Direct debit vs Standing Order - what’s the difference?

Standing Orders and Direct Debits are both methods of making payments for goods and services that are set up to pay automatically.

But whilst they may look the same from the outside, there are a number of fundamental differences, relating to how they work, how they are set up and who’s in control. Whether you are a customer or a business, it is important that you know about these.

So in this post, we’re comparing and contrasting Standing Orders and Direct Debits to see what things are the same and what things are different.

Click the links to jump to each section...

· What is a Standing Order?

· What is a Direct Debit?

· Who is in control?

· How is Direct Debit different from a Standing Order?

· Standing orders for small businesses

· How to set up a Direct Debit

· Which is right for you?

· Direct debit vs Standing order comparison table

What is a Standing Order?

A Standing Order pays a set amount of money on a set date or after a set interval.

These have been around almost as long as banking itself and as the name implies, they are an order to your bank that they leave on file (or “standing”).

For example, if you have rent to pay, you could set up a Standing Order with your bank to pay your landlord every month or every quarter.

In the past, they were used a lot in the publishing industry and customers would set up Standing Orders to pay for magazine or newspaper subscriptions.

What is a Direct Debit?

A Direct Debit is a simple and easy way of making regular and occasional payments to another business or organisation, such as utility bills, or mobile phone bills.

It works by you giving permission to a business or organisation to take money from your bank account by giving your account number and sort code.

The organisation that you’re paying will need to provide you with the amount you will be paying and when the money will be collected - before any payment is taken from your account.

Money is collected from your account automatically and if there are any changes to when it’s going to be collected or the amount, you will be notified before it happens.

Standing Orders vs Direct Debits - who is in control?

The biggest difference between Standing Orders and Direct Debits is that of control.

With a Standing Order (or “SO” on your statement), the customer is in charge of setting them up with their bank. The value of the order can only be changed by the customer which they will do directly with their bank.
A Direct Debit Mandate (or “DDM”) is set up by the customer with the business. Essentially the customer gives the business permission to take an unspecified amount of money from their bank when it needs to. The business then sets this up using a system that links to the BACS network.

Of course, this sounds alarming at first sight because, for Direct Debits, the control is all in the hands of the business. They decide when they take the money and how much they take.

Now the vast majority of Direct Debit Mandates are set for a specific date and for a specific amount of money. For example, you may agree to pay for your phone contract on the 31st of every month and you’ll know how much it will cost.

But the good news is that if the business takes the wrong amount or takes money when it shouldn’t have, then the consumer is covered by the Direct Debit Guarantee. So, although technically the business is in full control of the Direct Debit process, the customer is fully protected.

How to set up a Direct Debit - the differences

When a customer wants to make a regular payment, they have a choice between a Direct Debit and a Standing Order.

When they wish to use the Standing Order, they will need to fill in a form and send or take that to their bank. The bank will then lodge that on their account record and the payment will be made according to the order.

Conversely, when the customer wishes to use a Direct Debit, the business provides them with a form that is usually in electronic format. This could be on their website or provided using a specific link. The customer fills in their details and the business then sets up the DDM on a specialist, secure system such as PaySuite.

The system transmits the data into the BACS system to tell the bank that the Direct Debit Mandate has been set up and then when the payment is due, the business tells the bank (via PaySuite) how much should be paid.

One of the reasons that Direct Debits have become so popular is that it is much easier for the business to set up and much more convenient for the customer.

Of course, this means that Direct Debits require specialist software to action and there is also a charge that is payable by the business to their bank. Standing Orders are free to the receiving organization and in most cases free to personal customers.

Standing Orders for small businesses

Finding the best option for your business largely depends on your organisation size, type of customers and payments that you collect.

Standing orders can be good for really small businesses

If you have a small number of customers (say no more then 25) and you can manage your payments efficiently, then standing orders can be a good way to manage your payments and you won't incur any fees. You'll have to continually check that payments are successful however. With a Direct Debit you'd be notified of any late or failed payments.

Standing orders are good for businesses with good customer relationships

If you feel you can trust your customers to pay on time then you might be fine with standing orders as this is in the control of the customer. But as businesses grow and scale this tends to be too risky.

Standing orders suit regular, fixed payments only

If you bill variable amounts, then standing orders can be tricky. Both Direct Debit and standing order are great for regular, fixed payments like rent or subscriptions. The best thing about Direct Debit is its flexibility. You are in control so you can adjust the amount or frequency of payments.

Direct Debits vs Standing Orders - which is right for you?

So how do you know whether a Standing Order or Direct Debit is right for you or your business?

Choosing between the two will be highly dependent on your business needs.

When to use Standing Orders

Standing Orders are very good when you know exactly how much needs to be paid and when it should happen.

Remember that you can’t change the payment amount or the payment dates so they would need to be canceled and a new one set up if anything changes.

They are a cheap way to receive regular payments from people and they don’t require any specialist software as the customer (or donor) does all the work.

This means that they are especially good for small organizations with just a few customers. A good example here would be a charity that wants to make a regular donation from a few supporters or a landlord wanting to use this as a way to receive rent.

When to use Direct Debits

Direct Debits benefit from the fact that they are much more flexible than Standing Orders.

A good example would be where a business is selling to another business on credit. They don’t know how much will be payable each month as it depends on how much the customer buys.

So the Direct Debit can be altered every month and this can be automated by integrating PaySuite with their accounting system.

Another use case would be where the business is selling something that needs to be paid for immediately and before use. So in the case of motor insurance, the firm will only allow a car to go ‘on risk’ when full payment has been made or a valid Direct Debit set up.

Direct Debits are also useful when you don’t know when you want to charge the customer. A good example here would be where a customer reached their credit limit. In that case, a Direct Debit call would be made and the resulting payment would settle their account or at least bring it back within terms.

It is also important to remember that Direct Debits are completely automated. This means that they are cheap to administer for the banks, meaning that they are also the cheapest way to take regular payments for businesses and charities.

The connected nature of Direct Debits also means that there are notifications that are included within the system such as changes of bank details, cancellations, and missed payments. These aren’t available with Standing Orders.

Differences between Standing Orders and Direct Debits at a glance

	Direct debits	Standing Orders
Specialist software needed	Yes, businesses can’t connect directly to the BACS network for security reasons	No, the customer does all the work
Cost	Very cheap. Free for customers to use	Very cheap. Usually free for customers
Convenience	Good. The company does the work but this can be automated and integrated with a website	Poor. The business is relying upon the customer to deliver a Standing Order form to their bank
Flexibility	Great. Dates and amounts can be altered and more than one Direct Debit can be actioned a month.	Poor. You set the amount and dates at the outset and this can only be varied by canceling and setting up a new Standing Order.
Security	High. The customer gets the Direct Debit guarantee and the business can only connect using an approved system like PaySuite	Medium. The control is entire with the customer but if they enter the wrong details on the order then they may never know and there is no guarantee.
Reporting	Great. The company will quickly know when a payment has failed and bank account changes can be actioned automatically	None.
Failure response	Great. The Direct Debit can be set to reapply on failure and the company will know within 24hr when a payment has not been made	Poor. A standing order may be cancelled if it fails and the company then has to rely upon the customer to set a new one up.

Frequently Asked Late Payments Questions

What is a standing order compared to Direct Debit?

A standing order is in your customers hands where their bank pays you a fixed amount at regular intervals such as monthly or yearly.

With Direct Debits, your customer authorises you to collect money directly from their bank account whenever their payment is due.

Which is best?

Standing orders are good for regular, fixed payments that stay the same like monthly memberships or subscriptions. If you collect payments with different terms and the frequency and amount varies, then a Direct Debit system is probably best.

What is an advantage of using standing orders?

The biggest advantage of using standing orders is not having to worry about late payments as the recurring payment is already set up and scheduled.

What are the disadvantages of a standing order?

The disadvantage of standing orders tends to be that it's hard to see if payments have failed. Failed payments can be for a number of reasons such as lack of funds or if the customer changes the standing order without telling you.

Why do companies prefer Direct Debit?

Convenience in king when it comes to Direct Debits for both consumers and businesses. Depending on volumes Direct Debits an be a cost-effective payments solution. Although standing orders can be free, it is time consuming to administer payments, plus there is no way to know about failed payments causing reconciliation nightmares.

How much do they cost?

Standing order – A standing order can be collected for free, although depending on your bank, there may be some additional charges.

Direct Debit – It depends on your Direct Debit provider. Usually there are fixed fees, or a percentage charge based on the transaction amount.

Although standing orders can be entirely free to use, it takes a lot of work to administer the payments and update your accounts. There’s also no way of knowing if a payment has failed, making reconciliation difficult.

What about recurring card payments?

A recurring card payment is where a customer gives a company their debit or credit card details so that they can take regular payments from you.

As a business you can set up recurring card payments from your customers for things like recurring subscriptions like a Netflix or Amazon Prime memberships.

Learn more about recurring payments.