Standing order vs. direct debits: Which payment method is right for you?

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Bank payments are the number one preferred way to pay invoices, chosen by 54% of businesses and 25% of consumer payers. So, if your business sends out invoices you need to ensure that you accept at least one form of bank payment, meeting your customers’ preferences and giving them an extra incentive to keep buying from you.

However, the term ‘bank payments’ covers a broad range of individual payment methods, including manual bank transfers, standing orders and Direct Debit payments. So, which bank payment method should you include in your payment mix?

Automatic payments

If you’re regularly invoicing your customers on a weekly, monthly or quarterly basis then you should choose a bank payment method that can be set up to collect automatically. Manual bank transfers leave you too vulnerable to missed or late payments as the payers have all of the control. Whilst missed payments can happen by accident or just due to human error rather than malicious reasons, the average SME still has to spend up to 30 hours a month chasing late payments. Plus, the added admin of chasing combined with manual reconciliations and matching payments also means that 83% of SMEs end up regularly having to work outside of core business hours.

For these reasons, you are better off choosing an automated payment like a standing order or Direct Debit. Let’s take a look at the differences between them.

What are standing orders and Direct Debit?

Direct Debit and standing orders are both automatic payment methods, which means they don’t rely on customers needing to remember or proactively send you a payment each time. However, there are a lot of fundamental differences between them.

A standing order is an instruction your customer gives to their bank to pay you a fixed amount at regular pre-agreed, fixed intervals. It’s what’s known as a “push payment” as the bank has been told to push the money to you each time. As the payer is pushing the money, they are in control of the payment relationship.

With Direct Debit, your member authorises you to collect money directly from their bank account whenever a payment is due. This is a “pull payment” as your bank is pulling the money each time. As you are the one controlling the payments, you also have the ability to update the frequency and amount of a Direct Debit after it’s been set up without needing the payer to re-authorise. This means no missed or failed payments during a transition to new pricing.

You are also notified automatically by the Direct Debit system of any payment cancellations or failures, making it easier to manage customer relationships and address any potential issues early on.

Which payment method should you choose for your business?

Choosing which is the right option for you may depend on two key things:

1. The size of your business
2. Fixed vs. variable payments

1. The size of your business

Standing orders are often easiest to manage if you have 1:1 relationships with payers, so if your business is still building up a customer base and you currently have 10 or fewer recurring payments, then you may decide that you can manage standing orders. With a standing order, you will always need to check your account when a payment is due to find out whether a payment has actually been set up or if a payment has failed - which is when the conversations with payers may then need to happen.

However, if you don’t have a strong relationship with your customers (and therefore might not feel as comfortable talking to them about money) or if you anticipate growing quickly, Direct Debit is probably a better option for you. You’ll be notified of any failures right away, giving you the assurance of which customers have paid without needing to log into your account.

2. Fixed vs. variable payments

Both Direct Debit and standing orders work well for regular, fixed payments. However, what happens when you need to increase your prices? Or if a customer changes the item or quantity within a regular order?

Standing orders are not ideal for variable payments where amounts or frequencies change. A standing order is only best suited for fixed, recurring payments. Any changes to the amount or frequency must be updated on the payer’s side. There is always the risk of a customer forgetting to set up their standing order, setting it up on the wrong date, or not changing the amount when fees change.

One of the greatest benefits of Direct Debit is its flexibility. You are in control, so you can adjust the amount or frequency of payments whenever you need to, provided you give your members the required advance notice. Once they have notice, there are no actions required on their side.

Choosing a payment that’s best for you

Consider the size of your business, if you believe your customer base will grow or change in the next 12-18 months, the level of trust with your customers, and the flexibility needed in payment amounts and frequencies. These factors will help you to know which type of automated bank payment, standing order or Direct Debit, suits your needs best. If you’re unsure or want to try a payment method, remember you can always add more or different ways to pay at any time. Payments are there to help grow and support your business, so look at them as an opportunity and not something to avoid managing.