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Understanding Direct Debits – Meaning and Usage

By on August 18, 2011

With the advent of internet and advancement in technology, most of the things can be handled with the press of few buttons on your desktop computer. Things are no longer limited to your room; you can do business dealings, prepare work related material, do shopping and pay bills even when you are on the move. Where it used to take hours to pay your bills, standing in long queues, now it takes a click. As facilities grow so do our needs.

We frequently use our credit cards and debit cards to make payments online. Some payments can be of routine nature while others may occur as and when the need arises. No matter where we are, utility bills are always there which have predefined generation date and specified due dates. In addition there can be recurring payments for rent, insurance premiums and also a recurring deposit made by you. Such payments are restricted not only to individuals but also extend to corporations. Consider the time involved in making a cheque and dispatching it to a vendor or time and again logging into you bank account to make a payment. Even though it does not take much time to release the payment using internet still many times we forget to make the payment.

Direct Debit Meaning

Direct debit is a solution to this problem. Here payee asks his/her bank to collect payment on his/her behalf in respect of certain predefined expenses on production of debit notes to the payer’s bank. These payments are generally of repetitive nature and by using direct debit facility, payer can avoid the hassle of remembering due dates for payments and face problems in case of delayed or no payments. With direct debit, dates on which payments are to be made as well as the amount of payment can be specified in advance. In case payee wants a change in either the date or amount, intimation shall first be made to the payer. Hence everything is agreed before a payment can take place.

Use Direct Debit For Fixed and Variable Amounts:

Direct debit facility can be availed for fixed as well as for variable amounts. Payer needs to authorize the payee allowing him/her to take payments from designated bank account. This can generally be done either by filling a paper form (also known as direct debit mandate) with the payee where your attestation is required or by making requests over telephone or internet. However before a payee can be added as a beneficiary, payer needs to authorize his/her bank to accept payment requests from the payee.

Once such process has been completed; payer’s bank can accept debit notes from payee and release payments by automatically debiting the payer’s bank account. Here payee gets the flexibility to claim variable amounts. For instance, you have taken a landline telephone connection, the statement of which is generated on 25th of every month, payment for which is required to be made by 7th of next month. Here amount is not fixed. Hence the requirement to state different amounts while requesting for release of payment becomes important in this case. On the contrary consider a situation where you are living in a rented accommodation, rent for which is 1,000 USD per month. You have to make this payment by 3rd of every month. Here the amount is fixed.

Make Your Bank a Party to Direct Debit Requests

It is preferable to involve your bank in direct debit requests as they can verify the authenticity of the payee before disbursing payments. Once payer authorizes payments in respect of a particular beneficiary, banks are no longer required to obtain further approvals to release payments to the payee. Once a direct debit has been set up, it becomes the obligation of the payee to claim payments.

Direct Debit Disadvantages

If direct debits offer convenience, they have certain disadvantages as well. If you do not have balance in your account, payment may still be released resulting in a negative balance in your account. Imagine a situation where you have to make an urgent payment on account of immediate purchases and suddenly a utility bill pops in and your entire balance is washed away. Not only this, banks may levy heavy charges in case of such a situation. Hence it becomes essential to monitor your balance, which should not be a very difficult task with the kind of online facilities we have now days.

Now consider a situation that payment has been released to a vendor on the due date and you receive a call from the vendor that payment is still due. This could be on account of failure by the vendor in maintaining appropriate records. Even though matter may get finally settled after adequate support has been provided, still it can result in conflicts and unnecessary wastage of time in tracking the transaction.

There can be other situations like this; still direct debit is a facility which can save a great deal of time and effort.

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