Automatic payments
What are automatic payments?
Automatic payments, also known as automatic bill payments, are transactions in which a business automatically withdraws funds from a customer’s bank account, credit card, or debit card on a recurring basis. This arrangement is commonly used to pay regular bills like credit cards, utilities, and mortgages. It’s also frequently used by subscription-based businesses to charge for ongoing services such as gym memberships, streaming platforms, subscription boxes, and gated digital content.
How do automatic payments work?
To set up an automatic payment, customers must choose a payment method (e.g. bank account, credit card, or debit card) and input their payment details. This may include a bank account number and routing number, or credit card information. Customers must also authorise the business to automatically deduct payments on a recurring schedule. Payments can be set at:
- Fixed intervals and amounts (e.g. $9.99/month for a video streaming service), or
- Variable amounts based on usage (e.g. monthly utility bills that change from month to month).
What are the benefits of recurring payments?
For businesses:
- Predictable revenue: Helps with cash flow, forecasting, and inventory planning.
- Improved retention: Reduces the chance of missed or late payments.
- Operational efficiency: Fewer manual billing tasks and reduced risk of human error.
For customers:
- Convenience: Once set up, payments are handled automatically.
- Avoid late fees: Especially helpful for time-sensitive bills like rent or utilities.
- Cost savings: Many businesses offer discounts for auto-pay, such as "subscribe-and-save" programs.
However, it’s critical that businesses ensure customer payment information stays up to date. Expired cards or outdated account details can lead to involuntary churn, failed payments that disrupt service and customer relationships.
