What's the difference between standing order and direct debit?
Do you ask yourself, what's the difference between a standing order and a direct debit? Then you are not alone, because these two types of transactions are often confused with each other. In this article we will show you what the difference is, what common examples there are for both types and what the advantages and disadvantages of standing orders are.
The difference between a standing order and direct debit is that the former is set up by the owner of the bank account; the latter is set up by a company or institution that will receive money from the owner's bank account.
With a standing order, you instruct your bank to execute a certain transaction with a fixed amount on a certain date. This can also be recurring payments. Typical examples of standing orders:
- Subscription fees (e.g. for Amazon or Netflix)
While a direct debit is similar to a standing order, there are two fundamental differences: the direct debit is set by the institution that will receive the money and the amount of money can vary. Typical examples of direct debits are:
- Monthly telephone bills
- Tax payments to HMRC
With direct debit, the account holder therefore allows the amount owed to be debited directly by the creditor, regardless of the amount or the time at which it is debited.
In order for a direct debit to be executed, the creditor must first obtain authorisation for the debit from the debtor. Without the debtor's explicit consent, the creditor is not allowed to debit.
In addition, a direct debit may only ever have one purpose, which must be clearly communicated so that the debtor can see exactly what the debit is for on the account statement.
The biggest advantage of a standing order is that you have control over it yourself. This means that you decide yourself when a transfer is to be executed and you know the exact amount.
In addition, you can cancel a standing order at any time by simply deleting it. No further transfers will then be made.
Standing orders are free of charge for account holders and there are usually no extra fees when transferring money (unless transactions generally cost a fee at the bank where you have the current account).
Standing orders are very practical for recurring payments of the same amount, for example for rent. You set up the standing order once and then no longer have to think about the rent transfers at the beginning of each month because the transfer is carried out automatically.
This way, you also know every month on which day a certain amount will be transferred, which makes budget control easier.
The disadvantage of a standing order is that you have to create it again if the amount changes (e.g. in the case of a rent increase), or if you want to transfer at a different time.
Forgetting to set a standing order can lead to missing a payment and then receiving a demand for payment from the creditor, where you may have to pay interest on top of the amount owed.
Many companies also refuse payment by standing order because they have no control over it. They then prefer direct debit, which allows them to debit the debtor's account directly.
We have now illustrated the difference between standing order and direct debit. With the former, account holders have control over the transfer, the time of transfer and the amount.
With direct debit, it is the other way round: the creditor has control over when and how much is debited from the debtor's account. However, the creditor must always ask the debtor for permission first. If the debtor does not agree to the direct debit, the creditor may not debit his account.