Should you switch to direct debit?

Handing over control of your bank account may be unnerving. But it could save you time and money. By Frances Howell

Hesitation over setting up a direct debit is understandable. Unlike a standing order, which instructs your bank to make a fixed-sum payment on fixed dates, direct debit instructions allow for the sum paid to be varied by the company receiving the payment.

Yet direct debiting is on the increase. A total of 4.6 million new direct debit instructions were signed during this year's spring marketing offensive by the banks, utilities and local councils.

Sixty per cent of UK bill payers now pay an average of four different bills by direct debit. But the banking industry and the companies which offer direct debit billing ( known as originators) still see room for growth.

Their aim is to encourage not only new recruits, but also those who are currently dipping their toes in the water with a mere one or two direct debits, to take the plunge by paying eight to 10 different bills in the same way.

"People clinging to traditional ways of paying are being made to think again by the discounts available," says Michelle Weller of BACS, the UK's automated clearing house for direct debit instructions.

Direct debiting is tightly regulated by a code of practice. One of the consumer safeguards in operation is the indemnity agreement that originators must enter into with their own banks.

This obliges the bank to refund a wrongly billed customer if the originator cannot. Incorrect billing includes not only collecting the wrong amount, but also taking payment at the wrong time, too soon or too late.

Changes in the amount to be debited must be notified to the customer, at least 14 days in advance in the case of monthly direct debits, and direct debits can be cancelled at any time.

Obviously a move to direct debiting involves a loss of flexibility. You cannot stall paying your bills if you are short of funds. But it does save you filling in a payment slip, writing a cheque, finding an envelope, a stamp and finally a post-box (assuming you are not a telephone banking customer). It also saves the originator time and hassle and therefore money.

A wide range, and increasing numbers, of companies are now encouraging their customers to turn to direct debit by passing on some of their own cost savings in the form of discounts.

Although each discount offered is worth only a few pounds, generally transferring your bills to direct debit can save you a few pounds several times over.

Marks and Spencer, which is so customer cost-conscious that it still does not accept credit cards, offers lower annual percentage rates (APRs) for its Chargecard holders who pay by direct debit. If your account balance is less than pounds 1,000 and you are a direct debit payer, your APR will be 25.3 per cent as opposed to the higher 26.8 per cent. Balances over pounds 1,000 are charged at 20.6 per cent APR regardless.

Most of the regional electricity companies are now offering discounts in return for direct debit payments.

For example, London Electricity's discounts for direct debit payers are about 3 per cent off the average annual household bill of pounds 276.59. This adds up to a saving of pounds 9.05 which, although not huge in itself, could at least buy you a bottle of wine. So far it has encouraged nearly 25 per cent of its customers to pay this way.

Big savings are offered by the AA to its members who pay by direct debit. These range from pounds 5 off the annual pounds 41 fee for basic roadside assistance membership, to a pounds 20 discount off the top-of-the-range service, Option 400, which costs pounds 126 if paid by cash or cheque. These discounts have prompted 64.7 per cent of existing customers to pay by direct debit, and more than 70 per cent of new customers do so.

"We can make huge savings on banking costs, administration and renewal of memberships if they are paid by direct debit, so we pass those savings on to the members," says Natalie Proud of the AA.

The RAC offers its largest discount to new members who join its Reflex Europe service, and who pay by continuous credit card authority, which is similar to direct debit but is attached to credit cards rather than bank accounts.

Credit card payers save pounds 31 by paying only pounds 139 instead of the annual pounds 170 fee, whereas direct debit payers have to pay pounds 164, saving only pounds 6. The reason, says the RAC, is that direct debit failures are more frequent than credit card authority failures.

BT gives direct debit paying customers only a slight respite from high line rental charges with a princely pounds 1 off per quarter. If your quarterly bills are as low as pounds 40, this adds up to a 2.5 per cent cut. If your bill is closer to pounds 80 per quarter, this drops to a measly 1.25 per cent.

Despite the row over excessive pay to its chief executive, Cedric Brown, British Gas is hot on the trail of cost savings in payment processing. Its direct debit system, DirectPay, gives subscribing customers a 5 per cent reduction off their bill. The average annual household bill of pounds 311.52 is reduced to pounds 294.81 by direct debit, saving pounds 16.71. Since the launch of DirectPay in November 1994, the number of British Gas customers paying by direct debit has shot from three million to five million, in just over six months.

Cheaper bills are not the only reason. The British Gas scheme enables customers to spread their seesawing bills evenly throughout the year by calculating a regular monthly payment. "Customers prefer to avoid a big winter bill and pay a predictable monthly amount." says Gareth Wynn of British Gas.

For customers who are still averse to setting up an automatic stream of payments, but who pay promptly, British Gas has just introduced OptionPay. Customers paying within 10 days of the date of the bill will have pounds 2 knocked off the total of next quarter's bill unless they use a tiny amount of gas. However, DirectPay provides better value for money.

The sums saved by direct debit payments are not going to make you rich. However, the average household could save pounds 29.76 a year by simply paying telephone, gas and electricity bills by direct debit. (These figures are based on London Electricity's discount structure - check with your local power company for its arrangements.)

If you are really counting pennies, you'll also save on stamps and envelopes. But the real bonus is that you are in effect earning money by not having to worry about getting your bills paid.

When paying bills by direct debit

DO

Check your bank statements regularly to see that the right payment has been made. Non-payment can cause more difficulties than overpayment, particularly in the case of life assurance or insurance policies, which might lapse. If a mistake is made, whoever is at fault pays. If a policy has lapsed because of a bank error and a claim arises, the bank is liable to put the customer in the position he or she would have been in if the policy had been valid.

Follow telephone or fax instructions with a letter. Mistakes can and do happen. Payments continue to be made even though a customer has cancelled the debit instruction. To reduce the risk of payments continuing by mistake, cancel the instruction with the originator, so that it stops demanding payment, as well as with your bank.

Choose payment dates to suit you, for example a few days after your salary is credited to your account.

DON'T

Be put off claiming refunds in cases of incorrect payment even if you only notice the error six months later. However, errors are much easier to deal with if they are spotted immediately.