What are automatic payments?
Automatic payments (also referred to as automatic bill payments) are payments that a merchant automatically withdraws from a customer’s bank or credit union account. An automatic payment arrangement is often used to pay bills—for example, a monthly credit card bill. Automatic payments are also frequently used for paying utility bills, mortgage payments, and more. Subscription merchants can also set up an automatic, recurring payment arrangement for their products and services, such as gym memberships, curated subscription boxes, newspapers, and gated digital content.
How does an automatic payment work?
To set up automatic payments, first, customers must choose a payment method; i.e. a bank account, credit card, or debit card. Then, they must enter their payment information—depending on the payment method, this can include the account number for a checking account, routing number, the name of the account holder, credit card number, etc. The customer must also give the company explicit permission, or authorization, in advance to withdraw the money from their account at certain intervals. An automatic bill payment can be set up to charge the same amount at each interval (for example, digital streaming services), or for different amounts within a certain time period (for example, a utility bill that changes in pricing month-to-month depending on usage).
What are the benefits of recurring payments?
For merchants, recurring payments provide a reliable stream of recurring revenue, which can facilitate greater ease and accuracy with essential business tasks, such as inventory management and forecasting. However, businesses must maintain accurate account information for their customers, or they can run the risk of involuntary churn if customers’ payment details become out of date.
For consumers, recurring payments can offer enormous convenience and value. For example, a customer of a utility company can avoid making late payments by signing up for automatic payments, thus avoiding late fees. Certain businesses may offer their customers a discount for a subscription—this type of agreement is called “subscribe-and-save.”