For any business, getting paid on time by customers helps them keep the lights on.
Yet, 73% of businesses still struggle with delayed payments, a challenge which becomes significantly problematic with recurring or subscription-type payments.
Two of the most common methods businesses rely on to accept automated recurring payments from customers are Direct Debit and payment cards, however, they have some distinctive differences.
If you want a detailed and no-holds-barred look at the differences between these two payment methods and which is better for collecting regular, recurring payments, you’re in the right place!
What is a Card Payment?
Payment (debit) cards are typically used to pay for one-off purchases made online or in person and to withdraw cash from your bank account via ATMs.
Sometimes they are also used to set up automated recurring charges on an account holder’s card to pay for services like periodic subscriptions, loan instalments, or bill payments.
With card payments, the customer grants authorisation to the business by securely inputting their 16-digit card number, card expiry date, and CVV (Card Verification Value) number which is then linked to their bank account by the card networks and settlement banks. This enables the business to collect payments from the card in varying amounts and frequency.
What is Direct Debit?
On the other hand, Direct Debit allows a business to collect payments directly from the customer’s account without requiring them to use payment cards or other payment intermediaries.
Instead, authorisation is given through a Direct Debit mandate. This could be a physical or online document the customer completes by securely sharing their banking details and proving account ownership. Once the direct debit mandate is authorised by the customer and approved by their bank, the business can debit their account automatically for fixed or variable payments.
Direct Debit is often confused with a Standing Order; they are similar but work differently. The latter gives the customer full control over the process while Direct Debit offers businesses more flexibility over the experience.
Differences between Card Payments and Direct Debit
Card payments have unique features that differentiate them from Direct Debit. To help you figure out which of these payment methods would fit right into your business and ensure that you can collect recurring payments more conveniently, we will look at these factors:
Setup and authorisation process
Flexibility
Payment timeline
Transaction cost
Failure rates
Security of transactions
1. Setup and authorisation process
Card payments require more steps and clicks in the setup process. Before a business is authorised to collect payments from customers’ debit cards, the customer has to manually enter their 16 digit card number, CVV number, and card expiry date, to link their card. They might also have to enter a one-time password (OTP) to verify the linked card and complete the process.
With Direct Debit, the customer authorises the business to collect payments from their account regularly by setting up a direct debit mandate on their account. The mandate authorization process requires customers to securely log into their bank account to prove account ownership and complete the setup.
2. Flexibility
Cards are often not very flexible when you consider how businesses usually continue to charge missing or outdated cards for due payments. This impacts their business’ cash flow as delayed payments pile up, and affects their customers too, who have to relink their cards and repeat the authorisation process whenever this happens.
In contrast, authorisation is a one-off process with Direct Debit. The customer authorises a direct debit transaction on their account and that’s it. Direct Debit is also flexible, in the sense that you can always initiate a direct debit payment on a customer’s account as scheduled because they never expire or become out-of-date like cards.
Additionally, Direct Debit enables businesses to adjust the payment date, frequency, and amount as desired without reauthorisation in cases like variable direct debits, as long as the customer authorised this from the initial setup.
3. Payment timeline
The processing timeline for card payments depends heavily on the card issuer and payment processor. However, once a debit card is linked, payments can be collected instantly or on the agreed payment date. The only downside? Settlement isn’t as instant. They usually require 1-3 business days before payouts are processed into your account.
On the other hand, Direct Debit payments are not as swift as card payments, while the timeline depends on your Direct Debit provider, it often takes 1 - 72 hours for a direct debit mandate to be approved by the customer’s bank before a debit can be initiated on their account. However, settlement is within 24 hours because they are direct account-to-account payments.
4. Transaction cost
The cost of using card payments is quite high. Businesses typically have to pay:
interchange fees
transaction fees depending on the payment volume and country
other associated fees to card networks and payment intermediaries
payment processing fees
chargeback fees
When you have to pay these fees regularly, the fees compound and aren’t very sustainable in the long term, especially for small businesses with thin profit margins.
Direct Debit is a more affordable option for collecting recurring payments, both as a small business and as a scale-size business that collects lots of payments.
With a Direct Debit solution like Mono Direct Debit, businesses pay a N50 setup fee for the signature mandate authorisation method and a 1% fee per successful transaction, capped at N1000.
5. Failure rates
On average, 15% of recurring card payments fail compared to Direct Debit payments, with a failure rate of less than 1%. Card payments are often declined because they are expired, missing, cancelled, or unfunded.
However, because Direct Debit payments are initiated directly from one account to another, they are a better way to collect recurring payments without raking up delayed or failed transactions.
Also, as bank accounts do not get cancelled or expire, direct debit payments are more guaranteed to be processed successfully than card payments.
In addition, Mono Direct Debit has a smart retrial system that automatically retries failed payments, improving successful payment collection rates.
6. Security of transactions
Credit card fraud is one of the most common types of payment fraud. In just Q2 of 2024, 111,000 cases of credit card fraud were reported. The way cards work; anyone with unauthorised access to your card information can easily make purchases online or initiate payments. This makes cards and their owners susceptible to loss of funds. In addition, when customers lose funds as a result of card fraud, they often file reports or chargebacks which do not reflect well on businesses and cost them revenue.
Direct Debit payments are less susceptible to fraud. This is because the risk of unauthorised access is lower, as the customer has to prove account ownership to authorise a mandate on their account, and their bank has to approve the created mandate before any payment is initiated.
To tie all this in, here’s a quick breakdown of the differences between Card and Direct Debit payments.
| Cards | Direct Debit | |
|---|---|---|
| Authorization flow | Customers provide their card information online to set up a recurring payment on their account. | Customers fills out a physical or online Direct Debit mandate form by sharing their banking details. |
| Flexibility | The customer often have to manually relink their cards if it gets lost, stolen, or outdated, before payments can run as scheduled. | Payments are fully automated and they do not require future authorisation from customers when payment details are updated. |
| Payment timeline | Payments are instant after the setup process is complete. However, settlements usually take 1-3 business days. | The business has to wait for 1-72 hours for the bank to approve the mandate before payments can be initiated. Settlements are instant or next day. |
| Transaction fees | The business will pay charges from interchange fees to setup fees and chargebacks. | Transaction cost is cheaper, with Mono Direct Debit you pay a 1% fee for every transaction, capped at N1000. |
| Failure rates | Payments often fail due to card expiry and cancellation. | The rate of failed payments are lower, as account details don’t expire and payments are transferred securely from one account to another. |
| Security | Cards have a higher risk of being used in payment fraud, if the customer’s card information is accessed without their permission. | Direct Debit payments are more secure and ensures that both the customer and bank authorise the mandate before the payment is initiated. |
| Refunds | Transaction disputes can be abused by customers via chargeback fraud. | Refunds are only initiated for unauthorised debits. |
Should you accept payments with Cards or Direct Debit?
Card and Direct Debit payments have their benefits but choosing the right payment method for your business depends on several factors. If you’re still unsure of which payment option to stick with, let's break down when you should use card payments or Direct Debit.
When should you use Card Payments?
Cards work best if you need to process the initial payment instantly after the setup process is completed.
If your business occasionally changes payment amounts or will do so in the future, and want the flexibility of not having to notify the customer in advance about these adjustments.
When should you use Direct Debit?
If you experience high payment churn rates and need a faster, more secure, and low-cost method of collecting recurring payments.
Direct Debit is perfect for your business if you want instant or next-day settlements for your transactions and a truly automated experience that allows you to revise payment terms and still debit customers’ accounts without requesting reauthorisation.
More businesses are now stepping up to collect recurring payments with Direct Debit because of the secure and convenient experience it offers customers.
If you’re in the market for a Direct Debit provider that can replicate this experience for your business and boost your payment success rates, you should try Mono Direct Debit!
We’ve had businesses that switched from cards to using Mono Direct Debit report that delayed payments have been reduced by over 60% and the experience of accepting payments became more frictionless.
To enjoy an easier and faster way of collecting automated payments like these businesses, get started with Mono Direct Debit at mono.co/signup and explore our integration guides here.
