(UK) Differences between Credit Card and Direct Debit

Not sure whether to opt for credit card or direct debit when collecting payment from clients in the UK? In this article, we’ll explore the differences between these two common payment methods, the advantages and disadvantages of each, and for which scenarios they are most suited.

The good news is that when collecting payment from your client, Ignition provides both options so you can choose which method is right for you and your client.

Want to give your client the choice? Then read on to understand what’s involved with each option.

Direct Debit is a pull-method of payment in which a client authorises you to collect funds from their bank account via a mandate known as a Direct Debit Instruction (DDI). The DDI can be filled out on paper, over the phone or online (paperless).

Direct Debits are facilitated by BACS and are one of the most popular methods of collecting recurring payments in the UK with over 4 billion payments processed through the scheme annually. Though they are well-suited to recurring payments, they can also be used for once-off transactions.

Fees for collecting payment via Direct Debits tend to be cheaper than credit cards and as such they are a great way to make savings when collecting regular payments.

Many Payment Service Providers (PSPs) will cap Direct Debit fees meaning that you’re not penalised for collecting transactions of a higher amount. At Ignition, we cap your Direct Debit fees at £3 per transaction, so you’ll always have peace of mind when collecting through Direct Debit.

When collecting payment via Direct Debit, you can expect a slightly longer clearing time than credit card due to the BACS three-day cycle.

Initially, when your client first sets up their Direct Debit, Know Your Customer (KYC) checks must be performed in order to verify the identity of the payer and their payment details. Collections can only be made once a DDI is verified. At Ignition, checks are carried out automatically on your behalf to make sign-up as smooth a process as possible.

Depending on your PSP, you can expect to receive your funds anywhere up to 4-5 business days after the collection, meaning clearing times tend to be slightly longer than credit cards.

With Ignition, this isn’t a problem since your client signs their contract at the same time they set up their Direct Debit. This locks in dates that you’ll be paid and ultimately ensures regular cash flow.

A key difference over credit card payments is that, when paying by Direct Debit, your client is protected by the Direct Debit Guarantee. This means that they must be notified in advance of any payments that are scheduled to collect on their account as well as any changes to their Direct Debit (e.g. any changes to the amount or collection date.)

Thankfully when collecting Direct Debit through Ignition, these notifications are taken care of automatically so you don’t have to worry!

In the unlikely event that there are any errors on your client’s Direct Debit (e.g. if their Direct Debit is collected on the wrong date, the wrong amount is taken, or they were not notified in advance of the collection), they are entitled to a full and immediate refund under the Direct Debit Guarantee.

This is known as an indemnity claim, or dispute. Indemnity claims are extremely rare and any refunds granted are done so at the discretion of the client’s bank and aren’t always honoured.

Unlike credit card payments, Direct Debits do not expire and so there is less input required from both parties; payment details do not need to be updated by the client and you do not need to chase them to update them!

This means that Direct Debit is a useful payment collection service for when you’re engaged with your client for a prolonged period of time.

In summary:

Direct Debits are:
✔ Useful for regular recurring payments, particularly if your client is with you for a long period of time
✔ Fees tend to be capped and cheaper than credit cards
✔ No expiry so no input required from yourself or your client to update details

When a client pays you with their credit or debit card, rather than providing you with their sort code and account number (as is the case with Direct Debit) they will instead provide their long card number, expiry date and security code, giving you permission to collect payment from them.

If your client pays you on a regular basis by card, then this is known as a Continuous Payment Authority (CPA). However, it is generally less common for cards to be used for regular recurring payments and in a lot of cases Direct Debit is the preference.

Fees for collecting via credit card tend to be higher than Direct Debit and are rarely capped.

Depending on your PSP, you may also be charged different rates for different types of card (e.g. International/American Express). However, credit cards can be a great solution for lower-value transactions and if the transaction amount is low enough, can be cheaper than collecting via Direct Debit.

At Ignition, we charge 1.3% + £0.20 for Standard cards and 3.6% + £0.20 for Premium cards.

Click here to learn more about our payment fees or see this article around the differences between cards.

Clearing times for credit card payments are quicker than Direct Debit.

With credit card payments you can expect funds to be with you around two business days after they are collected from your client. This means that credit card payments provide a great solution for upfront, once-off transactions where you want to get paid quickly.

Unlike Direct Debit payments, when your client pays via credit card you are not required to notify them ahead of any upcoming payment collections or changes in amounts collected.

In addition, should they dispute any transactions on their card, they are not entitled to a full and immediate refund and instead must provide reasonable evidence that they have not received the services they have paid for. In terms of chargebacks, this means your client has less protection when paying you through a credit card than through Direct Debit.

Though such disputes are handled differently from bank to bank, there is generally an evidence-based process that you must follow to appeal any disputes your client makes with you. At Ignition, we support you at every step of the way in your appeal in the rare event that a client disputes a credit card payment.

Regardless of payment method, we believe it’s vital that you have a contract or engagement letter in place with your client before doing business with them. Clearly defining scope and fees ensures the risk of any disputes is mitigated. Click here to read more about how Ignition can help you generate an e-contract or engagement letter in minutes for your client to sign online.

Credit cards have an expiry date; if they’re not watched there is a risk of missed payments. Likewise, when credit cards do expire, your client is required to update their details if they wish to continue paying you.

If opting to collect credit card payments via Ignition, we’ll alert you when your client’s card details are coming up for expiry and also send an automated retry link in the event of a failed payment. This takes the hassle out of expiring cards and ensures you continue to get paid.

In summary

Credit Cards are:
✔ Useful for lower-value, once-off transactions
✔ Shorter clearing times for quicker payouts
✔ Less customer protection

We’ve summarised the differences between the two payment methods in the table below to help you decide which is a best fit for your particular scenario. If you’d like more help choosing which method of payment to use, feel free to speak to your account manager at Ignition.

	Credit Card	Direct Debit
Fees	High	Low
Minimum time before first payment can be collected	Immediately	4 business days
Clearing Times	2 business days*	5-6 business days*
Customer Protection	Medium	High
Expires?	Yes	No
Notifications Required?	No	Once for Direct Debit mandate confirmation. Once before each payment collection or schedule of payment collections.

*Based off Ignition's clearing times. This can vary from one PSP to another.

Sources:
[1] Credit card chargebacks https://www.moneysavingexpert.com/reclaim/visa-mastercard-chargeback/
[2] Direct Debit Guarantee https://www.directdebit.co.uk/DirectDebitExplained/pages/directdebitguarantee.aspx