Introduction to Direct Debits

Most people have heard of the term ‘Direct Debit’ but it is important to know an exact definition and how a Direct Debit might differ from other forms of payment such as Standing Orders, faster payments and Direct Credit.

Definition of a Direct Debit

A Direct Debit can be defined as an instruction from a customer to their bank or building society authorising an organisation to collect varying amounts from their account, as long as the customer has been given advance notice of the collection amounts and dates.

This definition contains a number of important pieces of information which are key to Direct Debit:

 

  1. Collection is by the Service User.

    The process of collecting the money is initiated and managed by the organisation who wishes to receive payment. It is not a process managed by the person paying the bill.

  2. Varying financial amounts and dates

    The Direct Debit can cover varying financial amounts and dates unlike a Standing Order which covers a specified amount.

  3. Bank and Building Society

    Not all Bank and Building Society accounts support the collection of Direct Debits.

  4. Approval

    The owner of the Bank / Building Society account must have given approval to the Service User to collect the payment by authorising a Direct Debit Instruction

  5. Direct Debit Guarantee

    The process is covered by the Direct Debit Guarantee which is offered by the Banks / Building Societies to the owners of the Bank / Building Society account.

About Bacs

Bacs is the not-for-profit organisation that regulates and manages the Direct Debit scheme. Bacs’ objectives are to ensure that a quality service is provided and that rules and regulations are adhered to by both users and banks. Bacs’ key responsibilities are to: Maintain the integrity of the scheme, Update the scheme rules and Act as an ombudsman / governing body for the service.

Bacs has grown in strength since its creation. The Government has acknowledged that the Bacs payment system is of critical importance to the UK financial system and has confirmed that it meets the recognition criteria set out in the Banking Act 2009.

On one day alone, in July 2015, Bacs processed a massive 103 million Direct Debits and Bacs Direct Credits transactions – that’s a whopping 6.7 million every hour the system was open, or 111,000 transactions each minute.

And the year brought huge growth in the use of Direct Debits; the number of payments made this way rose by 239 million, surpassing the last record of 161 million set in 2004 by some way. In percentage terms, that’s an increase of 6.6 per cent and trillions in value!

Bacs History

  • 1968
  • 1971
  • 1983
  • 1985
  • 2003
  • 2004
  • 2005
  • 2007

BACS started as the Inter-Bank Computer Bureau

The Inter-Bank Computer Bureau changed its name to the “Bankers Automated Clearing Services Limited”. This is where we get the term ‘Bacs’

ACSTEL (a telephone service) was introduced. This meant that Bacs could process transactions over a phone line which resulted in a quicker, more efficient service. Previously data had to be sent using magnetic tapes which were biked to their destination – a slower and less secure service. With the introduction of Bacstel, the number of Direct Debits being processed increased.

The company shortened its name to “BACS Limited”

The company split into two separate arms:

  • Bacs Payment Schemes Ltd. This arm took responsibility for promoting and governing the scheme as a Not for Profit Organisation
  • BACS Ltd. This arm owned the infrastructure that processed the scheme

To avoid confusion, BACS Ltd changed its name to VOCA

All Service Users migrate to using Bacstel-IP software, a system which allows users to submit and monitor payments via the internet. This resulted in a further increase in the use of Direct Debits

VOCA merged with LINK, the organisation that runs the UK’s cash machine network and became known as VOCALINK. VOCALINK provide domestic and international transaction services to banks and corporate organisations.

Box Image Bacs Members

Bacs Members

Bacs is owned by 16 of the leading banks and building societies in the UK, Europe and US. These are called the Member banks. Member banks have a direct link to Bacs and will upload transactions to Bacs directly.

There are hundreds of other banks (and building societies) that can offer accounts that support Direct Debits however. These are called Agency banks. They are not direct members of Bacs and will themselves bank through one of the Member banks. They will send their transactions to their Member bank and the Member bank will send the transactions to Bacs on their behalf. Bacs Members

Other terms that you might see are Sponsor Banks and Paying banks. Sponsor banks are actually the member banks. They sponsor organisations, and the Agency Banks to use the scheme, i.e. it is their authority that is required for an organisation to be authorised as customers who can use the Bacs scheme.

Paying banks are any banks who offer accounts that will accept Bacs Payments.

All banks, whether Member banks or Agency banks are governed by the same set of rules that regulate the scheme. How they process transactions can be different however and this in turn can have an impact on your organisation. It is worth knowing therefore if your bank is an Agency or Member bank.

An Agency bank is any bank or building society that is not a member of Bacs but is sponsored to participate in the Direct Debit or Direct Credit scheme by a Member bank.

Important Direct Debit Terms

The following are terms that you will see used throughout this training site and are common within the area of Direct Debits. Understanding these terms will help you better understand the Scheme itself.