Making the Transition to Online Payments, Part II
In this second article, I discuss how to use bill payment services and some gotchas to look out for.
Before enrolling in a bill payment service, I hope that you first took advantage of the free lunch offered by your bank as discussed in Part I. Using the direct bank payment option is the best place to get started with online payments.
Rocky Start for Bill Payment Services
Bill Payment is a service setup at your Bank or Credit Union where you authorize them to send your payments drawn from your checking account to third parties you specify. Once enabled, you define who you want to send payments, and then you can enter one-time or recurring transactions as needed. I started using bill payment services over 10 years ago at my Credit Union. The first service offering was not very good, they could only provide payments to a select list of well known large institutions. Since you couldn’t pay every bill with the service, this made the offering less convenient. I rarely used it.
The service offerings available today are complete, they can pay any kind of bill. How is this done? The key change that was made over the earlier systems was adding a default delivery method that is totally old school: snail mail checks. When you enter a payment to an institution that is not in the database, they will initially mail out a paper check drawn from your account. Behind the scenes, the administrator will then attempt to set up an electronic interface for subsequent payments. No action is required on your part, it all happens automatically.
Send a Check to Anyone
The next question you may ask is what if they never setup an electronic interface. No problem, they will continue to send out the check in the mail. I have used the service to send out checks to my mother, who I can say with certainty will not have an electronic interface in the future! The only requirement to set up a payment is a mailing address, it can be any institution or anyone (read your service limitations – my service has a few exceptions e.g., they won’t make payments to some government institutions).
Don’t worry about blowing your check writing limits, the bill payment service will typically offer its own check writing limits in addition to any limits you may have with your checking account.
It gets better. Competition for deposits is so intense at banks that you will likely be able to use the bill payment service at your Bank or Credit at no cost. Banks realize that Bill Payment services are very sticky – they require investment of time to setup – and once setup customers are less likely to move accounts to a competitor. There are some significant savings for you in postage and also time. The cost for postage is included in the service.
Funding Your Account
The account where you will pull cash out to make payments needs to be funded through your billing cycle (typically monthly). If I expect to pay bills of $300 each month, I try keep at least 2-3X this amount in the account to account for unexpected bills (e.g., a large heating bill during a month). You do want to try to limit the amount of cash in this account, since the checking/savings account will typically earn little to no interest.
Setting Up Recurring Payments
The first payments to setup are the easiest – recurring payments that are the same amount each billing cycle. Setup small payments as recurring, because if you try to setup up your larger payments it is easier to be underfunded which may lead to a bounced check. If you always keep a buffer of some extra money in the account (as mentioned above), it will be less likely that you will not have the required funds. The folllowing types of bills are ones that are good candidates for recurring payments:
- Credit minimum payments.
- Cell phone bills.
- Insurance Premiums.
- Cable/Internet/Land Line bills.
- Auto Loans.
- Normalized Utility bills.
These should be clear, but a note about a few of these bills. Your credit card bill likely will not have the same charges every month. You can use the payment service to pay a minimum amount each month (regardless of the actual charges). This will protect you from fees due to a late payment (but not extra finance charges, of course). Also, your utility bills will likely vary every month but it should be possible to setup a fixed monthly payment plan for each if you take the time to call up each utility. This will then convert a variable monthly bill into a fixed bill – keep in mind that these still may require some adjustment if your usage varies from year to year.
One Time Payments
All the rest of the payments are considered one time payments, you will need to enter these every time a payment is required. The following types of bills are ones that are good candidates for one time payments:
- One time bills (an annual subscription, e.g.)
- Mortgage/Equity Loans.
- Large Auto Loan.
- Excess Credit Account Payments (in excess of minimum payment amount).
I verify that the money is available in the source account before entering these payments. Even though the mortgage is a fixed payment typically, I choose to enter this one every month as a one time payment. It’s too important of a payment to get wrong, also, I want to be certain the funds are in the account when the payment is made.
When you first setup a payee, make a payment far in advance of the due date. Verify that the payment was received in a reasonable amount of time by contacting the payee. Payments by check will take a week (5 business days), while electronic payments will take (3) days or less. If a payment is sent but is actually never cashed by the payee, the check will be cancelled after some time and the money will be returned to your account (my Credit Union cancels a check after 30 days).
In the paper world, there was a lag between when you mailed the payment and when the money was actually removed from the source account. When using these services, keep in mind that this window has been reduced. Even for payments sent by check, the service pulls the money out of the account in as little as 2 days from when the transaction was initiated. Check you service provider for details.
A Word of Caution
After successfully setting up an electronic payment plan for my mortgage, the bank decided at some point to reject third party electronic payments (the payment came back with a rejected status). It took a couple of months to get a clear answer from the bank regarding the policy change, but in the meantime I switched back to sending a paper check. It’s a good idea to keep on top of your payments, particularly your ‘prime time’ bills that affect your credit most, just in case any errors occur without warning.
Keeping tabs is getting easier. The Bill Pay service sends me mail notifications at my choosing, including when a payment is sent. Also, I set up another email notification with my mortgage provider to notify me when a payment was received. Between these two notifications, I can determined relatively easily if a payment wasn’t made when I expect it to be made.
Making the Time Investment
Setting up your bill payment transactions will take time – you will likely want to verify the initial payment of every payee you setup (especially the most important payments, such as your mortgage). Don’t setup the service at multiple institutions, the best strategy is to pick the bank you know the best and currently do significant business with. Pick carefully, if you move to another bank you will have to go through the setup exercise again. Ask yourself, do you trust this bank? Are they easy to do business with? A good choice would be the bank where you currently have your payroll checks deposited or where you currently pay your bills with your checking account.