What is the Difference Between a Standing Order and Direct Debit?

Two automatic payment options available to bank account holders worldwide are the standing order and direct debit. There are two major differences between them: the source of the transaction and the amounts to be paid. A standing order is a directive from an account holder to the bank to pay a specific amount to a third party on a set schedule. A direct debit is a payment arrangement initiated by a third party and approved at the outset by the account holder; once approved, the third party can present direct debits to the bank in any amount, often at indeterminate intervals. Standing order and direct debit arrangements can be canceled by a simple instruction from the account holder to the bank.

Standing orders, which are established by the account holder, pay only a set amount to the third party. Thus, they’re best suited for payments where amounts never vary, such as rent or mortgage payments, insurance premiums or periodic contributions to savings programs. Generally, a standing order takes two to three days to complete, and can usually be canceled at any time except the day before and the day of the transfer. In the United States, standing orders are not as commonplace as they are in other countries.

Direct debits are originated by the third party, such as a utility company, credit card company or online service provider. Approval is obtained from the consumer, often on a paper form, but more frequently online. One-time purchases, both online and in traditional retail environments, are also frequently paid by means of a direct debit. When a direct debit is intended to remain in force beyond the original sale, for the collection of additional amounts due, the customer usually specifically approves the arrangement, which is called a "direct debit mandate."

The difference between a standing order and direct debit is important to the third party — the party being paid — because the standing order takes longer to execute. When a third party presents a direct debit for payment, the funds are transferred immediately. By contrast, when an account holder places a standing order to take place on a specific date, the funds may not arrive in the payee’s account for up to three days after the effective date of the transfer. Direct debits are preferred by companies because they can collect a wide range of amounts whenever they become due, although many voluntarily present direct debits only once a month. In addition, from the third party’s standpoint, if small additional amounts like service charges become due, it’s far more convenient to debit the consumer’s bank account directly rather than send a paper invoice.

From the consumer’s perspective, the difference between a standing order and direct debit is also critical. For all transactions where the amount due remains constant, or must only be adjusted rarely, the standing order is preferable because it guards against unplanned or inaccurate charges by the third party. These charges, whether or not justified in the eyes of the third party, usually interfere with the account holder’s budgeting. Considering potential exposure to human error or fraud, the standing order is clearly the preferable arrangement from the consumer’s viewpoint.

While the consumer can cancel both a standing order and direct debit, the functional difference is one of control. The consumer retains absolute control over the standing order and only veto power over a direct debit; that is, a consumer may not instruct her bank to pay some but not all of a third party’s direct debits. The third party holds significant control over the direct debit process, and many will penalize those customers who withdraw authorization.