Automatic Bill Payment

What Is an Automatic Bill Payment?

Automatic bill payment is a recurring money transfer scheduled on a predetermined date. It is authorized by customers of financial institutions to pay different types of regular bills such as mortgage payments, electricity bills, cell phone bills, etc.

You can set up automatic bill payment using a debit or credit card, a checking/savings account, or a money market account. These payments are typically carried out through a payment system by banks or in collaboration with the government.

Bills can be paid in different ways, including in-person, by mail, by phone, and automatically. Many customers prefer automatic payments as they can simply set it up and forget about it.

However, some companies don't allow for automatic payments. In this case, you may be required to manually set up online bill payments, make a payment over the phone, or send a paper check in the mail.

Billers, bankers, aggregators, and consolidators play a vital role in the overall process.

Billers may use more than one model to provide the most outstanding service to their clients since the sector is constantly evolving, and the range of possibilities and opportunities continues to grow.

Example of an Automatic Bill Payment

You have a 2022 Ford F-150 XL $30,000 loan and are concerned that you will miss a payment. Assume your payment is $300 and is due on the 10th of every month for the next 60 months.

You can either log into your online account with the lender to make payments or inquire about an automatic payment option.

If you go with the automatic payment option, the lender requires the borrower to sign a document authorizing the lender to directly take payments from your bank account automatically.

Automated payment options are available from several lenders' websites.

In this example, you log on, specify the account from which you would like the payments to be deducted each month, and agree on the payment due.

Signing up on the lender's website gives you full access to your account to check how much is left to close your loan and make changes to your agreement regarding the payment amount you need.

Suppose you want to double your monthly payment as your income increases, so instead of a $300 payment, you desire to make a $600 payment for 50 months.
You can request that you want a more significant amount on your account through the lender's website.

Setting up An Automatic Bill Payment

You have multiple options for setting up automatic bill payments, including the following:

1. ACH transactions

The Automated Clearing House (ACH) is a financial network in the United States that facilitates electronic payments and money transfers. It facilitates electronic fund transfers or EFTs that move money to or from a bank account.

When you activate automatic payments through your bank or credit union payment system, you tell them when and how much money should be transferred to your chosen party.

The bank then allows the amount to be withdrawn from your chosen account and transferred to the company you must pay each month.

2. Credit card

You might set up an automated payment to have costs sent to your credit card regularly.

You can set up auto payment in one of the following three ways:

• With the biller (vendor): Give the biller your bank account information, such as account numbers, so the payment can be taken out automatically on the payment due date.
• Using a credit card: Provide the biller with your credit card number, expiration date, and CVV. You aren't paying the biller directly, as your payment will subsequently be charged to your credit card. In other words, you pay your credit card company on the balance that applies to your account.
• Through the bank's online bill payment service: Make arrangements with the financial institution that holds your checking account to ensure that the correct payment is made monthly.

For example, you have a student loan, and your loan company gives you an interest rate discount if you use an automatic bill payment. What would you do in this situation?

You must access your student loan account through the website of your loan company and select the automatic payment. Then, you can enter all the details about your arrangement regarding the amount of money and payment due.

As we mentioned, there are three ways to set up this method. Let's suppose you prefer to pay with your bank account. In this option, you must provide the lending firm with your account and routing numbers.

Advantages of Automatic Bill Payment

There are benefits, as well as drawbacks, associated with automating bill payments. Consider the pros and cons of automating your bill payments before deciding whether this is the best course of action for you.

Advantages for customers

Some advantages are:

• Build credit score: By making frequent and timely payments to vendors and avoiding late fees and penalties, automatic bill payments can help you improve your credit score.
• Friendly usage: It is not difficult to establish recurring payments with a bank account or credit card, and many online videos show you how to go through this process.
• Save time: You can save time because you no longer need to pay bills or write checks manually each month.
• Secure: The processing of automatic payments typically takes place on a protected website, so the chances of fraudulent transactions are low.
• No late payment: Setting up your bills to be paid automatically helps you avoid late payments and hence avoid late fees and penalties, improving your credit score.
• Convenient: Automating the bill-paying process means you don't have to visit several websites or deal with invoices at different times of the month. You can keep track of your bills through your bank while sitting in your home. Some businesses send you an email informing you when a payment is about to be taken.

Advantages for lenders

Some advantages are:

• Save time: Applying automatic payment can save time for the lending entity. Other payment methods require a company to generate bills and send them out to customers. Then, waiting to receive a check from the customer and processing payment can take even longer.
• Enhance client experience: It also creates a better user experience by providing them with a more convenient and timely means of paying recurring bills. Providing a great experience helps them get customers’ loyalty and attract new clients.
• Increase security: Payments made using a credit card or bank account are safer than checks or cash mailed in an envelope because they are verified and encrypted. It is also considered an eco-friendly process as it reduces paper waste and contributes to protecting the environment.
• Eco-friendly and sustainable: As more and more organizations automate their payment procedures, the amount of paper saved ensures that a significant amount of resources for future generations are maintained. Currently, society is more aware of sustainability and supports any company that transfers some of its activities to a more sustainable way. Individuals are more biased toward social responsibility companies so that the company will get new clients.
• Lower business costs: When businesses automate their payment, they can achieve significant cost savings on office supplies, including envelopes, stationery goods, postage, and other expenses.

Disadvantages of Automatic Bill Payment

Some disadvantages are:

1. Canceling payments that are set up to be automatic might be challenging as the company previously authorized the transaction.
2. You may be charged a high fee if an automatic payment is returned due to insufficient funds. So, keeping an eye on your bank account is a crucial step to avoiding fees.
3. If you pay using a credit card or debit card, you need to make a note to change your details before the card's expiration date. Otherwise, They may not accept your recurring payment.
4. If you do not maintain a close check on your account balances, automating your payments could put you in danger of having an overdraft occur in your account.
5. Automating recurrent payments may make you less attentive to your finances as you rely on another party to make the payment on your behalf, leading to unpaid bills or overspending.
6. Some billers don’t support or even accept automatic bill payments.
7. If you forget about an automatic bill payment set up, you may continue to be charged for services you do not currently use.

How to use automatic bill payment?

The answer to this question depends on whether your monthly bill is consistent or fluctuates. This is a crucial question as the response determines whether you should enroll in automatic payments.

1. If your monthly payment is fixed, utilize your bank's auto-pay feature to consolidate numerous accounts for recurring expenses of the same amount.
2. If your monthly payment fluctuates, it is preferable to sign up for automatic payments directly through billers to collect the total amount owed.

Making an automatic credit card payment can also be problematic if you do not pay your credit card bill in full each month. If you only pay the minimum due, you stay in debt longer and spend more interest. It could also impact your credit rating.

Having money routinely taken from your bank account might not appeal to you very much if you have one of the following problems:

1. You have an irregular monthly income.
2. You don't always have a cash reserve in your bank account to cover payments.
3. You have lost your job or are seeking work and aren't getting paid regularly.
4. You have trouble budgeting and keeping track of your spending.

managing your automatic bill payment

Even though this service is designed to make your life easier, it might have the opposite impact if you aren't careful. That's why you can't put them out of sight and must keep tracking your automatic payments.

To avoid the negative impact that could be generated by this approach, you should keep in mind the following points: 

1. Once you select some of your bills to be paid automatically, keep track of which of your bills are paid automatically and which ones are not.
2. It's a good idea to keep track of when your payments are due so that you don't forget about paying them, avoiding the possibility of lowering your credit score.
3. You can avoid overdrafts by setting up banking alerts to tell you when your account balance falls too low while processing an automatic bill payment. However, if you fail to monitor your account balance and it is insufficient when an automatic (or other) payment is due, you may incur overdraft or NSF fines.
4. At least once a week, log in to your online or mobile banking and your credit card to check your balance and look for any strange payment activity. This allows you to investigate accounting errors and fraudulent charges and take quick action to stop the transaction before the problem gets bigger.

Researched and authored by Khadega Bazarah | LinkedIn

Reviewed and edited by James Fazeli-Sinaki | LinkedIn

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