How Long Does Direct Debit Take to Clear?

For businesses big and small, it’s important to understand all the different kinds of payments that you can accept from your customers. Equally, as a consumer, it’s great to have different options that allow you to pay as conveniently as possible. Many businesses and consumers choose to accept and make payment through direct debit.

But how does direct debit work, exactly? It’s a relatively simple system that involves the customer instructing their bank to authorize collection of payments from a given organization. Customers will have to provide permission and specific details of dates and amounts for the funds to be collected. Keep reading to find out more about direct debit and how to set up direct debit.

How does direct debit work?

The first question that comes up for newcomers to this payment system is generally: “what is direct debit, and how does it work?”. As previously mentioned, direct debit requires the customer to provide instruction to their bank, authorizing the business to collect payments on the due date. This makes it a pull-based payment method, since the payee initiates the transfer of funds.

You might now be wondering how to set up direct debit for your business. These payments are processed through the Automated Clearing House (ACH) network, which is an electronic network that is used for processing the transfer of funds. In order to process these kinds of payments, you must be a registered business entity within the United States.

The process for direct debit payments generally works as follows:

• A customer enters an agreement to make payments. These are usually regular payments, such as for utilities or insurance.

• The customer will then be required to sign an authorization form, which may be either paper or digital. This states their agreement to be automatically debited rather than manually pay for each instalment.

• When it’s time to collect payment, the payee will make a pull request through an Originating Depository Financial Institution (ODFI), which is a type of payment processor. This instructs the ACH debit system to take funds from the customer’s account.

What time do banks take direct debits?

You may have heard that direct debit payments are time sensitive, which often leads to the question: “What time do banks take direct debits?”. Well, it depends on when the request for payment is made. You should aim to submit this request before the 4.45pm ET cutoff, which will ensure you are paid by 6pm ET on the same day, provided there are no errors.

If you miss the cutoff time, then the transaction will be settled at 8.30am ET on the following business day. The payee will receive funds within minutes or hours of this.

Using GoCardless for direct debit

Did you know that you can use GoCardless to process direct debit payments? After an initial set up, this pull-based method allows businesses to automatically take payments from customers on the due date. This reduces your risk of late payments, and also makes life more convenient for your customers.

Unlike setup via a bank or Direct Debit Bureau, there are no fees for setup and management. GoCardless simply collects a flat fee per transaction, and doesn’t take any further payments beyond this. There’s also an easy-to-use dashboard that integrates with other cloud-based accounting systems, streamlining the financial processes of your business.

We can help

GoCardless is a global payments solution that helps you automate payment collection, cutting down on the amount of financial admin your team needs to deal with. Find out how GoCardless can help you with one-off or recurring payments.