Once upon a time – and we mean a really long time ago – any transaction involving money was simple: take your goods or receive a service, and hand over a selection of coins. We can all agree that things are nowhere near that simple any longer; but while things have become more complicated, they’ve also opened up a world of possibility. For example, today’s business has multiple methods available for payment collection, from good old cash transactions and EFTs, to debit order and credit card collections.
Cash payments and electronic funds transfers, however, are entirely the responsibility of the payer. Today, we want to look at the two most popular methods used by recipients to collect invoice payments – credit card and debit order – and compare the two.
How they work
Debit order: according to PASA – our regulating body – an EFT debit or debit order is “a facility whereby somebody can collect money from your bank account without you having to do anything other than having given such person a written, electronic or recorded voice approval to do so.” In other words, once you, as the debtor, have received authorisation to collect the direct debit, you may do so according to your agreement, until the creditor retracts the authorisation. This type of payment is collected directly from a bank transactional account, like a cheque account.
Credit card: PASA defines a credit card as “a payment instrument issued by a financial institution and linked to a credit card account with a pre-approved credit limit”. To arrange credit card payment, the payer gives the recipient their credit card information and authorises its use for payment, much like a debit order. This type of payment is linked to a credit facility, not a bank account.
The Pros and Cons
Because a debit order is linked to a bank account, payment is guaranteed as long as funds are available. If however, funds are unavailable, the debtor is able to make a second attempt to collect. Direct debit payment amounts, therefore, are also only limited by the amount of money available in the account, rather than being limited to a credit limit. Contrary to what many people think, debit orders don’t have to always be the same amount, either – an authorised invoice payment debit order can vary according to what is owed. In addition, it can be collected according to an agreed-upon schedule, rather than being an immediate payment. DOs are among the most secure payment methods, although we always advise our clients to have robust anti-fraud procedures in place.
Credit cards are linked to a credit facility, as we mentioned before. That means payments are restricted to the available credit facility, and run the risks associated with this. On the plus side, credit card payment is one of the most convenient methods for the payer, and payment is immediate, which can be of benefit to the collector. However, the fees associated with credit card payments are considerably higher for the debtor – the highest of all payment methods, in fact – which means that, even if collection is successful, a significant percentage of the payment is lost. Finally, the risks associated with credit cards are much higher than any other non-cash payment method, both for the card holder and the merchant.
Which to choose?
On balance, while credit card payment is often cited as being the most convenient, debit order invoice collection is much safer, more reliable, and more cost-effective than credit card collections. Setting up debit orders for your customers is simple and quick, and with a proven system in place, can help your business maintain an even cash flow.
Need help switching to debit order revenue collection? Get in touch with Three Peaks today.