The United Kingdom banking system has a universal financial feature known as the Direct Debit. Direct Debit transactions are governed by the Direct Debit Law, which is more commonly known in the UK as the Direct Debit Scheme. This set of guidelines governs these specific financial transactions, providing safeguards and protections to the consumers that use the Direct Debit system.
Direct Debit System
The UK Direct Debit System was established to provide a safe and secure way for consumers to make payments to a business, organisation or even another individual. The Direct Debit System is operated in the UK by the BACS (Bankers’ Automated Clearing Services) Corporation. The BACS is a not-for-profit financial industry organisation that processes the Direct Debit System payments and is owned by 15 leading banks and building societies (mortgage lenders) in the UK and Europe.
Direct Debit Law/Scheme
The Direct Debit Law or Scheme allows a consumer to authorise his financial institution to permit a business to claim money from their account. UK Direct Debit allows the recipient to claim payments from the consumer without having to have a new authorisation from the payer each time. For example, this allows a utility to collect payments in varying amounts each month and on varying days if necessary. A Direct Debit authorisation allows the payee to withdraw the exact amount needed from the payer’s account. Payments take three days to process.
Direct Debit Safeguards
The Direct Debit Law allows a business to withdraw money from a customer’s account as needed. Because the business has direct access to the customer’s account, a direct guarantee policy was enacted to protect the consumer from erroneous or unlawful withdrawals. The direct guarantee provides that the customer’s bank must refund any disputed payment without question, pending further investigation. Recipients of direct debits are also carefully investigated and examined before they are approved to claim payments from anyone.
Direct Debit Uses
The Direct Debit Law allows payments to be made for a large variety of purposes in the UK. In 2008, the BACS processed over 5.6 billion payments with a total value of £3.85 trillion GBP. Direct Debit experiences high usage in the UK as it is widely used to make rent payments, car payments, insurance payments and donations to charity. Other common uses include making credit card payments and utility payments to companies such as British Telecom and British Gas.
Usage Outside UK
Direct Debit is in use in most countries in some form. In Germany, Direct Debit is enabled for one-time and recurring payments, while France allows it for recurring payments only. Ireland allows two forms of Direct Debit, one based on submitting hardcopy authorisation forms, while the other accepts approvals online and by telephone. In Sweden, recurring Direct Debits are allowed, but if the amount withdrawn changes, advance notification must be given to the consumer. The U.S. uses the Automated Clearing House network to process Direct Debit transactions.