Repeated payment: SEPA versus credit card Direct Debit

There are several different types:

• Simple recurring payment without limit of occurrence: periodic payment of a defined sum until termination (e.g. subscription).
• Simple recurring payment with occurrence limit: periodic payment of a defined sum, limited in time (e.g. payment in instalments).
• Evolving recurring payment: special model where the amount to be paid evolves (e.g. subscription with a pay-as-you-go payment).

And recurring payments mean direct debits. In fact, to avoid customers having to make payments manually, risking withdrawal or non-payment, direct debit is the solution. At this stage, two payment methods are available: direct debit and SEPA direct debit. Even if they both serve the same purpose, there are major differences in their scope and use. Here are 7 of them.

To be valid, SEPA direct debits, also known as SEPA Direct Debit (SDD), require the edition and signature of a SEPA mandate, i.e. a contract between the merchant and the payer, specifying the authorized direct debit conditions. The merchant then collects the customer information needed to issue the mandate (surname, first name, address, IBAN, BIC). Historically, this is sent by PDF or by post to the customer for signature. However, this process causes a break in the digital sales path, which is why some payment service providers (PSP) offer, in addition to collecting debtor information on an online form, electronic signature of the mandate by SMS code.

A recurring direct debit can also be set up on a bank card. Unlike SEPA, no contract is signed between merchant and cardholder. The payer simply needs to enter the card’s code, expiry date and CVV, then run the 3D-Secure process to authenticate. The funds will then be debited from the credit card in accordance with the payment plan.

SEPA direct debits are available to all customers in the SEPA zone, which comprises 34 countries (the 28 countries of the European Economic Area, plus Andorra, Monaco, San Marino, Switzerland and the Vatican). It can also be operated in EUROS currency only.

Direct debit by credit card works for all customers of the VISA, Mastercard and American Express card networks, i.e. over 200 countries, with the associated currencies.

Unlike SEPA direct debits, credit card direct debits are immediate. In the case of a credit card payment, the payment service provider captures the funds instantly, then releases them on D+1. This enables the merchant to deliver his product or make his service available immediately. The card payment route is considered more affordable and familiar to consumers.

With SEPA direct debits, several days may elapse between the direct debit execution request and the transfer of funds to the debtor’s account. This usually takes 3 to 4 working days, which can make it difficult to deliver the service or organize the merchant.

SEPA direct debit payments are not subject to any maximum limit set by the payer’s bank. On the other hand, for bankcards, a payment limit is set according to the type of card used (personal or business) and its options (weekly/monthly limit, payment abroad, etc.). That’s why it’s best to debit at the beginning of the month, and to let the payer choose according to the capacity of his means of payment.

Bank cards are generally valid for 2 to 3 years. As a result, direct debit is directly impacted by the life cycle of the card, as well as any random events that may occur (damaged card, stop payment, etc.).

A SEPA direct debit mandate has no expiry date. It is valid until revoked by the debtor. In addition, if no direct debit order has been made within 36 months of signature, it becomes null and void, and therefore unusable.

A major difference between these two payment methods is their cost. For SEPA direct debits, the merchant must pay a variable service fee (often % variable fee + fixed fee / per transaction). If you use a bank, you will have to pay a fixed fee. It should also be noted that additional charges of up to 20 euros may be added in the event of a disputed direct debit. Direct debit attempts are not to be taken lightly.

The cost can be significantly higher for direct debit. In addition to PSP service fees, card transactions are subject tocardscheme fees. These fees vary according to the type of card: they are particularly high for “corporate” or non-domestic cards (outside the French CB network).

The risk of dispute is a major issue when choosing a recurring payment method. With SEPA direct debits, the payer can dispute and be reimbursed instantly within 8 weeks, for commercial reasons, and within 13 months for “unauthorized transactions”, i.e. invalid or without a mandate. In the case of a product sale, for example, SEPA direct debits are very risky for merchants.

With direct debit by bank card, 3D-S avoids disputes over “transactions not authorized by the cardholder”, as it is strongly authenticated at the time of payment. Possible disputes can only be of commercial origin, if the service has not been rendered or the product not delivered. However, the merchant has the option of defending himself and providing his customer’s bank with proof of delivery or use of his service in order to refute the dispute.