What is a Direct Debit Mandate?

Dale Marshall

A direct debit mandate is authority given to a third party by a bank account owner to charge, or debit, his bank account on a periodic basis to pay amounts due. It differs from most transactions because it’s not limited to a single occurrence. Essentially, a consumer authorizes a company he deals with to debit his bank account directly without obtaining a new approval each time. In the United States, the rules governing direct debit mandates are outlined in the automated clearinghouse regulations maintained by the Automated Clearinghouse (ACH) and the Federal Reserve.

Businessman with a briefcase
Businessman with a briefcase

For busy householders, whose time is always at a premium, a direct debit mandate can be a great convenience. The chore of sitting down for an hour or so to pay bills, even with the convenience of online banking, often gets postponed. From time to time some bills get paid late, which can damage the consumer’s credit-worthiness. Having regular bills automatically charged to one’s bank account prevents late payment and the associated late fees.

Unscrupulous merchants sometimes exploit direct debit mandates to take advantage of consumers, though. Usually offering “free trial periods” for different services, they’ll require consumers to provide account information, with the promise that if the service is canceled before the end of the free trial period, the account won’t be charged. What they’re counting on is the fact that most consumers will forget to cancel even if they mean to. As soon as the free trial ends, the merchant files the direct debit mandate with the bank and collects payment.

Many Americans don’t regularly review credit or bank account statements. Direct debits, especially for small amounts, may go on for months or years before they’re noticed and questioned. When they finally are caught and stopped, those unscrupulous merchants usually refuse to refund any but the most recent month’s payment. Another way some merchants take advantage of direct debit mandates is that they don’t stop collecting payments after a debt has been satisfied. This usually happens with consumer credit arrangements; when the amount due has been paid and the debt satisfied, the lender continues to present the monthly debit to the bank.

It’s relatively easy to prevent direct debit mandate fraud, though. Most banks in the US provide contact information on bank and credit card statements that make it easy for their customers simply to call the companies debiting their accounts. All that’s necessary, then, is for consumers to review their account statements upon receipt, question those items they don’t understand, and call the companies responsible for those charges. Consumers can stop direct debit mandates either by instructing the debiting company to stop making the debits, or by instructing the bank to stop honoring them.

While direct debit mandates can expose account holders to moderate risk from online criminals, they help secure them from more traditional thieves. Some of these criminals rifle outgoing mail for bill payment envelopes, while others will root through trash looking for canceled checks. Direct debit thwarts their efforts and puts consumers’ banking information out of reach.

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