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Using Direct Debit to facilitate your business

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By Elizabeth Adegbesan

ONE of the ways businesses reduce the risk of decline in revenue due to delayed payment for goods and services is the use of Direct Debit.

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According to the Nigeria Interbank Settlement System, Direct Debit was used to pay for goods and services worth N320.94 billion in 2017. Direct Debit is a secure and simple automated payment method that allows a business to pull payment directly from its customers’ bank accounts.

It is also an instruction from a customer to his/her bank authorizing an organization to deduct certain amount of money at certain period from his/her bank account. The deduction can be in respect of loan repayment, savings or payment for goods and services. 

Types of Direct Debit

There are two types of Direct Debit you can use to receive payments or pay for goods and services. These are:

  1. Fixed Direct Debit: Allows fixed amounts (say ‘only N1000’) to be debited from a payer’s bank account.
  2. Variable Direct Debit: This type of Direct Debit allows different amounts to be debited from a Payer’s bank account.

How Direct Debit works

Direct Debit typically involves five parties namely: A biller, biller’s bank, payer, payer’s bank and payment service provider. The payer is the customer that receive or purchase goods and services while the biller is the individual or organisation that provides or sold the goods or services.

For the Payer: As a payer, you are to fill a direct debit form of your bank to activate a direct debit service. You can use any type of account to operate a direct debit. In the form, you would stipulate the amount to be debited, the bank account number of the biller, the date and period (quarterly, monthly, half yearly or annually) the biller’s bank account is to be credited.

You do not pay charges for direct debit carried out from one bank account to another in the same bank (i.e. Intra-bank transaction). However, banks charge about N200 for direct debit transaction between bank accounts in different banks. While there is no limit to the amount you can transfer or receive via direct debit, for transaction involving amount above one million, the payer will have to generate a hard token to effect an automated direct debit payments.

Furthermore, to terminate an automated direct debit, with billing cycles of one calendar month and above, the payer has to give a cancellation notice of not less than 10 business days to the end of the current billing cycle. For the biller: To be entitled to a direct debit scheme as a biller, you must be an incorporated entity.

To participate in a direct debit scheme as a biller, you would need to do the following.

  1. Contact your bank to get an Automated Clearing House (ACH) account number for your business banking account, as you need this to enrol in direct debit programs. Confirm with your bank that you have the proper account to accept direct debits.
  2. Sign up with an ACH service.
  3. Link your ACH account to your bank account
  4. Begin processing Direct Debits from authorizing customers by acquiring automatic direct debit authorization information e.g. the customer’s bank account number.

Benefits of Direct Debit

1.Cost saving: It reduces the risk of penalties for late payment of bills and fees and allows you to better plan your finances. This is because direct debit allows for a breakdown in large payments of which payments can be made automatically every month and small regular payments can be set up easily.

  1. Time-saving: As a customer you can set up the payment once and let it run, eliminating the time spent making payments every month.
  2. Secure: Direct debit due to its robust security technology, would increase your customers’ confidence in your business.
  3. Cashflow improvement: As a business owner, direct debit will give you a clear knowledge of your regular income, allowing for better forecasting and financial planning. The automated nature of direct debit will dramatically reduce the likelihood of late payments and the need to chase outstanding invoices because you are less dependent on the payers’ cooperation.
  4. Automated and secure: Automating the process of collecting regular payments gives you more time to focus on activities to further increase your revenue. All transactions are also processed through highly secure technology and are covered by the direct debit guarantee, ensuring your peace of mind.
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