March 30, 2022
Many business owners of all different types are trying to use the subscription business model as much as possible. This model relies on recurring payments for the ongoing provision of a product or service and offers a steady cash flow to business owners. Customers also appreciate automatic payments because it saves them the time they would otherwise need to spend re-inputting their payment information each time a payment is due.
For business owners and customers alike, recurring payments offer the “set it and forget it” model. A customer can purchase a subscription and select the recurring billing option and their credit card or other payment method will be automatically charged at the designated time. They never have to think about it again. From the merchant’s perspective, the recurring payment will arrive each billing cycle without the merchant having to take any action either.
In this article, we will explore what is recurring payment and why it’s good for business.
The definition of recurring payment is a purchase model in which a customer gives a merchant permission to withdraw funds from their account or charge their credit card automatically at regularly scheduled intervals in exchange for a product or service provided.
The customer is only required to enter their payment information one time and then the recurring payment is deducted automatically at the designated times until the agreed-upon end date.
Recurring billing and recurring payment are opposite sides of the same coin. From the customer’s perspective, they are making a recurring payment when they sign up for a subscription or other purchase that involves an automatic recurring charge. From the merchant’s perspective, it may be recurring billing that automatically gets sent to the customers to remind them that they are being charged for their subscription or other product.
Now that we have explained what a recurring payment is, let’s dive into how recurring payment processing works.
Just like for any other payment method, a seller must have a merchant account and payment infrastructure in place, including a merchant account, payment gateway and payment processor. Once this infrastructure is in place, the following steps are generally followed in order to set up recurring payments:
While the process is the same for both, it is important to note that there are actually two different types of recurring payments - fixed - also called regular - and variable - also called irregular - recurring payments.
Regular recurring payments are charges of equal amounts each time. For example, a gym membership that costs the same amount each month or a monthly magazine subscription would both be fixed recurring payments.
In some cases, the payment amount is subject to change depending on how much the customer used a particular product or service, making the recurring payment irregular or variable. An example of a variable recurring payment is an electric bill or a phone bill - the monthly amount is likely to change depending on usage.
There are a number of reasons why businesses like to offer recurring payments and encourage customers to choose that option, including:
A merchant requires the following infrastructure in order to be able to accept recurring payments from customers:
Without one or both of the above, it is impossible for a business to accept any payments online, including recurring payments. When choosing the payment services provider that you want to use, check the terms and conditions and make sure that the solution is the most cost effective and integrates easily with any other products that you use.
As with most things, there are both advantages and disadvantages to offering recurring payments to customers.
It is up to you to decide what types of payment methods you will accept, both for one-off payments and recurring payments. The more options you provide the better so that customers can pay using the method of their choice. Most recurring payments will be done via ACH transfers or using a credit or debit card.
Automated Clearing House (ACH) payments are payments made directly from a customer’s bank account. It can take a few business days before the funds arrive in the seller’s account because the bank must first verify that the customer has sufficient funds to cover the transaction.
It’s very simple to allow customers to use their credit or debit card to set up a recurring payment. They just have to enter the information one time and then it will be saved for future processing on the designated billing dates.
When setting up automatic payments using a credit or debit card, the customer must sign an authorization form giving you permission to charge their card on the designated dates. This document is important to have on file in case of any disputes or issues that come up with the recurring payments.
Many different types of businesses can benefit from the recurring payments model, including:
Customers can stop recurring payments made via a credit card by contacting the credit card company and asking them to cancel the payments or by canceling directly with the seller.
As a seller, it is in your best interest to provide your customers with clear terms and conditions for using recurring payments that include the policies and procedures for cancellations. You can decide under what conditions the customer can cancel and whether they will need to pay any penalties.
With Pay.com it is easy to offer your customers the ability to set up recurring payments using the payment method of their choice. You can keep track of all of your recurring payments in the customized dashboard. This information can then be exported for use in budgeting and creating your financial statements.