What is Standing Order?
The term “standing order” refers to the simple way of making automatic payments from one’s bank account. The account holder must instruct the bank to pay a fixed amount at pre-decided regular intervals. Since the account holders provide the amount to be paid and the frequency of payments, they always control the payouts. Standing orders are usually used to produce various bills, rent, subscription fees, etc.
Some of the key takeaways of the article are:
- Standing order is the special permission given to the banks by the account holders to pay their fixed monthly/ quarterly obligations automatically.
- Some of the most common uses of a standing order include putting money into savings accounts or mutual funds, paying rent and utilities, paying subscription fees, etc.
- Although setting up standing orders may vary across banks, the basic steps are more or less similar.
How does Standing Order work?
Standing order ensures automatic payment of a pre-determined fixed amount of money at regular intervals. These orders are usually used to send money from one bank account to individuals, organizations, or other bank accounts. In other words, the account holders can use standing orders to permit the banks to pay companies or organizations on their behalf. It is to be noted that the payments should be of the same amount every time and follow a pre-defined fixed frequency, say once a month. These orders are considered very useful as these can cut down on time otherwise spent on managing payments.
Examples of Standing Order
Let us look at the following examples to understand the concept of the standing order.
ASD Inc. has taken a commercial real property on an operational lease. The lease rental to be paid every month is $20,000, which will get due on the 7th of every month. The entity can automate the rental payment using a standing order.
If the company opts for the standing order, the banker will initially ask for some specific details. Once the request is approved, the banker will start paying the rent of $20,000 on the 7th of every month. If the given date falls on a public holiday, the bank will pay the rental the following business day.
Now, let us move to some real-life uses. Netflix and Amazon Prime mainly operate on a standing order basis to pay their annual subscription fees. These orders ensure that the customers can enjoy uninterrupted service while the service providers automatically get the payment from the customers’ bank accounts.
When to use a Standing Order?
Many people use standing orders to make bill payments to regular suppliers, while many suppliers prefer using standing orders as a way of accepting payments. So, it can be seen that these orders make life easier for people on both sides of the transaction. Nevertheless, it only makes sense to use standing orders if the transactions are regular and repetitive.
The following are some of the most common uses:
- Putting money into a savings account
- Paying utility bills
- Paying rent
- Monthly or quarterly subscription fees
- Payments of mutual funds on a SIP basis
Setting up of Standing Order
A customer can set it up through his/ her bank by following the below-mentioned steps:
- Put an application at the bank branch, call the bank’s customer service, or log in to their online banking.
- In the case of the branch, find the bank’s standing order form in hard copy. On the other hand, look for the link for the standing form in the case of online banking.
- This request form has to be completed by furnishing all the required information, such as details of the recipient, the amount to be paid, and the payment dates.
- The bank will process the details and set up the standing order once the application is approved, which may take a few days.
- Once the standing order is set up, the payments will be debited from the applicant’s bank account and credited to the recipient’s account as per the instructions.
Advantages of Standing Order
Some of the significant advantages are as follows:
- Once set up, the payer doesn’t need to remember future payments. It just needs to ensure that the account has adequate funds to cover the payments.
- It is one of the easiest and the cheapest, or even accessible in many cases, ways to put in place an automatic payment system.
- The account holder retains control over the standing order, and nobody else can change the amount or the payment dates.
Disadvantages of Standing Order
Some of the major disadvantages are as follows:
- It requires advance notice from the account holder and can’t be used for urgent payment needs.
- Since standing orders can only be used to pay a fixed amount to the recipient, they can’t be used to pay variable bills, such as post-paid utilities.
- Customers may have to face a lot of trouble in the case of incorrect payment, which is not the case with direct debits.
So, it can be seen that standing orders are a handy automation tool that can help consumers cut down on the time that they otherwise need to spend on managing their payments. It is just about their choice – whether or not they want to automate their payments, as many people tend to avoid automatic payments from their bank accounts.
This is a guide to Standing Order. Here we also discuss the definition, working, when to use and set up, and advantages and disadvantages. You may also have a look at the following articles to learn more –
- Shares Outstanding Formula
- Cross Border Merger and Acquisitions
- Cost-Benefit Principle
- Inherent Risk