Many consumers use direct debits to pay bills, and most of the time they probably work well. However, it is still worth asking a very fundamental question: are they really of net benefit to all consumers?
Direct debits certainly benefit businesses in many ways. For example, direct debit gives a higher level of payment certainty than other ways customers can pay bills. Another benefit can be higher customer retention rates.
Indeed, it is worth consumers asking whether the discounts provided by some businesses for direct debit payments are big enough - and why do some do not provide any discount?
But the benefits for consumers are less certain.
Direct debits can definitely reduce the amount of time consumers spend paying bills. However, this may be at the cost of not spending enough time checking that bills are accurate. Paying each bill individually does have this advantage.
Relying on the regularity of direct debit also means that many consumers probably do not check enough whether there are better deals elsewhere or with the same business. This results in a definite reduction in competition.
And some consumers may never get round to cancelling direct debits for services/products they no longer require, or maybe even still receive. They might, however cancel, if they had to pay each bill individually.
Another downside is that sometimes a direct debit does not go through as planned, resulting in a reminder from the business and maybe penalty charges and loss of discount. The failed direct debit may be something as simple as not changing the details when there is a change in a card’s expiry date.
There can, however, be some far more serious problems for consumers. For example, some consumers regularly find it difficult to ensure there are sufficient funds available to pay a direct debit. This can lead to the financial institution imposing a direct debit dishonour fee. Some of these are lower than they used to be, but many remain too high.
For low income consumers these charges and fees can be significant. Some of these consumers would be better off without direct debits, so that they could, where necessary, manage cash flows more effectively. Often financial counsellors will suggest that consumers cancel direct debits as a first step for clients experiencing financial difficulty, because direct debit fees eat up precious income.
The use of credit cards as the direct debit account can also result in debt building up to unmanageable levels. There can be other problems as well, because you cannot cancel these types of arrangements directly with banks - you have to contact the service provider, who may or may not make it easy to cancel the direct debit.
Direct debits on credit cards can also be a barrier to closing or switching credit cards. Unlike transaction accounts, credit cards were not included in the recently implemented ‘tick and flick
’ switching arrangements instituted by the Treasurer.
Closing a credit card account means cancelling all of the direct debits arrangements first. Some consumers think they’ve done this, only to find that they continue to receive a credit card bill when a forgotten direct debit, perhaps an annual or six month insurance payment, is debited.
These are just some of the many costs and benefits to take into account when trying to decide, individually or more generally, whether direct debits are of net benefit to consumers.
Better processes, rules, and consumer protections and more financial literacy and consumer education could undoubtedly reduce some of the negatives of direct debits for some consumers. But direct debits are always likely to reduce the extent to which consumers shop around, and so will always reduce competition.