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Direct debit, also known as pre-authorized debit (PAD) is a payment scheme which authorizes a payee to collect money directly from the bank account of the payer. Payments can be a one off in some countries, but in most countries direct debit payments are usually associated with recurrent payments. Unlike payments by direct deposit (or BACS in the UK) which requires direct transfers by the payer, direct debit payments are initiated by the beneficiary but with the authorization of the paying account holder. Payments can also be set on agreement with the payer to occur on a monthly, quarterly or yearly basis for a fixed amount, or varying amounts determined by the payee – the later is often associated with paying utility bills or mobile phone contracts where the payer may have varying monthly amounts to pay from the use of a service.
For a business to collect payments by direct debit, they will usually subscribe to the scheme through the relevant regulatory and processing authority of the country of operation. Normally the paying account holder is expected to sign a written instruction which the beneficiary will present to the manager of the paying account holder's bank to effect payments, but as the scheme has progressed over the years, it is now common that certain companies qualify to use the scheme when authorized by the account holder over the phone or through the completion of online forms.
Organizations and governments prefer to collect their payments by direct debit because it is cost effective for them. The payment is electronically and they can automatically update customers accounts. They also get to save high card processing fees and commissions usually charged by credit and debit card companies. To this regard, some merchants are willing to offer discounts to customers who pay by direct debit, so it seems those who pay by credit and debit cards are penalized with a fraction more. Businesses also prefer direct debit payments over direct deposits or cash payments into their accounts because with these methods, though they may not be required to pay commissions, they will need to employ more staff to look into their bank accounts and be sure who has paid what amount and for what service – it can be a cumbersome job when dealing with hundreds of thousands of customers payments that way.
Paying by direct debit is also convenient for the customers – they don't need to worry over finding time to carry out their payments as it is collected as at when due by the merchant. They also pay the cheapest rates as competition encourages the merchants to pass on little savings to reward those who make doing business in a cost effective way, and those who pay by credit and debit cards or cash seem to think therefore that they are penalized with higher rates.
However, paying by direct debit is not without its own problems. Organizations are known to sometimes keep charging customers even when customers terminate their service contracts. To avoid this the best way is to actually cancel the direct debit authorization from your bank. The key issue is to understand that the account is yours, and the power behind the direct debit scheme is the authority you gave to the beneficiary to collect directly from your account. Your bank manager has no right to honor any payments from your account after you have written well in time to the bank canceling that authority.
Perhaps, of a bigger problem with paying by direct debit is the penalty charge you incur from your bank when there is insufficient funds in your account to cover the payment. In the United Kingdom for instance, banks charge between £ 20 to £ 39 each time a direct debit payment fails due to insufficient funds, and where the banks eventually honored the payments and have the account overdrawn, customers are often charged unauthorized overdraft fees that range between £ 12 and £ 25, and the fees can increase on a daily basis. To avoid failed direct debit charges people now subscribe to SMS reminder service provided at www.directdebitalerts.com . The service allows users to enter all their direct debit outgoing dates, and schedule SMS reminders which will be delivered directly to their mobile phones before the payment due date. You can set your SMS reminders to arrive 1, 2 or 3 days earlier so it is near enough not to forget again, but not too near that you don't have a chance to do anything about it. The idea is that you will remember in time to make sure you find sufficient amounts to credit your account and therefore avoid the bank penalty charges. Another advantage of the service is that you can schedule SMS reminders for your appointments, meetings, birthdays and anniversaries, etc, and the service is available to people in all parts of the world.
You can enjoy the benefits of paying by direct debits and escape the risks that is associated with it.