Direct debit
A payment the recipient pulls from the payer's bank account, on a schedule or on demand, under an authorization the payer signed in advance.
In short
- The payer authorizes once; the recipient initiates each collection.
- In Canada it is called a pre-authorized debit (PAD); in Europe, a SEPA Direct Debit.
- Payers have strong rights to reverse unauthorized or incorrect debits. The mandate must be kept.
A direct debit lets a business collect money directly from a customer's bank account. The customer signs an authorization, called a mandate or PAD agreement, and from then on the business can initiate collections, either on a fixed schedule or for variable amounts with notice.
Where it is used
Utilities, insurance, gym memberships, subscriptions, loan repayments and B2B invoices on agreed terms all commonly use direct debit. For the collector, it means predictable, on-time payment. For the payer, it means not having to remember each bill.
How it works in different countries
- Canada: pre-authorized debits follow Payments Canada's Rule H1, which sets requirements for agreements, notice of amounts and dates, and the payer's right to reimbursement if a debit wasn't authorized or doesn't match the agreement.
- Euro area: SEPA Direct Debit, with a Core scheme for consumers, who can request a refund within eight weeks, and a B2B scheme with no refund right for authorized debits.
- United States: ACH debits, under Nacha rules.
Good practice
Keep the signed authorization, send advance notice of amounts and dates as the rules require, and handle failed collections quickly, since insufficient funds and closed accounts are common. Direct debit works best alongside clear invoices. Customers can see what each debit pays for.
Worked example
Monthly invoices collected automatically
A B2B software company invoices clients on the 1st of each month and collects by PAD on the 15th. Each client signed a PAD agreement at onboarding and receives the invoice, with the debit amount and date, 14 days ahead. In a typical month, 97% of collections succeed on the first attempt, and the rest are retried after the client is contacted.