Guide: Payment Methods
There are many different ways to pay for products and services in the UK and all involve different timescales and requirements. This is a short guide to the most common payment methods we use and what is involved in each one.
Debit card payments
Use of a debit card is linked directly to the cardholder’s bank account. When a payment is made using a debit card this is taken directly from the account in question, rather than being paid at a later date. It can take several days for the payment amount to leave a bank account but with a debit card payment if there are insufficient funds in the account then the payment won’t usually go through and will come up as ‘declined.’
Credit card payments
A credit card is not linked to a person’s bank account but to the line of credit that is being extended to the cardholder by a lender. Essentially, the money is being borrowed by the cardholder so as to pay for goods and services and is paid back to the lender at a later date. Interest is charged on the amount of credit that the cardholder has used (unless the cardholder benefits from an interest-free period on the credit card). When a payment is made with a credit card for goods or services there is greater protection for consumers against fraud – Section 75 of the Consumer Credit Act allows consumers to claim any money lost through fraud when an item is purchased using a credit card from the credit card company, as long as it is not less than £100 and not more than £30,000.
Direct debits are a way of making regular payments to a third party. They are usually set up with a direct debit mandate or by going into, or speaking to someone at, a bank. Direct debits are set up to come out directly from a current account and are periodic, for example on a monthly, weekly or annual basis. Once they are set up direct debits effectively give the third party the right to take the money from the bank account in question on the date in question. The amount of the payment can be changed by the third party taking it (this is the biggest difference between a direct debit and a standing order) although the bank account holder must be notified if this happens.
Direct debits are often used to pay regular bills, such as a TV licence or energy bills, and many businesses will offer a discount where a customer is willing to pay by direct debit as it is viewed as a more reliable form of payment than waiting for the customer to transfer the money each month.
If there isn’t’ enough money in a bank account to pay a direct debit then there may be a small buffer zone, depending on the bank, from which the direct debit can be taken. If this is not the case, or if the amount of the direct debit is too large, then the payment won’t be made. There may be bank charges to pay if the direct debit payment pushes an account into overdraft. Direct debits can be cancelled by the customer at any time. When cancelling a direct debit it’s important to do so in plenty of time or the payment may still be made – and to notify the recipient of the cancellation.
A standing order is similar to a direct debit in that it is a way of setting up a regular payment to be taken directly from a bank or building society current account. The main difference between the two is that the customer retains control of the standing order and can change the amount and the date of the payments at any time. Standing orders can be set up by a customer signing a form that is provided by the company that is to be paid, or by the customer going into their bank and setting up the regular payment – this can also usually be done online for those customers with internet banking.
Standing order payments can be set up for any amount and set for any frequency – for example, the payment could be set up to be transferred on the 5th of every month. This can run for a specific period of time, or on an ongoing basis until the customer cancels the standing order. When cancelling a standing order it’s important to notify the company that was to be paid and to make sure the standing order is cancelled in plenty of time – if not the payment may still be made.
It usually takes three working days for a standing order payment to reach the recipient. If there isn’t enough money in an account to meet the payment then, as for a direct debit, there may be a small buffer zone out of which the payment can be made and, if not, the payment won’t go through.
Continuous payment authority
A continuous payment authority is another type of regular payment that can be set up to meet payment obligations but it is different from a direct debit and a standing order. The authority can be linked to a debit or credit card and when a payment is taken it will come from either the current account linked to the debit card or the credit card account.
The main difference between this form of payment and direct debits and standing orders is that a continuous payment authority gives the company to whom the customer is granting the authority the right to take payments on the date that they choose and in the amount that they choose. There is no set date and the amount does not have to be set in advance. Payment amounts may be different every time and can be taken on different dates too.
A continuous payment authority can be cancelled by the customer telling the company in question or by informing their bank. Where the customer tells their bank to stop a payment then the bank has to do so. However, if there is an agreement in place to make payments then any remaining payments should be made and the company should be informed that the authority has been cancelled.