SEPA direct debit: How to keep it fit for the future

Direct debits have become indispensable, especially for recurring payments. After all, it is extremely straightforward – once set up for a payee, such as a service provider or company, you never miss a payment again. It’s no wonder that direct debits are also used in e-commerce, and SEPA direct debits will remain relevant. Over time, however, it will need an upgrade to solve problems and weaknesses. We provide an overview of its general concept, what the status quo looks like, and how direct debits could develop.

What is a direct debit?

A direct debit is an authorization for companies or organizations to collect predetermined amounts from a customer’s account. This is particularly useful for recurring payments, as payers do not have to remember to make a bank transfer. The prerequisite is that they have been informed in advance of the amount and the time of the direct debit, and by signing a SEPA direct debit mandate, customers give their consent. This is an instruction to the bank that payment recipients for whom it has been issued may collect the specified amounts from the customer’s account at the agreed time. This helps to avoid missed payments.

How does payment with the SEPA direct debit mandate work?

If a SEPA direct debit mandate has been issued, payments are automatically debited from the customer’s account on the due date. In contrast to bank transfers or card payments, neither the customer nor the payee need to take any action. This makes direct debit a convenient way for both parties to process recurring payments, and the automated payment method authorizes companies to collect payments directly from a customer’s bank account when invoices are due. Sending invoices or fees for card payments via third-party providers is no longer necessary. This is because it is a bank-to-bank transaction.

By the way, SEPA handles direct debits in the eurozone and enables cross-border payments in the EU and selected neighboring areas.

What type of payments is the direct debit suitable for?

The SEPA Direct Debit is suitable for various types of payments, especially those that are to be processed regularly or. We summarize the different areas of application below.

Recurring payments

Direct debit is a convenient option for regular payments such as rental costs. They can be collected each month automatically using a SEPA direct debit mandate. Suppliers also often use the procedure for electricity, water, and gas bills to charge recurring amounts, and this method is also suitable for insurance premiums and membership fees or subscriptions, for example, for newspapers, fitness studios, or streaming services. Companies also often use SEPA direct debits to collect receivables efficiently – especially for recurring invoices to customers or suppliers.

One-off payments

Direct debit is regularly used for individual invoices, such as online purchases. Customers can pay without a manual transfer, which simplifies the payment process. However, online stores do not receive payment immediately. Still, only after around three to four days, and many retailers who can wait this time for the payment to be completed prefer to use direct debit. The reason is that there are lower fees compared to card payments. In addition, the payment success rates are usually higher than with other payment methods – merchants are, therefore, on the safer side.

Possible disadvantages of the SEPA direct debit

Direct debits have a lot of potential, but they also have disadvantages—for both customers and companies. These include disruptions in the process and fraudulent direct debits, payment defaults, and administrative costs due to chargebacks.

• Disruptions: When setting up the SEPA direct debit mandate, many customers experience disruptions, which often cause frustration and make the actual practical procedure less popular. The most common problem is having to find the IBAN and enter it manually.
• Fraud: Customers sometimes enter an incorrect IBAN – deliberately or by mistake, because they made a mistake when entering it manually. In this case, the amount cannot be debited, resulting in costs for the payee.
• Payment defaults: Direct debits have lower payment defaults than credit cards. However, if the customer’s account does not have sufficient funds, transactions cannot be executed, resulting in fees for both the payee and the customer.
• Uncertainties: Customers are often unsure whether and how they can cancel or dispute a SEPA direct debit mandate. Many, therefore, prefer to make payments manually. However, this means more effort and requires regular transfers.
• Chargebacks: A direct debit mandate requires trust. Therefore, if the payment has been debited incorrectly, payers have the option of disputing it within eight weeks. The payment will then be refunded immediately. This administrative effort can increase the payee’s costs. If the direct debit mandate was not legally signed—as is usually the case with online procedures—this right of return even applies for 13 months.

Many of these disadvantages could be avoided with an automated direct debit. In the following, we look at what the direct debit mandate of the future could look like. The focus here is on user-friendliness.

Modernized and user-friendly: the future of direct debit

Although direct debit is a practical procedure and not unknown, it is not very popular with customers. This is mainly due to its lack of user-friendliness. However, direct debit could be easier with an automated SEPA direct debit mandate. Automation would be an upgrade for the procedure and could make it more user-friendly.

This would make setting up a direct debit mandate child’s play—quite simple in the banking app. Numerous advantages would benefit both e-commerce merchants and customers. Before we outline these, we will first look at possible features of the direct debit solution.

Automatic SEPA direct debit procedure – convenient in the banking app

Future-proof and uncomplicated: An automatic direct debit mandate would address the current weaknesses of direct debits and make them more user-friendly. The solution could bring the classic direct debit directly into the banking app.

• Virtual signature: Authorization of the direct debit mandate using two-factor authentication would be secure and legally binding via the user’s banking app.
• Automatic transfer: Customers would not have to manually enter their IBAN or other payment details. This would help to speed up the process, and incorrect entries would be a thing of the past.
• Increased trust: As customers could use their usual banking app, this would increase their trust in the payment process and the conversion rate. In addition, customers could manage all transactions independently in the app – for a comprehensive overview and full control.
• Flexible application options: The solution for automated direct debit mandates could be used in mobile apps, web stores, and at the point of sale (PoS). It could, therefore, be used wherever payments need to be made.
• Legal protection: The digital signature would create a legally binding SEPA direct debit mandate with an eight-week return period.

For example, customers could use this solution to simply scan a QR code in web stores, which would automatically transfer all payment information to the banking app. Authorization could then be carried out using two-factor authentication. This would all help to make the user experience smoother and increase customer satisfaction.

Future-proof SEPA direct debit: The focus is on the customer

When it comes to finance and payments, trust is an important asset. Many customers, therefore, prefer to use their bank for payments. And this is where SEPA Request-to-pay from Gini comes in. An automated direct debit could bring payments to the shopping cart with the customer’s bank account or banking app. The latter would no longer have to worry about manually filling in the payment details. With just one click, this would be done automatically with Gini – all that would be needed at the end is a final confirmation from the user. Direct debit could be that uncomplicated. We say it’s time to move into the future and offer customers and merchants a smooth payment experience!