What Is Online Bill Pay and How Does It Work?

Learn how to use the bill pay feature

Man paying bills online
••• franckreporter/iStock

Online bill pay is a digital banking service that lets you pay bills over the web from a bank account—often at no extra cost. It can simplify your finances by eliminating the need to write out checks or count and distribute paper currency. Understanding what online bill pay offers and how it works can help streamline your cash flow.

Online Bill Pay Systems

There are two major entities that offer online bill pay services:

  • Banks: With the bank model, you give your financial institution information about recipients to whom you owe money, be it another bank or a business, and the bank sends money to that recipient. Depending on the payee, the bank will issue an electronic payment or a paper check using funds drawn from your checking, money market, or another eligible bank account within one to five days. However, if a recipient company is already set up within the bank's system, the bank can often transfer the money electronically—that too, on the same day. Many banks impose no limit on the number of bills you can pay through the feature.
  • Service providers: This online bill pay system works like the bank system, but in reverse. You grant phone companies, mortgage companies, utility providers, or other providers your bank account information so that they can withdraw from the account to pay for the company's services.

Electronic payments often reach payees within two days or less, whereas paper checks can take four or five days depending on the bank.

Using Online Bill Pay

Follow these guidelines to set up payments through your bank or service provider.

Setting Up Online Bill Pay With a Bank

To make payments online through your bank, visit your bank's website and go to the Bill Pay section of the site. Click on the relevant link to add a new payee and then type in the name of recipient company; you’ll need a copy of a bill issued to you by a service provider so that you can copy the address and your account number, along with any other essential information, from the bill in the payor details. Then, enter the desired payment amount and schedule and complete the setup sequence. Thereafter, each time you want to make a payment, simply enter the amount of the bill—the bank will do the rest by pulling money from your account.

Setting Up Bill Pay With a Service Provider

To establish online bill payment with a service provider, you’ll often need to provide a voided check and an authorization form to grant the company in question permission to withdraw funds from your bank account. You'll be asked to provide bank account information such as your account number and any routing numbers associated with the checking account either in the authorization form or separately.

In some cases, you may be able to supply your debit card information instead of a checking account. You may also be able to deliver bank account information online without provided a voided check. Again, you will be asked to specify the payment amount and schedule before you complete bill pay setup. A typical payment date is the bill due date for the company. Once things are up and running, payment will go directly from your bank account to your service provider.

To be safe, individually verify the online payment instructions or requirements of each payee, be it a bank or service provider.

Choosing Online Bill Payment Types

Once you set up the payment system, your bank or service provider will generally give you the option to make one of a few useful types of payments through online bill pay:

  • One-time payments: As the name suggests, this is a payment you issue a single time. This option makes sense for services you use infrequently, such as a landscaper or a lump-sum payment on a car.
  • Future payments: This online bill pay option gives you the ability to schedule payments at a late date. Use this online bill payment option when your bill due date isn't in the near future but you want to set up a payment in advance so that you don't forget it later.
  • Recurring payments: These are generally payments you make at regular intervals, such as monthly. Health insurance premium bills, utility bills, or monthly bills for childcare are examples.

Automatic Online Bill Pay

If you love automated processes that you don't require your constant attention, automated online bill payment facilitates one-time or recurring payments on a regimented basis through a bank or service provider.

By automating one-time payments, you can authorize your service providers to pull money from your account for irregular, one-off expenditures without any activity on your part. For example, you can have your bank automatically make payments on a seldom-used credit card whenever the card accrues a non-zero balance.

If you automate recurring payments, your online bill payment service can pay your monthly phone bill or your quarterly insurance payment. Automating online bill payment for regular expenses is a great way to pay on time and avoid incurring late fees.

In both cases, the service provider directly asks the online bill paying company for payment as needed, and the payment is made without your involvement; however, you can stop automatic payments later. If you authorize these types of payments, keep enough available funds in your account to cover these payments. Online bill pay can save time, reduce paperwork, and make life easier, but it can also lead to a negative account balance and associated fees if you set up more withdrawals that exceed the balance. Shrewdly budgeting and paying attention to your balance can help you make the most of this convenient banking feature.

Article Sources

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