Automatic payments are payments debited by a service provider from a customer's bank account or credit/debit card for an agreed amount and frequency;
The service provider must gain the customer’s authority, one time upfront, to debit funds on an ongoing basis. Automatic payments will continue until the customer withdraws their permission or meets their contractual obligations;
As the service provider has the control and authority to debit funds directly from the customer, there can be complications when the customer wants to change or stop the relationship with the service provider or change the way they pay for the goods or service.
Point of View
When a customer enters into an ongoing commercial agreement with a service provider, one option for a customer to pay for their goods or services is by agreeing that the service provider can debit their account on their behalf. When funds are debited from a bank account, these payments are known as direct debits. When funds are debited from a credit/debit card, they are known as recurring payments. Examples may include paying for your monthly gym subscription, Netflix account, mobile phone or quarterly gas bill.
For the purpose of this article, we will call both these types of payments automatic payments.
When automatic payments are initially set up, the customer agrees to terms and conditions, passing the control of debiting their account on an ongoing basis to the service provider. Direct debits are governed under the AusPayNet BECS rules. Recurring payments are governed under the rules defined by the card scheme that issues the card.
Benefits to customers
These types of payments offer customers the benefit of convenience. Service providers pull funds from the customer’s account, without them needing to initiate future payments to meet their contractual obligations.
Benefits to service providers
The key benefit to service providers is control. As service providers have the control to debit their customers, they are not reliant on customers remembering to initiate future payments. Most major charities have regular donation programs where donors have elected to have regular amounts debited from their credit cards in support of charitable causes. According to the Fundraising Institute of Australia, these donations are said to make up over 50% of the current private fundraising revenue donated by Australians.
As service providers have the control to withdraw funds directly from a customer’s account, there can be complications when the customer wishes to stop or change the automatic payment. In some instances, customers find it difficult to ensure that their requested changes to automatic payments are enforced (such as changing the underlying account from where funds are debited or stopping automatic payments altogether). The recommended process for changing or ending a recurring payment or direct debit differs in that;
Ask your Financial Institution to cancel the direct debit request and they will promptly assist with this. Additionally, customers can ask their FI to investigate an unauthorised direct debit and the FI will act promptly to assist with this request. The FI may also suggest that the customer also contact the merchant / service provider.
“The best way to cancel a recurring payment is in writing, directly to the merchant. This is because as a customer, you want to cancel not only the payment, but also the service provided by, and the contract you have with, the merchant. We recommend you keep a copy of all notifications, just in case the merchant doesn’t follow your request.
"If you have issues in cancelling a payment with a merchant, please contact your bank. If you believe you’ve been incorrectly charged a recurring payment, and can provide your bank with a copy of the notification you sent to the merchant to cancel it, your bank may be able to dispute the transaction through its chargeback process and/or block the payment for you and thus, ensure you are protected. Please note, however, this does not end any contractual obligations you may have with the merchant.”
It is important to note while changes can be made to direct debits or recurring payment, the onus remains on the customer to fulfill or cancel their contract with the service provider.
By giving control to service providers to debit their account, customers can lose transparency of future debits. Customers can check the accuracy of these debits by checking their statements and ensuring charges were accurate. The ABA has recognised this issue and sought to provide greater support to customers. FIs will provide a list of automatic payments for the past 13 months to customers who ask. This expands the existing provision in the ePayments Code and the BECS rules regarding regular payments, to include credit/debit card recurring payments.
Another area that is increasingly being scrutinised is the practice of inertial billing. Inertial billing is the practice of service providers billing customers after a fee free period. Examples include subscriptions to apps or online content. The concern is where customers wish to stop the service after the trial and forget to opt out before the end of a free offer. Mastercard recently announced its crackdown on this type of billing, revealing it will require service providers to obtain explicit consent from cardholders at the end of free trials before new recurring payments are authorised, rather than relying on customers to opt out. According to Mastercard’s chief franchise officer Paul Petta, “the rule change will require service providers to gain cardholder approval at the conclusion of the trial before they start billing… to help cardholders with that decision, service providers will be required to send the cardholder – either by email or text – the transaction amount, payment date, service provider name along with explicit instructions on how to cancel a trial.” It was also noted that Mastercard is moving to make which service providers are accessing recurring and pre-authorised payments a lot more transparent - a move clearly intended to let customers better identify and track who is getting their money, which can potentially reduce disputed transactions and chargebacks.
Financial institutions are committed to protecting their customers through their internal dispute procedures and/or blocking incorrect automatic payments. In the long term, there is a need for customers to have greater transparency and ultimate control over charges being deducted from their accounts. There are a number of initiatives underway to deliver this customer experience. These include:
Payment Schemes have developed Network Tokens that can be used to make digital payments. MasterCard defines Tokenisation as “the process of replacing a card’s primary account number (PAN) - the 16-digit number on the plastic card—with a unique alternate card number, or token. Tokens can be used for mobile point-of-sale transactions, in-app purchases or online purchases.” In the future, Issuers may publish a cardholders tokens through their Banking Application, providing customers with transparency and possibly the control to stop or change recurring payments occurring on a Network Token.
The New Payments Platform Australia (NPPA) released a white paper – Real Time Payments 2.0, to discuss Request for Payment (RfP). RfP is defined as the collective term for systems that initiate payments from bank accounts. There are many use cases for RfP, but the NPPA paper discusses the payment of utility bills. “RfP can allow for the utility company to request a payment from the customer via their bank, potentially allowing for part payment or delayed payment based on the relationship with the customer.” This type of push payment (as opposed to pull) gives the customer greater transparency and control over the timing, amount and regularity of payment.