Paperless direct debit is a method of sending payments directly from a bank account to an unrelated account without using written authorizations. This process is the opposite side of the more commonly known direct deposit. Using direct deposit, an unrelated account, often the account of an employer, sends money to a bank account. Since sending money from an account usually requires authorization from the holder of the account, the process for setting up this system is more complex than the common direct deposit process. In the United States, the most common forms of paperless direct debit are automatic bill payment systems and PayPal®.
Direct deposit and direct debit are two sides of the same coin. When a transaction happens, the payer will see it as a debit and the receiver will see it as a deposit. In the past, direct debit wasn’t as easy as it is today; often, standard paper checks were sent to authorized banks and deposited manually. As the banking system became more computerized, simply moving money from one account to another became much easier, and the modern debit/credit system came into being.
The main difference between direct deposit and direct debit is the need for authorization. No one needs to authorize a deposit made into a bank account. The banks assume that no one would turn down someone giving him money, so, therefore, they don’t ask. On the other hand, people track debits down to the penny and want to know exactly where their money goes and when it left.
One of the main ways to authorize these withdraws is through using a check-like system. The payer gives a direct debit notice to the payee who then takes it to the bank. This method is more secure than other forms of payment, but is not truly ‘direct’ and can be a hassle for everyone involved. The other way of initiating one of these payments is through a direct debit agreement, where the bank is simply told to honor any request from a certain firm.
Neither of these common authorization methods are paperless direct debit, as they both require a written and signed agreement note. Paperless direct debit is not available in all countries, and many banks in the United States prefer not to use it. In other parts of the world, particularly Europe, the process is much more common and highly regulated.
In most cases, a paperless direct debit authorization is performed through a secure computer account. The payee will request money and the payer will log into his or her account and authorize the transaction, or the payer will simply send out money without a request. In either case, the login is considered equivalent to an authorization and the payer is not required to sign anything.