What is a standing order and how does it work

In the world of subscriptions and continuous payment authority, the various terms used may sometimes lead to confusion. From recurring payments themselves to standing orders and direct debits, they all share some similarities, but there are some fundamental differences.

In this blog post, we explore what is a standing order and the primary differences between it and direct debits. Let’s get started.

Definition of a standing order

A standing order is an order or further authorisation given to your bank or financial institution in which you set up regular, fixed and recurring payments to an organisation or an individual from your bank account. 

The frequency can vary –  weekly, monthly, bi-annually or something else. Your account number and account details are linked to the payment. The payment will appear on your bank statements.

In addition, the recipient is usually an organisation or individual to whom you would like to pay money every month from your bank account. However, it is useful when you don’t particularly want to set up an online payment or go to your bank’s branch to perform the same function each time.

They’re great for saving you time on performing redundant tasks.

Examples of standing orders

In essence, you can make standing orders for a variety of regular payments that are at a fixed amount. 

These can include the following:

• Paying rent;
• Magazine subscriptions;
• Gym memberships;
• Paying your monthly mortgage amount;
• Sending a fixed sum to your child away at university each month;
• Making a monthly donation;
• Making a payment from a current account into a savings account;
• Or something else.

Standing orders are a convenient way to manage regular, fixed payments effortlessly. They ensure timely and consistent payments for various expenses, no matter if you’re a business or an individual. 

Advantages and disadvantages of standing orders

Standing orders come with both advantages and certain disadvantages. Let’s explore some of these in more detail below.

The advantages include the following:

• A standing order is usually free to set up.
• You can set it up fairly quickly and easily.
• The payer sets up the payment amount, the time period and payment date.
• Standing orders eliminate the need to perform repetitive tasks.
• A standing order introduces ease and convenience when making fixed, recurring payments.

Meanwhile, you can expect the following disadvantages:

• You may not get payment notifications for a standing order.
• There is less flexibility if you need to change the details of the standing order. You may have to create a new one.
• It could have a high administrative burden on businesses receiving payments via standing orders.
• If you are a merchant who regularly receives standing orders, you should be aware that these can be cancelled by the sender at any moment in time.

Standing orders vs. direct debits

Now that you know what a standing order means, let’s take a look at some key differences between them and direct debits. 

Let’s start with the way each one is set up. 

You set a standing order up with your financial institution. On the other hand, a direct debit means a payment that is set up by an external company or organisation with which you have an agreement for them to withdraw funds from your account each month.

When it comes to fees, a direct debit has a low set-up and management cost, if any at all. Meanwhile, standing orders are said to have ostensibly few costs involved.

What happens if you don’t have funds in your account

But what happens if a standing order or a direct debit cannot go through to the intended recipient, for example, if you don’t have enough money in your account? What are the outcomes?

With standing orders, you may incur a penalty fee and it could take some time for you to notice the failure because of the absence of notifications to that effect.

With direct debit payments, you are more likely to get notified immediately by your bank or financial institution. This means you can rectify the situation quickly to ensure your payment goes through as intended.

Because standing orders are made for fixed payments regularly, there is some flexibility in terms of payments, but not much. With direct debits, on the other hand, such as for a telephone bill which may fluctuate each month, there is much more flexibility offered in terms of how much the provider can draw from your account. 

As for debit orders, you can take advantage of the direct debit guarantee, which enables you to get a refund in the event of funds erroneously or fraudulently taken from your account.

Conclusion

And there you have it! Some clarity about the world of payments regarding standing orders and direct debits. 

While the former is usually used for fixed and regular payments and is something you set up yourself, direct debits are usually an agreement between you and an external company or organisation to withdraw a certain amount of funds from your merchant account each month to ensure that your bills or subscriptions are settled.

Disclaimer: Please be aware that the contents of this article and the myPOS Blog in general should not be interpreted as a legal, monetary, tax or any other kind of professional advice. You should always seek to consult with a professional before taking action, since the particulars of your situation may materially differ from other cases.