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Standing orders and direct debits are both popular options for regular payments, but there are some key differences you need to understand.
There's even a new way to pay your monthly bills and other recurring payments, known as variable recurring payments (VRPs).
So, what is the best way to set up a regular payment and how are you protected if something goes wrong?
We explain in detail how standing orders and direct debits work later, but the main things you need to consider are:
As for direct debits:
A standing order is a regular payment which you instruct your bank to make. The easiest way to do this is via online or mobile banking but you may also be able to set these up in your local branch or over the phone.
Standing orders are typically used for rent payments, monthly charity donations, and regular payments into a savings account.
A standing order amount will remain the same, unless you amend your instruction. The money is transferred through the Faster Payments Service, and will be processed on the same day, or on the first day after a weekend or bank holiday.
Standing orders can be simpler than direct debits, mainly because the business is not involved in claiming payments from you, but offer less consumer protection.
At set times, your bank just sends the money into the beneficiary's bank account and only you can alter the payments. The beneficiary can be anyone.
Whereas you set up a standing order yourself, a direct debit is set up by a company, using your sort code and account number.
When you sign a direct debit form or mandate, you give that company permission to take a certain amount each month.
Direct debits are often used for mortgage, phone, energy or gas bills.
The main advantage of direct debits is the flexibility, as the payments can vary in amount or frequency. The variable nature means that organisations or individuals can claim different amounts at different times.
Its usually better to pay by direct debit as it gives you more consumer protection.
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Usually, you have to sign a direct debit form, although some companies are authorised to set up direct debits over the phone.
If that sounds a little risky, remember that the company must have obtained the bank account details from you and that you are protected by the Direct Debit Guarantee.
The beneficiaries of direct debits should be subject to careful vetting procedures and, once approved, they're required to give indemnity guarantees through their banks.
However, rogue businesses do slip through, for example, Which? has reported on cold callers taking direct debits for worthless appliance repair cover, often targeting elderly, vulnerable people.
The Direct Debit Guarantee applies to all banks and building societies taking part in the direct debit scheme. It states that your bank should refund disputed payments without question, pending further investigation. It says that:
If you've cancelled a direct debit and the money has still been taken from your bank account, contact your bank or building society.
It doesn't matter whether you owe money to the company in question or not – if you cancel a direct debit, your bank should ensure that no payments are taken.
Under the Direct Debit Guarantee disputed payments must be refunded by your bank without question, pending further investigation.
A brand new payment option is aiming to offer a more transparent, flexible alternative to direct debits – it's known as a variable recurring payment (VRP) or ‘bank on file’ and it's powered by secure technology called open banking.
These are being tested with low-risk sectors such as utility companies, financial services and government agencies first, before being rolled out more widely.
Further down the line, VRPs could be used for subscriptions, regular charity donations, and as an equivalent to existing one-click checkouts for online shopping, where your card details, delivery address and contact details are kept on file so that they don’t need to be entered each time (pioneered by Amazon).
You should be able to cancel VRPs via your banking app or online bank account at any time.
But, as things stand, there is no equivalent to the Direct Debit guarantee.
A recurring card payment – also known as a continuous payment authority (CPA) or future card payment – is set up by a company using your debit or credit card details, instead of your current account details.
For example, subscriptions for Amazon Prime, Netflix, Spotify and magazines take card payment details for recurring payments eg once a month or annually.
Subscriptions can usually be changed or cancelled by contacting the company taking the payment, although your card provider must cancel these payments if you ask them to. If further payments are taken by mistake after you've asked for a cancellation, your card provider must refund them.
If a company is refusing to cancel recurring payments because you signed a contract, you can still ask your bank to step in but if you are in breach of contract think carefully first as you will owe the company money.
Contact your card provider quickly if you spot a recurring payment you didn’t authorise.
Which? has become increasingly concerned about rogue subscription businesses taking recurring payments, most of which are linked to fake or misleading adverts and dodgy QR codes.
Your bank can put a stop to future payments if you are unable to cancel a subscription, though getting a refund for money you’ve already lost can be more difficult.
If the company in question won’t refund you, ask your bank to help and escalate your case to the Financial Ombudsman Service (FOS) if you're not happy with its response.
You can cancel a standing order, direct debit or recurring card payment at any point in your branch, over the phone or via secure online banking.
But, it's best to confirm your instruction in writing via a letter or email so that you have a record of it.
Use our template letter to cancel a direct debit with your bank.
Make sure you inform the person or company in receipt of the payment before you cancel it, as you could incur fees or penalties for non-payment.
Also, it's worth checking the terms and conditions of the business that you're dealing with, just in case you're still within the fixed term period of the contract, or in case a notice period has to be given.
Be aware that if you don't pay a bill on time, this could affect your credit rating and will appear on your credit file.
Always confirm your cancellation in writing or email and be sure to make alternative arrangements for payment so as not to adversely affect your credit rating.
Our guide explains how to check your credit report and why it's so important.
As with all standing orders or direct debits, once you've cancelled always take care to check subsequent bank statements to ensure your instructions have been followed.
That way any error will be identified immediately and steps can be taken quickly to secure a refund.