Direct Payments vs. Online Bill-Paying: Something for Everyone

by Anna Thayer

Millions of households have discovered a way to save as much as $88 a year. Interested? All you have to do is stop mailing your bill payments.

Direct payment--also known as ACH (Automated Clearing House) debit--and online bill-paying are two services that help millions of people save time, money, and hassle. But, while these methods have many benefits, each has drawbacks--just as conventional bill-paying does. Read on to learn about direct payment and online bill-paying, their benefits, and their weak spots.

Direct payment

Direct payment allows a company to debit funds from your checking or savings account for bill payment on a day of the month you determine. The company must have written authorization from you, as well as your account information, to do this.

Once the company has your authorization, it will debit the bill amount from your account on a specific date each month, typically at no cost to you. "The consumer needs to enroll in the direct payment program of the company," says Mike Herd, media relations specialist at NACHA-The Electronic Payments Association, a Herndon, Va., developer of electronic solutions to the payments system, "After that, there is no consumer action necessary. Bills are paid automatically."

If the amount of the bill to be paid varies monthly, the company must send you notification of the payment amount 10 days prior to the transaction date. This is usually done through the company's normal billing statements, according to Herd.

Online bill-paying

Unlike direct payment where, once enrolled, the customer no longer is involved in the bill-paying process, online bill-paying requires consumers to go online once they receive their monthly bills to enter bill amounts and authorize payments.

If the company's Web site offers online bill-paying, you can pay a specific bill there, although this means you have to visit numerous Web sites each month to pay your bills. Or, you can sign up for a bill-paying service. Your credit union may even offer bill-paying at its Web site. Industry surveys indicate that 17% of credit union members use online bill payment at least once a month--and the number of users continues to grow. With such a service, you set up account information for each merchant to be paid. Then, when the monthly bill comes, log on to the service's Web site and enter the amount due. The service then sends an electronic check to companies that are set up to receive them, or prints out a paper check to send to those companies that aren't.

While going to the specific company's Web site is generally free, most online bill-paying services do charge a monthly fee, so you will have to pay for the convenience of one-stop bill-paying. Typically fees average from $7 to $13 a month.

How skipping paper checks will benefit you

Simplify lives. The average person spends approximately three days a year paying bills. Using direct payment or online bill-paying saves you much of that time.

Provide a hassle-free way to pay bills. You can eliminate the hassle of buying stamps, writing checks, and mailing payments. That's all taken care of for you.

Help save money, especially since the price of stamps just rose to 37 cents. "This means that if you pay 15 bills a month by mail, you will be spending $66 per year in postage just to pay your bills, with no guarantee they will be on time," says Herd. For someone who pays 20 bills a month, the savings jump to $88. Add to that the amount you normally spend ordering new checks to pay those bills, and the money saved through direct payment or online bill-paying really adds up.

The perfect ways to pay bills?

Not necessarily. Direct payment and online bill-paying each have drawbacks you should consider before deciding how you want to pay your bills.

For example, although direct payments reach most of the common merchants you receive bills from (utility companies; mortgage, insurance, and auto lenders; cable companies; and credit card companies), they do not reach all of them, says Herd. Some merchants will not accept direct payment. So if you pay monthly bills that are not from larger, more mainstream companies, you may want to consider using an online bill-paying service.

However, online bill-paying requires a certain amount of participation in the payment process. Unlike direct payment, you have to go online to enter the amount owed and to send the payment request to your bill-paying service. And because you have to go online to pay your bills, you'll need to have Internet access when the time comes to pay them, which can be an inconvenience when traveling. Or, prepare for travel by setting up payments in advance of your trip. Direct payment, on the other hand, requires no computer knowledge or Internet connection.

Furthermore, while online bill-paying saves you the money spent on stamps and provides a hassle-free way to pay bills, you still run the chance that the third-party vendor processing and sending your check will send it late. And, even though you did not "write" the check, a late payment still hurts your credit. Direct payments, on the other hand, are done directly through the company you are paying, so there is never any worry about late fees.

Which one is right for you?

There is no clear answer. Each consumer should look at his or her schedule, as well as the types of bills paid each month. Do you have the time to go online each month to enter bill amounts? Do you primarily pay major companies that would accept direct payment?

Both online bill-paying and direct payment have advantages over writing paper checks each month. They can save you time, money, and hassle. You just need to decide which payment method--or even a combination--best fits your lifestyle.

August 26, 2002