This little known fact is a gem: if you have customers on standing orders rather than direct debits, this practice is very detrimental to your mortgage rate, and how much you repay each month.
1 - It stops you from moving bank
2 - It stops you being offered a more competitive rate by your current bank
3 - Other banks view your business as less portable, and problematic, therefore more risky
1. You don't move bank when you should
If you have 100s of customers, and they are all on standing orders, it puts you in a position of weakness in the marketplace (I know one such firm who has over 840 on standing orders).
You can easily find a more competitive rate in the marketplace from another bank in 2013, we are testimony of that. However, if you are on standing orders with customers, you will find it more difficult to port your business to other banks, because of fear of loss of income, and necessity.
2. Your current bank does not offer you a more competitive rate
When you change bank, you will need your customers to sign new standing order mandates, which is a time consuming and resource intensive task. It’s a hassle and many business say why bother? However, your current bank knows this and as a result has no incentive to offer you better rates, knowing you will probably not go through the hassle of changing to Direct Debit to move banks, and will stay. The bank has the position of power, not the business.
The other major problem a business has with Standing Orders is if you want to increase your prices, you have to get the customer to agree to the change, again filling out a new form. The customer is in control here, and has the power to say no, or simply take forever to sign the form. Multiply this by 100 customers, and again you have a laborious process, where you may also lose customers who do not want to pay a higher price.
Under Direct Debits, price increases are automated. A letter does go out to explain the price increase, and the customer has 30 days to hand in their notice. If not, their acceptance is assumed and the higher amount will be taken the following month without all the hassle you get with Standing Orders.
Under Standing Orders the customer is in control. Under Direct Debits, the business is in control. Using Standing Orders, the business is restricted in generating increased revenue through price increases. Under Direct Debit, it is not and the overall risk is lessened to a business's cash flow.
3. Your business is difficult to port, and therefore less attractive to an alternative bank
The 3rd difference is that businesses using Direct Debits are more attractive to banks because they are easier to port.
A new bank sees Standing Orders as a risk, and is likely to want you to move to the DDO Scheme (Direct Debit Origination), which incurs some cost (around £1-2,000). It is not only easier to move bank using Direct Debit (a 1 step automated process), but a bank will view you more favourably as a result and want to a) do business, and b) offer a more competitive rate.
At the very least, when you have Direct Debit systems in place, your current bank will feel more obliged to offer you a more competitive rate. I personally have seen rates shaved by around 0.25% on this basis alone.
So understanding the difference is crucial. If you’re currently on Standing Orders, it may pay to make the move to Direct Debit sooner rather than later.
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About Chris Davidson
Chris Davidson is Managing Director of Discover & Invest Ltd.
He believes passionately in providing businesses with market-leading financial insights that have a positive impact on the bottom line. As a result, Chris helps get the best rates and terms available at any one time.