The Dangers of Online Bill Pay and Automatic Deductions

by Jacques Sprenger on October 9, 2008

Happy with your high yield savings account or checking account? We may love the convenience of online bill pay and automatic deductions, but they’ve got a downside.

keep money safe and secure while you travel

When our money travels along the ether, we don’t usually think about it much. But according to the Electronic Payments Assocation (or Nacha), the electronic payment network upon which our automated payments travel, the error rate for our money transactions occur at a rate of 38 for every 100,000 bill payments.

That doesn’t seem like much, but if it happens to you or to me, it’s one time too many. Just trying to fix the error by the bank would try the patience of Job (and he had plenty).

Almost everybody uses internet banking and online bill pay systems, and appreciates the convenience of automated deductions. You set it up and you forget about it. Hey, no writing checks, no spending on stamps and no forgetting to send the payment on time. There are however a few problems as indicated above, and others that escape even the careful watch of “Nacha”.

Why I Don’t Set Up My Bill Pay Account for Automatic Deductions

When I was younger and innocent (just a little), I decided to allow my home security provider (who then handled our home alarms) to automatically deduct his monthly fee from my checking account. After a couple of years, I felt that the service was lousy, their headquarters was 600 miles away and they didn’t have an office in my small town, so I told them to terminate the agreement. Little did I know that an apparently simple procedure was going to cause me so many headaches.

First of all, they demanded to know why I wanted to cancel: well, I had every right to do so after 2 years! Then they applied the usual trick of trying to intimidate me with the falsehood that my contract had not yet expired: well it had, 2 months earlier! Meanwhile, the payment kept going into their coffers. Exasperated, I sought a friend who worked at the bank and asked him to terminate the payment. He said that only the payee could do that. As a last resort, I sent an official looking letter with as much legalese I could muster to the security company threatening them with a lawsuit if they didn’t desist. They finally did, without a thank you note, can you believe it?

My takeaway here is this: be very careful to whom you deliver your checkbook which is what you effectively do when you set up automated deductions.

Except for very reliable large companies, such as house and car payments, I stopped automated payments to small outfits. Nowadays, I prefer controlling every monthly payment I have to my creditors such as the phone company, credit card company, utility outfits and whoever handles my memberships. Since then, I’ve had no problems whatsoever.

Who Wants To Deal With Online Bill Pay Gone Awry?

“Sorry, Sir, we just discovered a small mistake in your automated payment. Your account is now delinquent to the tune of $2,000.” Oops! Guess who has to take time off from work or from the kids to spend a whole day at the local bank. Luckily, the law gives you up to 60 days to rearrange your finances. Who wants to go through that? I’d rather have my appendix taken out by mistake; I don’t need it anyway.

So you already know what I’d recommend: stay away if you can from automated payments, but if you really want it, set it up only with large companies who don’t want their reputation dragged through the judicial mud for a few extra dollars, since it affects their bottom line.

Is That Me Writing A Check?

Here’s another point of concern: when you allow companies other than your bank (if you can’t trust your banker, then who can you trust?), to take money out of your account, you also increase the risk of identity theft. The people at Acme Alarms have access to your data. Can you sleep soundly thinking about that?

I believe that giving your private financial data to any company other than your bank is an added risk of identity theft. We all have heard of hard drives and laptops stolen with millions of pieces of financial data on them. It’s not a far stretch for an employee at Acme Alarms to succumb to the temptation. Banks are usually more careful and secure with that information. They have more to lose — much more — since they’re carefully audited and regularly monitored.

So be careful: as a consequence of automated deductions or bill pay correspondence with a non-bank, you may eventually end up with some guy out there who could be writing checks on your account. Be very careful about protecting your identity!

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{ 7 comments… read them below or add one }

1 Laura October 11, 2008 at 7:54 am

Great advice!
My mother go burned this summer with AT&T Wireless. Her job shorted her about $1000 and she only gets paid once a month. She contacted all her bills and requested a lower payment until next month, to which all agreed. AT&T took all their money instead of the partial payment and it caused a cascade effect (she banks with BofA.)

2 SVB October 11, 2008 at 10:59 am

This has happened to me as well. Foolishly, I had set up auto payments with Clark’s Pest Control to deal with our ant problem (using our credit card). When we decided to cancel, they made it very difficult for us. We had to write them a letter to cancel — they wouldn’t do it over the phone. And despite repeated letters, they wouldn’t close our account, claiming that the letters were not received. It seemed like we were dealing with a rogue office (since these pest control companies have local offices). Eventually we simply disputed the payments via our credit card company, who investigated the issue, and this was how we ended up resolving things — through our card company.

This would have been so much tougher to deal with if our bank had been involved, I am sure! So be wary of how your deductions are being made.

In addition, I’ve heard of transactional errors as well, involving double billing or over billing. So just because the payments are automatic doesn’t mean we should completely forget about them conveniently. On the contrary, we may have to remember about them all the more in order to monitor these potential mistakes.

3 Slinky October 28, 2008 at 2:34 pm

It’s always struck me as slightly insane to give ANYONE free access to your checking account. They can take any amount they want!

For the same reason I don’t give out credentials for my accounts, which is why I won’t use Mint. They may not store that info, but Yodlee does. Someone hacks them, and I could get cleaned out in two minutes.

I’ll trust my bank, because I’m not keeping my money under a mattress, but my bank lets me keep control of my own money, thank you very much.

I pay all of my fixed rate bills automatically. My bank sends them a check on my behalf. To cancel, I just pop online and click a few buttons. Variable bills, I have to set up manually, but it takes less than 5 minutes to schedule a payment from my bank. The only things I write checks for are rent and wedding presents.

4 SVB October 28, 2008 at 3:37 pm

Slinky,

Very interesting! I actually worked as the blog editor for Mint for a little bit of time and the issue on security has popped up now and again as a concern. Admittedly, Mint says that their service is not for everyone, as there are folks who will never be comfortable with the sharing of their personal information or who only will do it on a very limited basis.

I guess if you’ve got your bank as the central point for your money management activities, that definitely works (I have it mostly set up this way as well). For others, they may decide to use Mint as their central repository for information.

5 Ruth L. Wooten December 27, 2008 at 9:28 pm

I would like a form sent to me or tell me how to bring up the form on my computer to have my monthly telephone deducted from my Checking account.
What s the charge for this feature. All my other bills are deducted from my checking account at no charge.

6 SVB January 1, 2009 at 12:39 am

Ruth,

I apologize but I cannot help you in this regard. Please ask your bank’s customer service to help you out.

7 Alger March 29, 2009 at 7:34 pm

Thanks for the personal experience. I just linked to it on my blog. I think this is the root of a lot of overspending too. People have no idea where their money is going.

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