Hello. In this blog we aim to explain in simple language what SEPA direct debit is about and how it differs to other payment types.
SEPA Direct Debit, push .v. pull.
For the purpose of this blog we will explain what a SEPA direct debit is from the perspective of the person collecting the money as opposed to those paying via SEPA direct debit.
SEPA direct debit is simply a payment, similar in ways to a credit transfer (often referred to an electronic funds transfer) that moves money from one account to another. The majority of us will be familiar with transferring money to someone we owe using our bank’s internet banking tool. We go online to access or bank account and make the payment to the person we wish to pay. The money leaves our account immediately and if the recipient is with the same bank they typically see the amount hitting their account straight away, if with another bank it could be the following day before they see the money arriving. This is considered a push payment, money being pushed from our account to the account of the person or business/school/club that we choose to pay.
SEPA direct debit is very similar in that the money moves from account to account just like a credit transfer but rather than being pushed, the funds are pulled. This is the fundamental difference between these payment types, otherwise the transfer of the funds uses exactly the same banking connections (referred to as the bank payment rails in the industry) as the credit transfer.
At this point we’ll refer to these SEPA direct debit payments as collections to help distinguish between push and pull, collections referring to the incoming funds pulled from a payers account. Further, we’ll refer to the person collecting the money as the creditor.
The SEPA Direct Debit Mandate
In order to process a SEPA direct debit the payer must authorise the creditor to pull the money from their account. This is achieved by way of SEPA direct debit mandate. This mandate holds a number of pieces of information including the payers name, address and IBAN along with some details of the creditor. This mandate can be paper based or it can be electronic in form where details are captured online.
Below is an example of a SEPA direct debit mandate presented via DebaPay on mobile for completion by our customers’ customer. In this example RealWorld is the creditor, a fictitious company. This in effect is a SEPA direct debit mandate with creditor details (the entity seeking to collect money) and the debtor details entered by the person agreeing to the collection. Not displayed here but after the payer enters their details they complete the request by clicking the desired button just a little further down, they can choose to pay in a single payment or via a payment plan option where made available by the creditor.
Fig 1. SEPA Direct Debit Mandate signed electronically on mobile via DebaPay.
These SEPA direct debit mandates are proof that the payer agreed to the debit(s) on their account. Where paper mandates are used to capture the payers approval it is important that these records are maintained in case there is ever a request for proof that the payer did sign the mandate. In DebaPay these mandates are stored electronically so there’s no need to maintain paper records.
SEPA Direct Debit .v. Standing Orders
SEPA direct debit can be used for both single collections (i.e. a one-off payment from the payer) and recurring collections.
Worth noting here, Standing Orders are often confused with SEPA direct debits. Standing Orders are used to setup a payment schedule whereby a set amount is transferred from one party to another on a defined schedule, this results in a number of push payments from the payer’s account. Standing Orders create SEPA credit transfers (push payments) whereas SEPA direct debit results in funds being pulled from the payer’s account, with their permission captured on the mandate. Standing Orders amounts can not vary. In order to change the amount the existing Standing Order is stopped and a new one set up. This payment method is fine where there is no change to amount or date but has limited somewhat application. Critically for cash management, where a Standing Order fails to process there is no notification to the creditor whereas with SEPA direct debit the creditor is notified of the failure and they can react to follow up with the payer. Catching failed Standing Order payments is often a challenge for creditors, time can easily pass by before non-payment is identified in a busy environment. Additionally the payer has to set the Standing Order up with their bank in order for the transfer to occur, this doesn’t always happen in a timely manner for various reasons.
Fig 2. Movement of funds from the payer to the creditor, either by single payment or a recurring schedule.
Available with SEPA Direct Debit:
Recurring collections for a set period or ongoing
Set and variable amounts
Notification of failed payments
When setting up a collection the agreement is made regarding the collection date, referred to as the debit date. This is the date the money is debited from the payer’s bank account and credited to the creditors bank account. It may be useful to know where collecting from consumers, SEPA Direct Debit can also debit a Credit Union account as most are now SEPA reachable. This aspect is something we highlight to people considering our service, it’s important to know that with SEPA direct debit the funds leave the payer’s account and transfer directly to the creditor’s account on the same day, the funds at no point touch a DebaPay account. For instance if the payer approves a series of collections to debit their account on the 15th of the month, the funds will leave their account on the 15th each month and be credited directly to the account of the creditor on that same day.
The mandate setup with the payer determines the type of agreement and hence the type of collection. In Fig 1 above we can see this as part of the details displayed to the payer when they receive the request electronically, the payer is fully informed in advance what is being approved.
To Conclude, for now
In short, a SEPA direct debit is a very efficient means of collecting money and once the mandate aspect is made simple and transparent for the payer this whole process is stress free and provides the payer with a simple means of paying you, after all there are many people who want to pay others on time, it just needs to be easy and convenient.
We’ll stop here with this blog and we’ll look to cover other aspects of SEPA direct debit such as reconciliation and re-submission of failed collections in part 2, we’ll also add a little detail around how DebaPay helps with the collection of money.
Thanks for reading.