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Modulr glossary

Direct Debit (UK)

Direct Debit is a UK payment method that allows businesses to collect payments automatically from a customer’s account on a scheduled basis. It is widely used for recurring payments such as subscriptions, utility bills, and loan repayments, and is unusual as it is a variable recurring pull payment that does not require further authorisation from the payee. Direct Debits can be confused with Automatic Fund Transfers, which also are able to move money at scheduled intervals, however the latter are payer-initiated, for fixed amounts and scheduled (such as Standing Orders), versus the flexible pull payment capabilities of a Direct Debit. A Direct Debit Mandate (or Direct Debit Instruction) acts as an authorisation for payments to be collected from an account in the future. The mandate does not specify the amount or frequency, rather it is a general authorisation for the Service User (e.g. the company collecting payments) to collect any amount at any point in time providing sufficient notice is given and the amount is specified in that notice. A Direct Debit SUN (Service User Number), or sometimes referred to as an Originator ID, is a unique six-digit number used to identify a business receiving money through a Direct Debit BACS transaction. The Direct Debit Guarantee applies to all Direct Debits. It protects payers in the rare event that there is an error in the payment of a Direct Debit, for instance if a payment is taken on the incorrect date, or the wrong amount is collected. It cannot be used to address contractual disputes between the payer and the billing organisation. A Direct Debit Indemnity (DDI) Claim is a claim under the Direct Debit Guarantee initiated by an account holder with their account provider.

Applications

E-commerce:

Reduces fraud in online card payments by verifying the cardholder's identity

Banking and fintech:

Helps issuers and payment providers comply with Strong Customer Authentication (SCA) requirements.

Advantages

  • Enhanced security: Reduces unauthorised transactions by verifying that the genuine account holder is authorising the payment
  • Fraud prevention: Helps reduce chargebacks related to fraud.

Challenges

  • User Experience: Additional authentication steps can cause friction and increase checkout abandonment
  • Implementation complexity: Requires integration with card schemes and issuer systems.

Related Terms

OTP Compliance Strong Customer Authentication PSD2
Item created by Modulr, Updated on
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