What are continuous payment authorities (CPAs)?

What are continuous payment authorities?

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 a CPA, a customer must provide their debit or credit card details – including the 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.

What are CPAs most commonly used for?

CPAs are used to facilitate recurring payments to a merchant, making them ideal for ongoing or repeat transactions. Examples include:

• Memberships: gyms, clubs and other recreation facilities and other membership-based businesses can use CPAs to collect fees.

• Subscriptions: services from meal delivery programmes to software providers to streaming sites rely on CPAs for recurring payments.

• Bills/utilities: CPAs help mobile, internet and TV providers draw variable amounts from customer accounts based on their activity in a given period.

• Loans: payday lenders and debt collection agencies commonly use CPAs to take repayments.

Advantages of continuous payment authorities for business

As a recurring payment method, CPAs offer several advantages compared to single payments. These include:

• Ease of use: payments are made automatically at set intervals, removing the need for customers to make manual payments and re-enter their details.

• Flexibility: CPAs let merchants increase or decrease the value of an individual payment without requiring reauthorisation from the customer. This makes it easier for businesses to collect recurring payments that can vary significantly (eg, a monthly phone bill).

• Simplicity: setting up a CPA is easy for both businesses and consumers. The customer simply signs up using their card details.

Disadvantages of continuous payment authorities

Especially when compared to other recurring payment methods, CPAs also present a host of disadvantages. These include:

• Poor consumer protection: CPAs have a reputation for enabling illegitimate payments. Because of this, customers may be wary of paying this way.

• Hard to cancel: customers have to contact the merchant to cancel a CPA, which can be difficult to pursue. They can escalate the issue to a card issuer, but they may still need to watch their statements to make sure the recurring payment has been cancelled.

• Risk of subscription traps: bad actors commonly use CPAs for subscription traps, tricking customers into signing up for a free trial and then switching them onto an expensive plan without a clear path to stopping the payments.

• High fees for merchants: since CPAs rely on credit and debit cards, they carry a litany of processing fees for each transaction.

• High rate of payment failures: cards are prone to payment failures due to loss, theft, expiry and more. In these cases, consumers must set up a new CPA.

What are the alternatives to continuous payment authorities?

While CPAs are prevalent in the UK, there are a number of options which benefit consumers and merchants alike. Here are some of the alternatives:

1. Standing orders

With standing orders, customers instruct their bank to issue payments of a fixed sum at established intervals, such as weekly, monthly or annually. The customer confirms the payment amount and controls 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.

Unfortunately, recipients lack visibility over the details of a standing order. This can result in unexpected cancellations, overdue payments and admin-intensive reconciliation processes. Standing orders are also unsuitable for payments of varying amounts. Once set up, they cannot be amended — they can only be cancelled.

2. Direct debit

Direct debits give the recipient of funds (ie, the business) control over the payments. It is up to them to determine both the amount and the frequency of each transaction.

Unlike CPAs, the customer receives protections under the direct debit guarantee. To set up a direct debit, the customer must complete a mandate authorising the merchant to ‘pull’ funds from their account.

Direct debits are convenient and flexible for businesses and are typically used to pay monthly expenses, such as bills 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 is that direct debits are slower than other recurring payment methods. They take 3-5 days to settle, whereas standing orders and other bank transfers settle immediately using the Faster Payments scheme in the UK.

3. Variable recurring payments (VRPs)

VRPs are a new, instant and secure way for businesses to collect recurring payments from customers using open banking APIs. VRPs let third party providers (TPPs) like TrueLayer initiate a series of payments for customers at varying amounts and intervals.

Powered by open banking, VRPs have strong customer authentication (SCA) built in, making it a secure way for consumers to pay. They settle instantly and carry lower fees than credit or debit card payments, making them an attractive option for merchants.

Most importantly, consumers maintain full control. They can cancel VRPs at any time, making these payments a safe, secure alternative to CPAs. And as more companies embrace the commercial applications of VRPs, there’s an opportunity to improve the payment experience of subscriptions, memberships and other types of recurring payments.

Read our guide to variable recurring payments.