Automatic bill payments are recurring money transfers authorized by a customer to pay certain vendors on a regular basis. The payments are often scheduled by users to pay various types of bills on a monthly basis, such as mortgage, credit card bills, installment loans, cell phone bills, electricity and water charges, streaming subscriptions, etc.
They are also used in B2B transactions for recurring payments for a set service. For example, a customer might schedule an automatic bill payment for the beginning of each month to pay his car loan installments.
Automatic bill payments are recurring money transfers authorized by a customer to pay certain vendors on a regular basis.
Several benefits accrue to businesses from the automated payment processes, including lower business cost, regular cash flow, increased payment security, enhanced client experience, and economies of time.
Automatic bill payments can help a customer improve their credit score by making regular, timely payments to vendors and avoid late fees and penalties.
How Does Automatic Bill Payment Work?
A customer can schedule an automatic bill payment in several ways: through their bank/financial institution, through a vendor’s website, or through cloud-based accounting software, to list a few. Regular payments can be authorized through the credit card, debit card, checking/savings account, or money market account. Once scheduled, the payment is made by the customer’s financial institution directly to the vendor through an electronic payment system.
Often, the vendor is authorized to charge the customer’s bank account for the amount owed for the specified month. The automatic payment can be stopped or rescheduled by the customer anytime.
Advantages of Automatic Bill Payment
1. Lower business costs
Companies can realize substantial savings on office supplies, such as envelopes, stationery items, postage, etc., by shifting the payment processes online.
2. Saves time
The time spent on manually generating bills, reaching out to customers, processing payments, and enquiring into late payments can now be invested in core business functions. The computer and banking software can take care of the billing processes.
3. Enhanced client experience
Automatic bill payments provide a convenient and timely method for customers to settle their recurring liabilities and enjoy an enhanced user experience. A late fee is seldom charged, which improves communication with the customer.
4. Regular cash flow
Knowledge of the exact date and amount which will be credited in the company’s account helps it to plan and manage its expenses more efficiently.
5. Increases payment security
Verified and encrypted payments through a credit card or a bank account are preferable over cash or a check sent in an envelope from a security stand-point.
A large volume of paper is saved when the payment processes are automated, with the effect being compounded as more and more businesses move towards automation.
1. Better credit score
In addition to comfort and economies of time and money, automatic bill payments can help a customer improve their credit score by making regular, timely payments to vendors and avoid late fees and penalties. Customers might be able to manage their personal finance better once they know the exact date and amount of recurring monthly expenses.
Disadvantages of Automatic Bill Payment
Automatic bill payments come with the following potential drawbacks:
For an individual without a job or a regular monthly income, scheduled automatic bill payments run the risk of over-drafting the bank account.
The automatic payment may bounce in case of zero balance in the checking account.
Forgetting to cancel subscriptions may lead to the customer incurring steep expenses indefinitely.
Not all vendors may provide an automated method of payment.
Example of an Automatic Bill Payment
For example, suppose that X takes out a monthly Netflix subscription for one year. A payment of $15 needs to be made for it on the 15th of every month for the next 12 months. Instead of setting monthly reminders for himself/herself, X can schedule automatic bill payments to ensure that the payments are made to Netflix from his account in a convenient manner.
The only date X needs to care about now is the date he wants to terminate his subscription. in such a way, X avoids doing a monotonous task every month, ensures timely payments, and saves time.
CFI offers the Commercial Banking & Credit Analyst (CBCA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful: