Direct debit is a payment method that authorizes a third party – typically a business or organization – to automatically pull funds directly from a payer’s bank account on agreed dates. The account holder grants this permission by signing a direct debit mandate (or authorization), after which the payee can initiate recurring collections without requiring the payer’s approval for each individual transaction.
How direct debit works:
The payer signs a mandate giving the payee permission to collect payments from their bank account. The payee then submits collection instructions to their bank or a clearing organization, which debits the payer’s account on the agreed date and transfers the funds. Direct debit differs from a credit transfer in that payment initiation rests with the payee (the receiving party) rather than the payer – the business collects the funds rather than the customer pushing them.
Key facts about direct debit:
- Commonly used for recurring payments including utility bills, subscription services, loan repayments, and insurance premiums.
- Requires a signed mandate (authorization) from the payer before any collection can take place.
- Schemes differ by market and currency – each governed by its own rulebook covering timelines, pre-notification requirements, and dispute resolution.
See also: Autogiro, SEPA Direct Debit