If you want to succeed as an online business you need to know how to take payments. If you are a membership organisation or run any sort of subscription model then you need to know about automated or recurring payment methods.
This article focuses on the differences between Standing orders and Direct Debit and the reasons why you are highly likely to graduate from one to the other as your business grows.
What is a Standing Order?
A Standing Order is an instruction created and managed by the customer. When a customer sets up a Standing Order, they are authorising their bank to pay a specific amount to another bank account at a specific frequency. The customer can dictate the number of payments or the end date on which the instruction should cease.
As a vendor, you can ask them to create a Standing Order and specify the amount and frequency of payments but you cannot directly control it.
Benefits of Standing Orders
Standing Orders are great for regularly putting money into a savings account, paying back a loan from a friend or paying membership fees to a local amateur society or club. Many customers like the control they have over Standing Orders and the knowledge they can stop them at any time.
As a membership organisation, having your members pay by Standing Order can often be a step up from cash, cheques or individual BACs payments. You can gain more assurance that fees are coming in on time and you can reduce your admin chasing up payments. Standing Orders are also free. So if you are just starting out and you are on a tight budget they can help you pinch pennies compared with more advanced online payment methods.
Disadvantages of Standing Orders
Keeping track of payments for hundreds of users is a very manual process that becomes almost impossible as your organisation grows. The pressure is on you to check that payments have gone through as you won’t automatically be notified. It will also be up to you to chase customers who miss payments.
If people pay by Standing Order it makes it very hard for you to update your pricing. You will need to communicate the change to your customers and trust them to amend the amount correctly. This makes the whole process quite awkward and inefficient.
What is a Direct Debit?
Like Standing Orders, Direct Debits are recurring payment instructions allowing funds to be taken from a customer's bank account. The customer is still responsible for creating the Direct Debit in the first place and they are free to cancel it at any time.
What’s different here is that Direct Debits shift some crucial controls from the customer to the vendor. With Direct Debit you can control the amount taken and the frequency of payments. You can even trigger one-off payments at any time as required.
A Direct Debit mandate allows the vendor to take whatever amount is owed to them at any time. The only condition is that the customer be notified in advance of the payment being collected (usually 7-10 working days).
Benefits of Direct Debits
As you, the vendor, have more control it is much easier to change pricing. You can also change the payment frequency or colect one-off amounts to get paid for services or anything else you need. This alone is a huge advantage but there is more.
Your customers or members can set up a Direct Debit mandate right on your website with the use of a built-in payment gateway. This means that their user journey is not disrupted by them needing to log in to online banking to perform a task there. We’ve written another post all about payment gateways here.
With the right membership management software and an integrated payment gateway, you can automate the entire reconciliation of payments. So there is virtually zero admin for you to check payments, update membership statuses or chase customers.
Direct Debit mandates won’t naturally expire. They will keep working forever as long as the customer doesn’t cancel or change their bank. This allows you to auto-renewing membership subscriptions by default. This is great for member retention and growing your business.
Disadvantages of Direct Debits
Using a payment service provider to help automate your billing does come at a small cost. This is typically only around 1% of the transaction amount and the time saved via the automation is often worth it.
Direct Debit is primarily a UK system. Some payment service providers do offer options to connect with similar systems in other countries allowing you to take payments from abroad. But, it’s generally not as scalable as Credit or Debit card.
Which should I use?
In our opinion, it is really a no-brainer. Start using Direct Debit as soon as you can. The costs associated will quickly save you lots of time. More importantly, you will be laying the foundations for future growth. Even if you are starting small it is a huge advantage if you can set the expectation early on that fees are paid via Direct Debit. You then won’t encounter so many hurdles later on if you want to increase prices or adjust your membership model.
Proper membership software does tend to carry an extra price tag. Often a monthly fee that scales as you grow. This can be a little harder to justify if you are really small and just starting out. But, if you are already earning £300-£500 per month in membership fees it could be well worth the investment.
You’ll often get a host of other features and benefits like event management tools or email broadcasting tools. If you grow organically you might find you start using various little bits of free or cheap software to cover these bases and then it can be a bit of a project to migrate to more of an all-in-one platform later.
White Fuse’s Membership Management Software integrates directly with Stripe and GoCardless, two of the leading payment service providers. White Fuse allows you to automate recurring payments via Direct Debit or card with really low transaction fees.