What is Direct Debit ?
A direct debit or direct withdrawal is a financial transaction in which one person withdraws funds from another person’s bank account. Formally, the person who directly draws the funds (“the payee”) instructs his or her bank to collect (i.e., debit) an amount directly from another’s (“the payer’s”) bank account designated by the payer and pay those funds into a bank account designated by the payee. Before the payer’s banker will allow the transaction to take place, the payer must have advised the bank that he or she has authorized the payee to directly draw the funds. It is also called pre-authorized debit (PAD) or pre-authorized payment (PAP). After the authorities are set up, the direct debit transactions are usually processed electronically.
Direct debits are typically used for recurring payments, such as credit card and utility bills, where the payment amounts vary from one payment to another. However, when the authorization is in place, the circumstances in which the funds are drawn as well as the dates and amounts are a matter of agreement between the payee and payer, with which the bankers are not concerned. In countries where setting up authorization is easy enough, direct debits can also be used for irregular payments, such as for mail order transactions or at a point of sale. The payer can cancel the authorization for a direct debits at any time, and the banker can decline to carry out a debit if the transaction would breach the terms of the bank account out of which payment is to be made, for example if it were to cause the account to overdraw.
Banking law does not authorize a bank to alter the payment amount.
A direct debits instruction differs from a direct deposit and standing order instruction, which are initiated by the payer. A standing order involves fixed payment amounts paid periodically, while a direct debit can be of any amount and can be casual or periodic. They also should not be confused with a continuous payment authority, where the payee collects money whenever it feels it is owed.