Collecting regular payments from customers often comes with some quirks.
The experience might look like, nudging customers to manually top up their digital wallets on a periodic basis so they don’t miss a future payment, or stretching yourself too thin trying to track and manage these payments.
Cards also aren’t a one-size-fits-all option for most businesses. They cost a lot in transaction fees, managing recurring card payments isn’t always flexible, and they are more susceptible to chargeback fraud.
If you’re looking for a better way to collect recurring payments from your customers, Direct Debit might be the way to go. In this guide, we will cover what Direct Debit is exactly, how it works, and if it might fit into your business.
What is Direct Debit?
Direct Debit is an automated payment. Typically, this is when you authorise a business to collect future or regular payments directly from your account at specific intervals.
For example, you can authorize your insurance company to automatically transfer insurance premiums from your account to theirs, without manually processing each subsequent payment.
Direct Debit is safer and more convenient compared to other payment methods. Authorization also happens once - you only need to share your account details to set up a payment instruction called direct debit mandates on your account. This could be a paper or an online form you complete, to authorise the company to automatically take payments from your account at agreed intervals.
Read more: Introduction to Direct Debit Mandates
How does Direct Debit work?
In Nigeria, direct debit is facilitated through the NIBSS Mandate service, in partnership with banks and other traditional financial institutions, allowing customers to grant permission for businesses to directly charge their bank accounts for regular or future payments. This method usually involves customers authorizing direct debit mandates physically or completing paper documentation.
NIBSS recently introduced a more digital experience to improve the mandate authorization process. Customers can now approve a mandate by uploading their digital signature or transferring a fee of NGN 50 from their account to a designated NIBSS account.
With 849 million payments processed via Direct Debit in Nigeria as of Q3 2020, third-party providers like Mono are now developing Direct Debit solutions on top of the framework of the NIBSS Mandate service, to power a simpler, more secure, and accessible experience of collecting direct debit payments for both customers and businesses.
When you use a direct debit solution like the Mono Direct Debit product, here’s the typical mandate setup process and user journey for direct debits.
The business prompts the customer to set up a direct debit mandate on their account.
The customer selects their bank of choice and choose their preferred account type (personal, business, or joint account).
The customer provides the required account details to verify ownership of the account and complete the account linking process.
The customer authorizes the mandate by making a transfer of NGN 50 to a NIBSS account (e-mandate), or via a signature which will be confirmed by the account holder's bank.
Once the mandate agreement is set in place, the business can now collect agreed payment sums from the customer’s accounts automatically on the scheduled dates.
Ways you can use Direct Debit
Direct Debit is often used to set up recurring payments with varying and fixed amounts collected at specific intervals. Some of the ways you can use Direct Debit to make payments include:
Loan repayments: With Direct Debit, lenders and Buy Now Pay Later (BNPL) businesses can provide an easier way for borrowers to repay their loans spread across specific instalments and durations.
Subscription payments: Direct Debit can also be used to automatically collect subscription-type payments like gym memberships, streaming, software, or magazine fees from customers. They are usually fixed, regular payments charged on a monthly or annual basis.
Account funding: Insurance, investment, payroll, or savings services can use Direct Debit to collect varying payment amounts, allowing users to top up their account/wallet for scheduled payments like portfolio funding, insurance premiums, automated savings, etc.
Money sweeping: For this type of payment, you can set up Direct Debit to move money automatically between two accounts owned by the same person.
Benefits of Direct Debit
Compared to other alternative payment methods, Direct Debit provides businesses with a couple of benefits, such as:
Convenience: Since direct debit payments are automatic, once a mandate is created, funds are directly collected from the customer’s account without the business worrying about charging expired or lost cards, and missing the set payment schedules.
Affordable transaction costs: Direct Debit is significantly cheaper than other payment methods like cards. This is because payments are directly transferred from the customer’s account to the business, ensuring that the business doesn’t have to pay high interchange fees or processing costs.
Better payment success rates: Unlike cards, bank accounts don’t expire or become outdated. This key advantage makes direct debit payments more reliable and ensures it has higher success rates whenever a payment is initiated.
More secure payment experiences: With Direct Debit, the chances of unauthorised persons using your account details to set up a direct debit mandate are significantly lower This is because the customer must prove ownership of the account before authorizing the mandate setup and both the customer and their bank have to approve the mandate before any payment is processed from their account. The customer can also easily request a refund for any unauthorised debits.
Important things to know when setting up Direct Debit
Authorization is important. Your customers must give their consent or approval before you can start collecting payments from their accounts.
When the business needs to make changes to already created direct debit mandates such as cancel, pause, delete them, or change the frequency, date or amount of the payment, the customer will be notified about these changes.
When a payment amount is debited by mistake, the business is expected to initiate a full and immediate refund.
In the event that customer cancels a direct debit mandate set on their account, you will be notified.
What is the difference between a Direct Debit and a Standing Order?
Direct Debit and Standing Order are both automatic methods of collecting payments from customers, however there are notable differences between them.
Direct Debit are usually initiated by the business and approved by the customer to set up recurring payments while a Standing Order is initiated by the customer and set up through their bank.
Also, with direct debit mandates, the business can make changes to the date, amount, or frequency of a payment but must inform the customer in advance. On the other hand, with Standing Orders, the customer has more control and is the only one allowed to make changes to the payment terms.
Here are other differences between a Direct Debit and a Standing Order:
| Direct Debit | Standing Order | |
|---|---|---|
| What is it? | A direct debit authorizes a business to collect scheduled payments directly from your bank account when due. | A standing order is an instruction to your bank to make payments to a person or business. |
| What is it used for? | They are used for regular payments of both fixed and variable amounts like loan repayments or account top-ups. | They are used for regular payments of a fixed amount like monthly rent or subscription payments. |
| How to set one up? | You complete a mandate form to authorizse the business to collect payments based on the agreed terms. | You instruct your bank to pay a certain amount at a specific interval to the business. |
| Can you process refunds? | With direct debit payments, the customer can request a refund for payments collected by mistake. | You can’t request for a refund with standing order payments. You can’t get it back after you have paid it. |
Choosing the right Direct Debit provider
Collecting direct debit payments requires some processes to work behind the scenes to ensure customers’ accounts are charged automatically for scheduled payments. Building your payment infrastructure in-house usually takes a lot of time and effort, so sticking with a payment processing provider might be the right way to go.
If you’re thinking of improving the way you collect recurring payments, here are some factors to consider when selecting the right Direct Debit provider for your business:
Coverage: To give your customers more choice over how they can pay you, it’s important to use a Direct Debit provider with a wide range of financial institutions and support for multiple account types.
Security and authorization methods: The mandate authorization process can either make or break the recurring payment experience for your customers. You need to ensure that the process is secure and intuitive, allowing for multiple ways for customers to authorise a mandate and a faster way for the banks to approve a created mandate.
Settlement schedule: You need to ensure that the Direct Debit provider has several settlement options you can choose from, to suit your business use case. The settlement schedule should also be consistent and timely.
Success rates: Sometimes direct debit payments can fail because of insufficient funds in a customer’s account. To reduce your failure rates, ensure you choose a provider that enables you to retry any failed payments.
Collecting seamless recurring payments with Mono Direct Debit
If you want a better way to collect recurring payments from customers, switching to Mono Direct Debit can make all the difference.
With access to over 20 financial institutions in Nigeria, Mono Direct Debit enables you to easily set up payment mandates for different account types — whether personal, business, or joint accounts, and choose between three authorization methods (e-mandates, signature, and global standing mandates), with an approval time of 1 to 72 hours. Settlement options are flexible too, you get to choose between instant or next-day settlement, giving you full control over your cash flow.
Mono Direct Debit also offers a smart retrial system that automatically retries all failed transactions, significantly improving your payment collection success rates. This way, you can focus on maximizing your revenue while Mono ensures that your recurring payment collection process runs smoothly. If you’d like to use Mono as your Direct Debit provider, you can sign up here to get started, and explore our detailed integration guides at mono.co/docs.
