What are continuous payment authorities?
In brief, a continuous payment authority (CPA) is a form of recurring payment set up by a merchant on behalf of a customer, using their debit or credit card information. In order for a merchant to collect payments when they’re due using a CPA, they must get permission from a customer, known as a ‘standing authority’.
In this post, we’ll go into more detail about CPAs, where they’re typically used, how they have become associated with disreputable companies, and alternatives for collecting recurring payments.
How do continuous payment authorities work?
To set up CPA, a customer must provide their debit or credit card details – including card expiry date and the security code on the back — to the company for an initial transaction. From then on, the company may perform a repeat transaction, and has the option to increase or decrease the amount as needed.
Capturing card details can be done in person, over the phone or online. There is no requirement for an official written record of authorisation and set up, but businesses should explain the terms of the CPA to the customer.
Customers have the legal right to cancel a CPA, and if companies ignore this request, banks must cancel them on behalf of the customer.
Advantages of continuous payment authorities for business
There are several advantages associated with continuous payment authorities. As they allow businesses to collect repeat payments, they are often used by businesses with recurring payment models, such as for gym memberships, subscriptions, and loan repayments.
Continuous payment authorities are flexible, as they give businesses the ability to charge varying amounts when the payment is due, without authorisation from the customer.
Setting up a continuous payment authority is very simple for both businesses and consumers, as consumers simply sign up with their card number. However, the ease with which a CPA can be created is also a drawback, since companies can take advantage of consumers (more on that below).
Disadvantages of continuous payment authorities
A big issue with CPAs is that they have a reputation for being a means for companies to take payments illegitimately. Because of this, customers might be wary of paying this way.
Also, CPAs can be difficult to cancel, and customers might feel as though they’re in a subscription trap. A subscription trap is when a customer is tricked into agreeing to a subscription — often under the guise of a free trial period — and then gets unexpectedly switched onto an expensive subscription plan without a clear path to stopping the payments.
Again, this means CPAs can deter customers from signing up for a company’s services. The problem is so great, there are even guides on consumer affairs sites dedicated to helping consumers cancel CPAs.
Aside from being associated with disreputable companies, another issue with CPAs is that, as with all credit and debit card payments, they incur high card fees for the merchant. These include processing fees, payment gateway fees and authorisation fees.
Payment failures are a further problem for CPAs. Card payments fail anywhere from 5-14% of the time, often because the card is lost, stolen or expires. If that happens and a card is replaced, a new CPA would need to be set up.
What are the alternatives to continuous payment authorities?
While CPAs are prevalent in the UK, there are a number of options which offer more protection to the consumer, and are more cost effective and reliable for the merchant. We’ll guide you through some of these alternatives below:
1. Standing orders
With standing orders, customers instruct their bank to issue a fixed sum of payment at established intervals, such as weekly, monthly or annually. It is the customer themselves who confirms the payment amount and the frequency.
Typically, standing orders are used to make fixed payments for recurring costs, such as rent payment, charity donations or the transfer of funds into a savings account. They are also well suited to small organisations, such as a local sports club, which charge membership fees.
A disadvantage of standing orders is the lack of visibility the business receiving payment has over the details of the standing order. This can result in chasing up overdue payments and an admin-intensive reconciliation process. Standing orders are also unsuitable for variable payment amounts, as once set up, they cannot be amended — they can only be cancelled.
2. Direct Debit
With Direct Debit, on the other hand, it is the recipient of the funds, ie the business, who has control over the payments. It is up to them to determine both the amount and the frequency. The customer must complete a Direct Debit authorising the merchant to ‘pull’ funds from their account.
Direct Debit is convenient and flexible for businesses and is typically used to pay monthly expenses, such as bills, WiFi and council tax. It can also be used to collect recurring invoice payments, one-off payments and recurring payments of fixed or variable amounts.
The main downside of Direct Debit is that payments take 3-5 days to settle (unlike standing orders, which settle immediately through the Faster Payments scheme in the UK).
Unlike CPAs the customer is protected under the Direct Debit guarantee.
3. Open banking variable recurring payments (VPRs)
VRPs are a new, instant and secure way for businesses to collect recurring payments from customers using open banking APIs. VRPs enable functionality that enables third party providers (TPPs) like TrueLayer, to initiate a series of payments for a customer at variable amounts and intervals, with their consent.
Banks in the UK currently have been ordered by the UK Competition and Markets Authority (CMA) to build these APIS, and have until July 2022 to do so.
Powered by open banking, VRPs will have strong authentication built in, making it a secure way for consumers to pay, while for merchants, VRP payments will settle instantly, and have lower fees than credit or debit card payments. Most importantly, consumers will have full control of these payments, including being able to ask payment providers to cancel them at any time.
Currently, banks are only required to provide VRPs for ‘sweeping’ use cases (a payment from one bank account to another, where both accounts belong to the same person). Sweeping is useful for use cases like smart saving and investment apps.
However, we do expect VRPs to become an option for many types of recurring payments in the future. The payment experience of entertainment subscriptions, insurance premiums, club memberships and much more would be improved by using VRPs.
TrueLayer and NatWest carried out the first live VRP transaction in January, and we think VRPs will eventually become the default payment method for recurring transactions.
Read our guide to variable recurring payments.