What Does Recurring Payment Mean? Definition, Benefits & Examples

Recurring payments are part of subscription based models. Learn all about recurring payments here and how they can help your business grow.

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.  

What is Recurring Payment?

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. 

Is Recurring Billing the Same as Recurring Payment?

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. 

How do Recurring Payments Work?

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:

  1. The customer chooses their payment method.
  2. Terms and conditions are displayed for the customer to read and accept.
  3. The customer enters payment details that are then stored in the payment gateway to be used for the future transactions.
  4. An invoice is automatically sent to the customer on each of the designated billing dates.
  5. The transaction is processed just like all other online payment processing with approvals from the credit card network and the issuing bank and finally a transfer to the merchant account.
  6. The recurring payment takes place on each of the predetermined dates and the customer receives a confirmation of the transaction status, including steps to take in the event that a payment fails.
  7. The recurring payment continues to be charged until the predetermined time period is up or until the subscription is canceled.

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 [Fixed] 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. 

Irregular [Variable] 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. 

Why Recurring Payments are Good for your Business

There are a number of reasons why businesses like to offer recurring payments and encourage customers to choose that option, including:

  • Fewer late payments - by setting up recurring payments, sellers can have peace of mind knowing that the payments will be collected automatically and on time. 
  • Minimize manual tasks - rather than having to manually prepare and send out invoices on a regular basis, recurring payment means just collecting the information one time and then leaving the rest to the payment system. 
  • Better customer relationships - customers love the convenience of recurring payments because they only have to enter all of their payment details one time and they don’t have to remember to make additional payments on time. This fosters good will and a healthy relationship with customers, encouraging them to increase their spending resulting in increased revenue
  • Fraud protection - customer data is stored by the payment gateway on a secure server. Most payment gateways use advanced fraud protection methods like tokenization and PCI-compliance. 
  • Assists with budgeting - it’s easy to predict income when recurring payments are involved because you know exactly how much recurring revenue you will receive on each designated billing date. 

What Infrastructure is Needed to Accept Recurring Payments as a Business?

A merchant requires the following infrastructure in order to be able to accept recurring payments from customers:

  • A merchant account in which funds from credit or debit card transactions are deposited until processing is complete and they are transferred to the seller’s bank account. Or, 
  • A payment service provider - including a payment gateway and payment processor - that facilitates the entire payment process. 

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. 

Pros & Cons of Recurring Payments 

As with most things, there are both advantages and disadvantages to offering recurring payments to customers. 

Pros Cons
Predictable income - provides a safety net in case of any unexpected market changes and lets businesses more accurately forecast their future profits. Churn - customers always have the option to cancel even if they have signed up for a subscription.
Upselling opportunities - there is ample opportunity to upsell to existing customers. Complexities - it can be complicated to manage the recurring billing process.
Convenience - customers save time by not having to re-submit payment information each period. The convenience extends to the sellers who do not need to chase customers for payment.

Types of Recurring Payment Methods

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. 

Recurring ACH Payments

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. 

Credit or Debit Card Payments

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. 

Payment Authorization Form 

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. 

Types of Businesses that can use Recurring Payments

Many different types of businesses can benefit from the recurring payments model, including:

  • Utilities - electric, gas, water and phone companies encourage customers to sign up for the automatic recurring payment option to ensure that payments are made promptly. 
  • Memberships - gyms, co-working spaces, course providers and other ongoing service providers charge users a monthly or annual fixed fee.
  • Subscriptions - no longer just for magazines and newspapers, this model has been adopted by all types of businesses across industries from food delivery to SaaS products. 
  • Financial Services - insurance products, loan repayments and other financial instruments can also utilize recurring payment services to make it easy for consumers to pay a fixed amount each month. 

How to Stop Recurring Payments

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.  

Recurring Payments with Pay.com 

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. 

FAQs

Does recurring mean monthly?

No. While many recurring payments do happen monthly, recurring payments can happen at any predetermined interval of time.

What is the difference between one time payment and recurring payment?

When a customer makes a one time payment, s/he enters the payment information and pays for the particular good or service that they are purchasing at that moment. With a recurring payment, the customer enters their payment information knowing that it will be saved and used at regular intervals.

What does “turn on recurring billing” mean?

Some service providers will offer customers the option to “turn on recurring billing” indicating their approval to change their payment method to a subscription model in which they will automatically be billed each month (or other designated time frame).

What does recurring payment mean on a bank statement?

If someone has signed up to make a recurring payment using their bank account (i.e. ACH transfers), they are likely to see a line on their statement indicating that the particular withdrawal amount was for the recurring payment.

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