Automated payments: What they are and how they work

What is an automated payment?

Automated payments are a simple way to cover regular expenses. They are taken directly from a customer’s bank account, debit card, or payment account on each due date. This helps reduce the effort of paying bills on time.

Each billing company determines if automated payments are available, and fees or costs may apply.

Common examples include:

• Gym memberships
• Food delivery box subscriptions
• Mobile phone plans
• TV subscriptions
• Magazine and newspaper subscriptions
• Software or digital platform licences

Types of automated payments

In the UK, recurring payments usually fall into two categories:

• Direct debits: These are set up by a business with the customer’s permission. Typically, they help manage changing amounts.
• Standing orders: These are set up by the payer and help manage fixed, unchanging amounts.

Automated payments can help you make on-time payments, whether you’re paying a utility bill (which is often a changing amount) or making a mortgage payment (which is typically fixed).

How automated payments work

In the UK, most recurring payments follow a few clear steps:

• Customer authorisation: You agree to the payment’s terms and conditions. This is typically through a signed mandate or an online agreement.
• Provide secure payment details: You provide your payment details to the institution. This often includes bank account or credit card data.
• Create a billing schedule: The business sets a schedule for when the automated payments will occur. This could be monthly, quarterly, or annually.
• Automated payment processing: The payment is processed on the scheduled date. The amount is debited from the customer's account and credited to the business.

Pros and considerations of automated payments

Recurring payments present some potential advantages and challenges. Here’s an overview.

Pros

• Simplify budgeting: Predictable monthly expenses can help create more accurate, effective personal budgets.
• Help improve financial planning: Scheduled payments help make it simple to plan short- and long-term finances.
• Convenience: Automated payments can help save time, reduce missed payments, and avoid fees or interruptions.

Considerations

• Risk of overspending: Forgotten subscriptions can add up quickly. Plus, unnecessary spending without regular monitoring can impact spending.
• Automatic renewals and trial periods: Trial periods often automatically renew at regular rates. If you forget to cancel these trials, you may experience unexpected charges.
• Difficulty tracking payments: Automated payments across platforms can be difficult to track. This can lead to financial disorganisation and a lack of control over finances.

Best practices for automated payments

Managing automated payments can help you make more informed financial decisions. Here are a few strategies that may help:

1. Regularly review subscriptions: Assess subscriptions to make sure they align with your needs and goals.
2. Set reminders for trial periods: Review and cancel subscriptions before trial periods end.
3. Use budgeting apps: Use money management apps to track payments and keep a clear overview of your finances.