Many companies, such as mobile phone suppliers and utility companies, are trying to entice us to pay by Direct Debit, but what is the difference between this and a Standing Order or a Continuous Payment Authority?
Many people do get confused between the different ways we can pay bills, in particular between a standing order and a direct debit. They both broadly do the same thing but work quite differently.
As part of our general personal finance information series of articles, we take a look at these different forms of payment to understand the key points about each of them and some of the advantages and disadvantages to consider.
This is perhaps the simplest way to pay your household bills or to make regular payments. You give the company you need to pay permission to take different amounts from your account on an agreed date each month – ideal for making payments that can vary from time to time such as mortgage instalments or utility bills.
You set up a direct debit by completing a Direct Debit Instruction or in some cases you can set one up over the phone or via the internet. Your instructions are passed to the bank to enable them to debit your account.
There is a Direct Debit Guarantee which makes it one of the safest ways to pay your bills. All banks and building societies who support direct debit payments are signed up to this Guarantee.
Under this any changes to your direct debit payments will be notified to you in advance of your account being debited. Importantly if an error is made in the payment of your direct debit by your bank or building society, you are entitled to a full refund. This also applies should the company you are paying make an error in the amount they collect.
You can easily cancel a Direct Debit by contacting your bank or building society. You also need to notify the company you are paying.
The key with a direct debit is that when the payment amount changes, the beneficiary will claim the new amount automatically. You don’t have to do anything other than read the advice sent of the change and make sure you are happy with it.
If you have a problem with a direct debit your first port of call should be your bank so that they can help you sort it out. If that doesn’t work then you can complain to the Financial Ombudsman Service
A standing order basically contains your instructions to your bank to pay a set amount, to a named beneficiary, at regular intervals for a specified period of time or until the order is cancelled.
On the agreed date, say the 1st of the month, the bank will send the money to your beneficiary’s bank account.
Whilst with a standing order you have control over your payments, the potential disadvantage over the direct debit is that only you, the customer, can alter the payments.
Another point to consider is that some companies will offer you a discount if you pay by direct debit but they will not offer this discount if you pay by standing order.
Continuous Payment Authority
This is set up using either a credit or debit card, it is not done through your bank account.
Whilst it is similar to a direct debit in that payments are taken from the account that is linked to the card and the company controls how much is debited and when, this form of payment is not covered by any bank guarantee. It can also only be cancelled directly with the company that has the payment authority.
Of concern is that these payment authorities are often set up over the phone which means there is not always a full paper record should there be any disputes over the amounts debited.
If you do decide to set up a continuous payment authority, make sure you read the terms and conditions carefully and ensure that there is a contact number for the company in case you need to cancel it.
Be aware that if there is a problem with a CPA it may be harder to get resolved than for example a direct debit. This is basically because it may end up as your word against that of the company’s.
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I have to advise that a continuous payment is in fact easy to cancel. Your bank should be aware that you merely have to cancel with them but of course have the courtesy to advise the company of your actions.
Hi I owe a company £359.11 and am paying it off by monthly instalment s of £5 a month by standing order, i have just had a letter from them saying they are changing the payment to £7 per month can they do this as its a stading order?
A company cannot change a standing order without your consent. With a Direct Debit they may change the amount but they must send you a letter to inform you and you can cancel a Direct Debit at any time by contacting your bank.
Really good article. Direct Debit is easily the safest method of payment for ongoing transactions. I think there is an additional benefit over credit cards in that there is a much lower risk of fraud. I would be much more nervous about giving out my card details than my bank details as there is little that can be done with my bank details. If someone does set up a fraudulent Direct Debit you are still covered by the Guarantee. Card fraud has affected over 6% of UK adults according to police figures released in April 2010.
Kind regards, Gavin Lawrence, Managing Director, Clear Academy.