property services

Property payments: Standing Order vs. Direct Debit for rent collection

By Modulr on 26 February 2020   •   6 mins read

When it comes to the great debate about whether you should collect rent payments via Direct Debit or Standing Order, opinion remains divided.

On the one hand, landlords often prefer Direct Debit while tenants find Standing Order easier -- leaving letting and real estate agents stuck in the middle. 

But the debate is changing as new entrants in the payments space challenge the status quo and highlight the hidden inefficiencies (see below for our list) in established payment collection methods. 

Here are the main differences between Standing Order and Direct Debit and, as a bonus, which payment technologies on the horizon might offer the best of both worlds.

What’s the main difference between Standing Order & Direct Debit?

Most tenants pay their rent through either Standing Order or Direct Debit payments. But, back to basics, what’s actually the main difference?

Standing Order pros & cons

With a Standing Order, you can only withdraw a fixed amount and tenants must sign into their bank accounts to set one up. 

Pros Cons

Preferred by tenants: Often preferred by tenants as they can only be charged a fixed amount, whereas Direct Debit allows any or variable amounts to be charged

Reliance on manual reference input: Reliant on tenants to remember to manually set one up and include a reference code to allow letting agents to reconcile

 

Poor user journey: Can lead to inferior customer experience as tenants need to leave the app or website and visit their online banking portal to set up a standing order

 

No notice cancellation: Landlords and agents also don’t receive a technical confirmation when tenants cancel a standing order

 

Direct Debit pros & cons

Direct Debits offer much more flexibility as once a Direct Debit mandate has been submitted and approved, the actual amounts and frequency can fluctuate.

Pros Cons

Flexibility: Direct Debits provide more flexibility than standing orders so tenants forgetting their reference number becomes less of a problem

Indemnity claims from Direct Debit: There is a potential misuse of the Direct Debit Guarantee, resulting in indemnity claims

Customer user experience: Direct Debits can be setup fully within the context of a website or mobile app provided by the letting agent, there is no need for the tenant to navigate away to their bank account to set up a standing order

 

Simplified reconciliation and more data control: For example, invoice or tenant reference numbers can be easily captured and mandated for Direct Debit when setting up the mandate, whereas tenants can forget or incorrectly type these when setting up a standing order

 

 

The hidden inefficiencies in Real Estate and Letting Agency payments

Regardless of the preferred payment method, manual and fragmented payment processes like the above create many issues for rental agencies looking to grow and scale. It means that without the right infrastructure, neither standing order or direct debit are ideal rent collection options for aspiring agencies.

But most letting and real estate agencies rely on these outdated, manual payment processes. When juggling a large portfolio of properties, this is especially problematic as letting agencies could be receiving rent collections and making landlord forward payments every single day.

Finance departments then need to track incoming payments on a spreadsheet or CRM, match these payments with properties (especially challenging if the tenant doesn’t include a reference), and deduct any rental fees before sending the final amount onto the landlord. 

Payments in property services today are:

  • Time-consuming. Finance departments need to spend several hours every day to make the process work.
  • Expensive. You’ll need a large team to simply handle the overly manual payment process.
  • Prone to errors. Whether it’s tenants forgetting their reference number or an error made in-house, manual processes create far more opportunities for mistakes.
  • Significantly slower. Manual payment processes take time as you’ll need to wait for the finance department to reconcile payments and most landlords are unhappy waiting. Bacs-based payment processing also adds delay and keeps funds in limbo.
  • Delayed follow-up. Longer processing periods also means it takes longer to recognise missing payments and follow-up, to the disapproval of landlords.

But payment technology can do so much more for property services

Modern payment solutions like Payment Initiation Service (PIS), payment splitting and payment platforms with API capabilities could ease some of the headaches in the property sector.

PIS (Payment Initiation Service) to collect rent payments for letting agencies

PIS is essentially the same concept as a Standing Order. But, look under the bonnet and you’ll discover that this alternative payment method gives landlords and letting agents greater control over the user experience and speed of settlement.

Say, for example, a tenant comes to your office or visits your website. You can build PIS into the user experience, so the tenant signs up today for a property and is instantly sent a link. The link confirms that the tenant will pay £550 in rent per month, every month. All the tenant then needs to do is press ‘Yes’ and they’re sent to their bank website or app where they can set up a recurring payment with pre-filled details (which is the same under the hood as Standing Order) before returning to your site.

Creating a seamless user experience, which effortlessly transfers customers from your site to their bank and back again, makes it easier to control when tenants pay with easier reconciliation and faster settlement.

Automated payment splitting to improve reconciliation

But PIS is only half the story. Payment technology platforms, like Modulr’s, are able to simplify collection and reconciliation and even automate the payment split for disbursement to landlords.

At most estate or letting agents, payments come in, fees and additional charges are deducted and then payments are sent onto the landlord. You could have as many as four or five payment splits during the process.

When this process is handled manually, your finance department must reconcile the payment and determine how much to deduct before the landlord receives their money. If you don’t deduct fees upfront, you’ll need to invoice the client at a later date which could harm your cash flow and inevitably lead to chasing down ad hoc payments.

Automating this process with a payment as a service platform like Modulr, which offers easy API integration with any software makes the rent collection, reconciliation and landlord disbursement automatic, quick and reliable. Our platform allows you to create rules to automatically configure payment splits on the fly. 

What the future of payments in property services looks like

With most established payment processes, tenants pay into one or two accounts held by the letting agency, which makes it time consuming and expensive to reconcile payments. Automated payment platforms, like Modulr, have an alternative method.

Funds arrive into a segregated account via Standing Order or Direct Debit (optionally PIS). The letting system then determines how much the letting agent and landlord is due and the Modulr platform executes the split immediately. Once the platform has deducted the estate agents’ fees, the rest is sent to the landlord. 

In this way, letting and estate agents can eliminate the hidden inefficiencies in their existing payment processes. Not only that, they can make payments their competitive advantage by streamlining and future proofing their finance function, and all while offering their customers the best experience available.

Discover automated payments from Modulr or contact a team member for more information.