Credit Card vs Direct Debit Payments

If your business charges customers for online purchases on a recurring basis, there are two main ways to take payment. You can charge a customer’s credit card or take a direct debit from their bank account.

Credit card and direct debit payments both have advantages and drawbacks, so it’s important to fully understand how these online payment methods work. In this guide, we’ll compare credit card vs direct debit payments and help you decide which to use.

Credit Card vs Direct Debit Payments: What Are the Main Differences?

There are several key differences between using a credit card and a direct debit for recurring payments that you should know about right away.

• Convenience – Credit cards. Credit cards are often more convenient than direct debits, which require customers to provide their bank account information.
• Cost – Direct debits. Processing fees for direct debit payments are very inexpensive compared to credit card payments.
• Reliability – Direct debits. Direct debits have a higher success rate than credit card payments. Your business also won’t lose money if a customer makes a payment in error.

How Do Recurring Credit Card Payments Work?

Recurring credit card payments, also known as CPA payments, enable your business to charge a customer’s credit card repeatedly.

To take credit card payments that recur, you must store the customer’s card information. You can then charge the card on each billing date for a subscription, invoice, or other purchase. Payments occur using the same payment gateway you use for one-time credit card payments.

How Do Direct Debit Payments Work?

Direct debit payments allow you to take payment for a recurring purchase directly from a customer’s bank account.

To take direct debits, you must store the customer’s bank account information. You can then submit a request for a direct debit to your merchant account provider on each billing date for a recurring purchase. Payments are made using the BACS payment network, which is an electronic network that facilitates bank-to-bank transfers.

Credit Card vs Direct Debit: A Detailed Comparison

Now that you know the basics of how credit card and direct debit payments work, we’ll dive into a more detailed comparison that highlights their similarities and differences.

Setup

To accept either credit card or direct debit payments online, customers will need to enter their payment information.

Entering credit card information is typically very convenient—many customers have their information saved to their browser so it auto-fills on your checkout page. Even if it doesn’t auto-fill, customers usually have their physical card on hand and can enter the information in a few seconds.

Entering bank account information for a direct debit payment is less convenient. Most customers don’t know their bank account information offhand, so they may need to log into their bank to get their account and routing numbers. This only takes a few minutes, but it can add enough friction to the checkout process to turn away some customers.

Customers will also need to authorise recurring payments for either a credit card or direct debit. Authorisation typically only requires customers to check a box and the process is similar for both payment methods. 

Flexibility

Both credit card and direct debit payments are relatively flexible. You can change the amount you charge or debit from one bill to the next. It’s also up to you whether you want to bill customers on a fixed schedule or request payments manually on specific dates.

Processing Time

Credit card payments are processed instantly. However, how long it takes proceeds to reach your business bank account depends on your merchant account provider. Some merchant account providers offer same-day payments, while others take up to two days to pay your business.

Direct debit payments usually take three business days from when payment requests are submitted to your customer’s bank. Some merchant account providers offer a same-day payment option, but this costs extra.

Processing Fees

One of the most notable differences between credit card and direct debit payments is how much they cost. Most banks charge a flat rate of 5p-50p per transfer for direct debits. Credit card transactions, on the other hand, usually have percentage-based fees that range from 1.5% to 3.5% per charge.

For a £100 transaction, a direct debit payment might cost £0.50 while a credit card payment could cost £3.50.

Payment Success Rate

Direct debit payments have a failure rate of only 0.82% compared to approximately 7.9% for credit card payments.

That’s because direct debit payments will only fail if a customer closes their bank account or doesn’t have sufficient funds for a payment. Credit card payments can fail if a customer closes their card account, gets a different card number, temporarily locks their card, or reaches their credit limit. While you can contact a customer to get new payment details for a failed payment, not every customer will respond—which means you could miss out on revenue.

Chargebacks

Chargebacks are handled similarly for credit card purchases and direct debits. For both payment methods, customers can initiate a chargeback if a payment was unauthorised or if there’s a quality issue with the product or service they purchased.

If a customer files a chargeback, your business will need to repay the funds to your merchant account provider.

Cancellation

Customers can cancel a direct debit authorisation by contacting their bank. This makes it easy for customers to end a subscription and doesn’t require your business’s customer support or billing team to be involved.

To cancel recurring credit card payments, customers must contact your business directly. While this requires your business to have customer service agents available, it also allows you to communicate with customers and convince them to keep a subscription.

When to Use Credit Cards for Recurring Payments

It makes sense to accept credit cards for recurring payments when you want to make the checkout process as easy as possible for your customers. That’s especially important for small purchases since customers may be less committed to making a purchase and could walk away if they need to retrieve their bank account details to pay. 

Many online retailers that sell recurring subscriptions and memberships accept credit card payments. 

When to Use Direct Debit for Recurring Payments

Businesses often use direct debit for large recurring payments, when a slightly longer checkout process is unlikely to dissuade customers. For example, many businesses use direct debit to collect rental payments or insurance payments.

Businesses also use direct debit to collect payments from other businesses for invoices. Credit card details can change every time employees at a company turn over, so connecting directly to a customer’s bank account reduces payment failure.