Monday, July 9, 2018

8 MONDAY, JULY 9, 2018
banking
personal
With Nike Popoola
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Should you use a standing order?
standing order is an automated method
A of making payments, where a person
or business instructs their bank to pay
another person or business, a fixed amount
of money at regular (fixed) intervals. The
payer controls the standing order; they set it
up themselves, and choose the amount and
frequency, according to gocardless.com.
Businesses who collect regular payments,
including subscriptions and instalment
payments, can do so via standing orders,
though there are some drawbacks.
In this guide, we will explain exactly
how standing orders work, present the
advantages (and disadvantages), and look at
the alternatives.
What is a standing order?
A standing order is an automated method
of making payments, where a person or
business instructs their bank to pay another
person or business a fixed amount of money
at regular (fixed) intervals. The payer
controls the standing order; they set it up
themselves, and choose the amount and
frequency. Standing orders are created to
cover a set period of time (e.g. every month
for a year), or until they are cancelled.
Any person or company with a current
account can set up a standing order, either
online, over the phone or in person at a
branch of their bank.
A standing order is different to a
direct debit payment. A standing order is
essentially an instruction from the payer
to their bank, telling their bank to ‘push’
funds to another person or organisation. In
contrast, when you set up a direct debit, the
person or organisation receiving payment
asks permission from the payer to ‘pull’ funds
from their account on a recurring basis.
Some small businesses collect regular
payments from customers by standing
order. Receiving payment by standing order
generally costs nothing, and, once the order is
up and running, the business can rest assured
that payments will be collecting automatically
and on time. However there are drawbacks: a
customer can change or cancel the payment
without notifying you, so you will have to rely
on them to get this part right.
How does a standing order work?
The first step in setting up a standing
order requires the payer to contact their bank
to request it. With some banks and building
societies, standing orders can be set up online
or over the phone. The payer then completes
a standing order form (paper or online) and
gives it to their bank. This will include details
of the account number and sort code of the
person or organisation being paid.
Banks don’t usually charge anything to
the payer or payee for setting up or using
standing orders. It is important to keep in
mind that customers can cancel a standing
order at any time, or change the amount or
payment date. Standing orders are created to
cover a set period of time (e.g. every month
for a year) or until they are cancelled.
Standing orders: use cases
People typically use standing orders for
making regular payments, such as rent,
mortgage, magazine subscriptions, monthly
charity donations or making payments from
a current account into a savings account.
Standing orders are particularly useful for
making regular payments from one individual
to another, where direct debit would be a less
straightforward option.
What are the advantages of standing
orders?
•Usually free of charge for both payer and
payee
•Easy and quick for payer to set up
•Useful for making recurring payments
between private individuals (such as tenant
to landlord)
•Helps businesses to collect regular
payments on time, once set up
What are the disadvantages of
standing orders?
No payment notifications. This means it
could potentially take a payee weeks to find
out that a payment had failed (either because
the payer cancelled it, or because their
account lacked the necessary funds to cover
the payment amount). If this happens, the
payee will need to chase the payer to set up
payment all over again.
•Less flexibility: Changing the amount
or date of a payment requires the payer to
cancel the standing order and create a new
one.
Risk of late payment: Many businesses
struggle to get customers to set up their
standing order quickly, or to amend it as or
when required. This brings back the risk of
late payment, potentially causing cash flow
problems for a business.
•High admin: Businesses taking
payments by standing order may end
up constantly checking their bank to see
if payment has arrived and manually
updating accounts once it does. This is
time and labour that could be better spent
elsewhere.
Standing orders for businesses
This section will guide you through the fine
details of using standing orders, including
when to use them, how to get access, set up,
change and cancel them, their timings, and a
useful comparison chart with other recurring
payment methods. There is even a handy
quiz at the end, to help you decide if standing
orders are right for your business.
When to use a standing order
For starters, think about how many
customers you currently have. Standing
orders are generally a good fit for small
businesses, organisations or clubs with
less than 25 customers, as a certain level of
trust is helpful when using standing orders.
Secondly, think about whether you trust
your customers to set up and make their
payments on time. If yes, then standing
order could be a good option for you, as
your customer does all the hard work in
setting it up.
And finally, deciding whether to use a
standing order also depends on the types of
payments you are most commonly taking.
If most of your customers pay by regular,
fixed payments, then either standing order
or direct debit can be used. It is also possible
to use either standing order or direct debit
for taking one-off payments, although this
is not how they are typically used.
For variable payments, standing orders
are less useful. They are not great for paying
bills with variable amounts or frequencies
such as utility bills or credit card debts or in
industries where you may want to increase
fees or upgrade subscriptions easily.
Direct debit is a better fit here, as it
is its highly flexible. You are in control,
rather than the customer, so you can adjust
the amount or frequency of payments
whenever you need to (as long as you
give your customer the required advance
notice).