What is Direct Debit Indemnity?

Direct debit indemnity requires a bank to refund money to a bank account holder immediately. A bank refunds money when it receives notice that a debit occurred without approval or that an incorrect amount was withdrawn from an account. For direct debit indemnity to work, the account holder must notify his bank of a debiting error. The bank refunds the money to the account and investigates the situation, if necessary.

A direct debit allows a person to pay bills automatically through a bank account rather than sending checks to several companies each month. A person is also able to buy goods and services with a direct debit instead of using cash. Many companies also prefer payments through direct debits because it eliminates their need to mail bills to customers, which minimizes their expenses. Problems may arise, however, when a business debits a customer for an incorrect amount or when a customer cancels approval of a debit. Direct debit indemnity solves these problems because a bank is obligated to refund money to the account holder immediately and then conduct an investigation. 

For example, Henry joins a gym and signs a one-year contract. He gives the gym approval to debit his bank account each month to pay for his membership. Two months later, Henry quits going to the gym and he tells his bank to stop any additional payments to the gym. Henry, however, does not tell the gym that he quit, so they continue to debit his bank account. 

Eventually, Henry learns that his bank is still paying the gym automatically with direct debits. He notifies them of the problem and requests an immediate refund. The bank complies with the request because of direct debit indemnity. The bank may require Henry to submit his request in writing. The bank can then recover its money from the gym. 

A business may file a claim to dispute the bank’s demand for a refund. It must do this within a certain period or lose such right. Any business that accepts payments through direct debit is required to sign a contract, which obligates the business to comply with procedures for resolving direct debit indemnity claims. A business that does not sign the agreement is not allowed to accept payments through direct debits. This may hurt a business, because so many people pay with direct debits. 

An account holder with a bank cannot avoid a lawful debt with direct debit indemnity. Although a bank makes an immediate refund, the account holder may still owe the debt legally. If the bank learns that a customer provided authorization for a withdrawal, the bank can require its customer to pay back the bank. A business may also choose to take legal action against a person who receives goods or services, but stopped payment wrongfully.