If you want to get paid quickly these days, there’s a price to pay. Credit card payments generally incur fees of anywhere between 2 and 3 percent, depending on the payment gateway (and your negotiating skills). Checks in the mail are too slow to compete and require a lot of administrative work. Wire transfers, although timely, can incur some pretty steep fees.
Even though businesses incur high credit card fees for transactions, there are big benefits to consumers. Consumers can access credit beyond what they have in the bank account. Given the near universal acceptance of credit cards, they can walk around totally cashless and still make purchases. And what’s more, credit card companies offer them the protection of disputing charges, in the case of fraudulent or incorrect transactions.
Given all the consumer perks, credit card payments are extremely popular in the U.S. But in other countries? Not so much. In order to make faster, recurring, lower-risk online payments, consumers abroad have adopted a payment method called direct debit, which processes more 6 billion payments annually. Direct debit payments are mostly performed between bank networks on a per-country basis (like the U.S.’s Automated Clearing House network), but consumers in the U.K. and Europe can send inter-country payments via the Single Euro Payments Area.
There are a few rules around how direct debits may happen:
- The payer must authorize the payee to withdraw funds from the account, via a notification to the payer’s bank (referred to as a mandate).
- Once configured, the payee may withdraw from the payer’s account per the terms the payer has agreed to.
- The payer must be notified if there’s a change to the withdrawal amount or withdrawal date.
- The payer’s bank may decline a transaction if it would cause the payer to overdraw on the account.
So how do direct debits differ from credit card payments?
To start, fees to perform direct debit payments are much lower than credit card payments. Processing fees for credit cards take a percentage of each transaction and sometimes add on a per-transaction fee. A business charging $1,000 for a transaction will pay between $25-$30 as their percentage fee, and then maybe $.25 as the per-transaction fee. Direct debit transaction fees are much lower worldwide. They start as low as $.15-$.20 per transaction on the U.S.’s Automated Clearing House (ACH) network, and 20-40p per transaction via the U.K.’s New Payment System Operator (NPSO) network.
In addition, direct debit payments in some countries offer more protection than credit card payments. There is a process to dispute charges on a customer’s credit card bill in place with many payment processors, but it isn’t guaranteed. In the U.K., the Direct Debit Guarantee offers payers a “full and immediate” refund in the event of an error on the amount withdrawn. Under this guarantee, the payer’s bank is required to issue the funds and then pursue a refund from the merchant’s bank. The merchant’s bank is then responsible for collecting from the merchant.
Direct debits clearly have the potential for faster payments to merchants and more protection for customers. With massively lower transaction fees and country-specific consumer protections that could be adopted globally, direct debits are poised to lead the payments market into the future.
Learn more on how to leverage the power of direct debits with Invoiced. Contact us for a customized demo today.