Continuous Payment Authority or Direct Debit?

When is a direct debit NOT a direct debit? When it’s a Continuous Payment Authority … It’s important to know the differences between a continuous payment authority and a direct debit – and why a direct debit solution might be the better option for your subscription service.

Free trial leading to subscription

It seems that you can’t open your inbox or your social media account without coming across an offer for a free trial – online TV and film services, e-books, diet products. The catch is that you are usually required to provide bank details and unless your cancel within the trial period, you will be billed for a subscription. It seems too that many people don’t appreciate that they will start to be billed at the end of the trial – usually with no further notice. These subscription services are sometimes set up using what’s known as a continuous payment authority (‘CPA’), rather than direct debit solutions.

A report by the Citizens Advice Bureau in 2016 revealed some startling statistics about CPAs (also known as ‘recurring payments’).

  • Between June 2014-June 2015, 16.8 million of us in the UK had signed up to a subscription service using a Continuous Payment Authority.
  • A staggering 84% of those who responded had not appreciated that they had signed up for a subscription
  • It appears that many of those who have signed up for a subscription using a CPA, either knowingly or unknowingly, have then had trouble cancelling the subscription
  • Only 21% of people knew what the difference between a CPA and a direct debit was.

The bottom line is that CPAs have resulted in a significant number of people having money taken when they didn’t realise it was going to happen, and equally, have trouble cancelling CPAs.

What are the differences between CPAs and Direct Debits?

Although CPAs and Direct Debits may appear similar, there are several key differences, particularly in relation to the protections afforded to customers. A direct debit is set up by the customer providing bank details to the company concerned; this payment type takes a couple of days to set up, and funds cannot be taken immediately by the company. Crucially, under a direct debit, the company cannot vary the payment amount or the payment date without giving notice. To cancel a direct debit, the customer simply notifies their bank, and the Direct Debit Guarantee provides a full and immediate refund to the customer in the case of error. Direct debit will often involve a payment failure fee for customers who do not have sufficient money in their accounts to cover the direct debit amount.

CPAs differ from direct debits in a number of ways. A CPA can be set up immediately (and funds can be taken immediately) by the customer handing over the card number, expiry date and security code of their credit or debit card. It is not linked to the bank account, but to the card. There is no requirement under a CPA for notice to be given if the payment amount or the date of payment is to change, and cancellation involves the customer tracking down the correct department in the company’s business, or speaking to the card provider. Refunds are only available if the customer complains. However, no payment failure fee is incurred under a CPA.

Why choose Direct Debit for your Subscription Service?

Although CPAs can be used without problems – and are used by many reputable businesses – there are problems with CPAs, not least the reputation that comes from situations where disreputable organisations have used CPAs unscrupulously. CPAs were the favoured repayment method of the generally discredited ‘pay day loan’ sector.

The increase in so called ‘subscription traps’ when people are unwittingly signed up using a Continuous Payment Authority has been viewed with such concern that they were mentioned in the Spring Budget. On 9th March 2017, the Chancellor of the Exchequer, Philip Hammond, announced his intention to make terms and conditions fairer and clearer in these circumstances, and also give more power to consumer enforcement bodies to deal with businesses that abuse CPAs.

Direct debits are protected by the Direct Debit Guarantee, and provide more peace of mind for customers. The requirement for companies using direct debit solutions to give notice of any changes to payments or to the date of collection help customers manage their money and avoid going overdrawn is a huge benefit too. By setting up your direct debit solution according to best practice, and ensuring your team is up to date at all times with the requirements of the scheme, using reputable training, you can use your direct debit solution to help build customer confidence and loyalty.

If you’d like to talk to us about how direct debits can work for your subscription service, get in touch!