Standing orders and direct debits do broadly the same thing, even though they work very differently. It doesn't help, though, when bankers themselves sometimes describe them incorrectly! Here's a brief explanation:

Standing orders are your instructions to their bank to pay a set amount, to a named beneficiary (an organisation for example), at regular intervals (say on the 1st of the month) - either for a specific period of time or until cancelled.

Direct debits are:

• your authority for a beneficiary to claim payments (variable in amount and frequency) from the your bank account;
• your instructions to your bank to allow the taking of those payments.

A standing order requires your bank to send the money. A direct debit requires the receiving beneficiary to claim the money from your account

Typically, a standing order might be used to pay a fixed amount to a savings account or to a local club. A direct debit is more likely to be used to make payments that can vary from time to time - such as mortgage instalments or utility bills.

The day-to-day advantage of a direct debit over a standing order is that as and when the payment amount changes, the beneficiary will claim the new amount automatically - after telling the customer of the change. With a standing order, customers need to give their bank new instructions each time a change is needed.

That's all you really need to know, but if you want more information read on!

How the systems work

Standing orders can be simpler than direct debits - mainly because the beneficiary is not involved in claiming payments. At set times, the customer's bank just sends the money to the beneficiary's bank and only the customer can alter the payments. The beneficiary can be anyone.

In contrast, the variable nature of direct debits means that beneficiaries can claim different amounts at different times. This flexibility is the main advantage of the direct debit system - but there is a potential risk that unscrupulous or inefficient beneficiaries might claim money that is not due to them.

To combat this - and to reassure customers - the direct debit system contains two main safeguards:

• The direct debit guarantee provides for the customer's bank to refund disputed payments without question, pending further investigation.
• Direct debits can only be set up for payments to beneficiaries that are approved originators of direct debits. In order to be approved, these beneficiaries are subjected to careful vetting procedures - and, once approved, they are required to give indemnity guarantees through their banks.

Usually, the customer has to sign a direct debit form, although some particularly trusted originators are authorised to set up direct debits where the customer has given authority over the phone. If that sounds a little risky, remember that the originator must have obtained the bank account details from the customer - and that the customer is protected by the direct debit guarantee.

Payments themselves are made by a system that is in some ways based on the cheque clearing system. This means that the process usually starts two working days before the money is due to reach the beneficiary's bank account

Was this answer helpful? If not, please contact us at welfarerights@isoshousing.co.uk

< Back to FAQs list