period

Banks investigate the claim, typically within 30 days.
4

Final resolution

If the claim is valid, you bear the cost. If invalid, the customer repays the bank.

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International considerations

Direct debit systems vary by country but share common features:

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Regional differences

  • Processing times: 1-5 business days depending on the system
  • Cost structures: Generally £0.15-£0.50 per transaction
  • Market penetration: Over 90% of UK adults use direct debit
  • Technical standards: ISO 20022 in Europe, proprietary elsewhere

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Major systems

UK Bacs

4.8+ billion transactions annually with 3-day processing cycle

US ACH

29+ billion transactions worth $72+ trillion per year

SEPA

Covers 36 countries with standardized euro transactions

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Best practices for success

To maximize the benefits of direct debit:
Communicate clearly: Explain the benefits and protection to build customer confidence.
Make setup easy: Offer online mandates with pre-filled information where possible.
Be transparent: Always notify customers before collecting payments or making changes.
Handle disputes professionally: Respond quickly and follow scheme rules to maintain your reputation.

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Next steps

Ready to implement direct debit for your business? Here’s what to do:
  1. Contact your bank to discuss direct debit facilities
  2. Choose a payment provider that offers direct debit services
  3. Implement compliant systems for mandate management
  4. Train your team on direct debit procedures
  5. Start with a pilot to test your processes
Direct debit remains one of the most efficient payment methods available, offering benefits for both businesses and customers while maintaining strong security protections. By following best practices and understanding the regulations, you can build a reliable payment collection system that scales with your business.