What are automated payments: a guide

Automated payments are creating a route to increased profitability for businesses and great new experiences for the customer.

They offer not just speed and security, but new ways for businesses to grow revenue.

In this blog, we examine the intricacies of automated payments. Explaining how they are the gateway to streamlined operations, heightened security measures, and enhanced customer experiences.

What are automated payments?

An automated payment enables businesses and consumers to make bill payments directly via an electronic payment system such as the Automated Clearing House (ACH).

They are also referred to as an automatic bill payment and are frequently used for paying utility bills and mortgage payments.

One of the fastest growing uses of automatic payments is for merchants offering subscription services.

These can take the form of electronic funds transfer, direct debits, virtual cards, and wire payments – allowing merchants to create regular and reliable revenue.

Payments are usually set up by the customer with the company receiving the payment. Although, it is possible to schedule automatic payments through the online portal of a checking account.

How do automated payments work?

To set up an automated payment, a customer must select their desired payment method. This could be their own bank or credit union account, credit card or debit card or an alternative payment method.

They then must enter their payment information. This is likely to include their account number, routing number and name of the account holder.

Explicit consent authorisation must be given by the customer to the merchant. This will allow the withdrawal of money from their account at the stipulated intervals.

An automatic bill payment can be set up to charge the same amount of money at each interval. For example, a monthly charge for a movie streaming service.

Different amounts can be charged at each interval, such as a utility company or bill that changes price based on usage each month.

When to use automatic bill payments

Automatic bill payments are most helpful to customers and merchants when goods or services are provided on a regular, recurring basis - such as monthly, quarterly, or annually.

These automatic, recurring payments could be for consumer services such as gym memberships, movie streaming services or repayment of a student loan. Or they may be for goods such as specialty food or wine clubs.

For business users, automatic payments could include those made for accounting or office cleaning services or business software subscriptions.

Those examples will involve a fixed amount each month.

Variable Recurring Payments (VRPs) are used in situations where the level of spend may vary from month to month depending on usage, such as utility bills or online gaming.

Advantages of automated payments

Typically, manual approval involves individual time-consuming decisions made by a payment authoriser.

This can be extremely disruptive and delay the payment. An automated system establishes encoding rules that can be used to approve or reject payments.

Recurring, automatic bill payments come with many advantages for both the merchant and the customer.

1. Better relationships with suppliers

Traditionally, Accounts Payable will spend a great deal of time answering queries around invoices and payment status.

By automating the payments process, they will have real-time insights about their transactions, even more so when an automated direct debit is set up.

Once a regular payments schedule is in place, the payee will have assurance that their bills will be paid on time.

For businesses using payment automation to settle bills from suppliers, efficiency of invoice processing is an important benefit as well as streamlining the payment execution process.

2. Faster cycle times

Automatic payments mean merchants don’t need to worry about late payments or missed payments – because they don't require any manual intervention or initiation.

They’ll know exactly when the payments will be processed, keeping the cash flow consistent and a reliable stream of recurring revenue.

3. Fraud prevention

An overwhelming 91% of customers who experience fraud on a company’s platform will not use that merchant again.

The software used for automatic payments offers high levels of security and encrypts sensitive financial data, such as bank account information, making it a safer and more secure option.

Disadvantages of automated payments

Automatic bill payments come with a few possible downsides.

1. Banking fees

Banks tend to charge a service fee for automated payments. Merchants should carefully read their bank’s terms and conditions before committing to their bills being paid automatically.

Scheduling electronic bill payments can push consumers and business into their overdrafts.

Historically paper checks took several days or even weeks to process, whereas electronic payments clear from the account within 24-48 hours, so debt can mount up suddenly.

Merchants should closely monitor their account balance and cash flow to avoid overdraft charges.

2. Security Risks

Although identity theft and fraud are more common when paying using cards, it is important to be mindful that there are still risks with automatic payments.

There is always a possibility that financial information may be illegally intercepted.

To reduce the chances of becoming a victim of financial crime, merchants and customers should invest in anti-virus software and use a secure internet connection before any sensitive information is transmitted.

3. Difficulty stopping payments

Stopping payments for bills paid automatically is more difficult than those paid manually.

For example, if a debit or credit card is lost or stolen, making or preventing a payment could pose some difficulty.

As automated payments do not rely on customers being sent reminders to send funds, the card owner would need to track down every regular debit made previously and transfer them to a new card.

This small issue in what appears to be a simple process could quickly result in late fees and unpaid credit card bills too.

Conclusion

Automatic payments offer benefits for both businesses and consumers alike.

For businesses, automated payments help ensure better relationships with suppliers by providing real-time insights and ensuring timely transactions without manual intervention.

They contribute to faster payment cycle times and completely eliminate worries about late or missed payments. They are also a great way to ensure a consistent cash flow.

These benefits are underpinned by robust fraud prevention measures, safeguarding sensitive financial data to ensure customer trust is maintained.

However, there are a few potential drawbacks. Banking fees are a consideration and security will always be scrutinised. Potential difficulties of stopping payments in certain circumstances may be a challenge.

By wisely using automated payments, businesses can leverage one of the most versatile tools in the payments industry.