March 17, 2022
Some merchants rely on one-off purchases for the bulk of their income, and others promote subscriptions or other ongoing purchases that require recurring payments. Recurring payments usually take place weekly, monthly or annually and are charges a merchant is authorized to take from a customer’s payment method on an agreed-upon schedule.
The market for subscription ecommerce products has grown over 100% per year over the last few years. This means there is plenty of demand and opportunity for any ecommerce merchant to offer recurring services or a subscription that requires customers to set up recurring payments or subscription billing.
There are benefits for both the merchant and the customer, and setting up recurring payments is certainly more convenient for both sides of the transaction. As a merchant, you’ll get paid on time and lower your administrative costs. From the customer perspective, they don’t have to re-enter their credit card or other payment information or remember to pay the bill each month. This article will answer the questions of what are recurring payments and what is subscription billing and will provide all the information you need to know to start recurring billing.
A recurring payment is a payment that gets made every week, month or other regularly scheduled time without the customer having to re-enter their payment information. Recurring payments, also knowns as subscription billing, are most commonly used when a customer purchases a subscription for an ongoing service or product or divides a larger payment into smaller chunks to pay off over time.
Recurring payments are also called automatic payments, and when a merchant charges a customer on a recurring basis the process is called recurring billing.
There are two main types of recurring payments - fixed and variable. Both involve the customer’s card or other payment method being charged at certain agreed-upon dates without the customer needing to be physically (or virtually) present. Once the customer gives their permission up front - often via a credit card authorization form - the merchant is free to charge the card in exchange for the subscription or goods that they will receive on an ongoing basis.
When a customer is charged the same amount at each scheduled time, it is called a fixed recurring payment. This type of recurring payment is often used for magazine subscriptions or other monthly subscriptions.
With a variable recurring payment, the amount charged each time will be different depending on the customer’s actual use or purchase of a service of goods. For example, an electric bill may be set up as a recurring subscription but the actual amount charged changes depending on the customer’s usage of electricity.
In order for an online merchant to accept recurring payments, you must first know how to set up a merchant account and set yourself up with a payment service provider so that you can accept payments online. The most efficient and easiest way to set up recurring billing is via your payment services provider so that once the customer enters their information one time, all of the back end steps (i.e. charging the customer and depositing the funds in the merchant’s account) are taken care of automatically.
After the initial set up, recurring payments generally get charged automatically. This process is referred to as an automatic payment. The process that takes place in the backend is identical to what happens when a customer enters credit card information to make a purchase. Once the automatic payment is complete, a receipt gets sent to the customer.
Depending on the business model, some merchants prefer to send recurring invoices rather than set up recurring credit card payments. In this billing model, it’s just the invoice that is automatically sent to the customer on a regularly scheduled basis, and then the customer must make the payment manually.
Automatic payments can be made using a credit card or other mobile payment options.
It’s easy for consumers to set up automatic payments using a credit card, and this method also provides merchants with a reliable and predictable cash flow. On the downside for merchants, however, recurring credit card payments do have a higher payment failure rate than debit cards or other options. This is primarily because credit cards may expire mid-subscription without the consumer realizing.
In addition, recurring payments using credit cards tend to be more expensive for merchants than other methods.
Most mobile payment providers like ApplePay and GooglePay also allow for recurring payments. As a merchant, it’s up to you to decide which payment methods you will accept, but whichever methods you offer make sure that you clearly indicate the billing frequency and amounts before the customer authorizes the recurring payment.
Another recurring payment option is ACH, which allows merchants to debit a customer’s bank account directly without the need for a credit card or other payment method. ACH payments usually have lower fees and also eliminate the risk of a failed payment.
In broad terms, recurring payments operate just like any other payment. In order to accept recurring payments, a business owner must open a merchant account and onboard a payment infrastructure solution. The payment solution takes care of the payment processing and making sure the money goes from the customer to the merchant.
The process generally follows the following path:
This process continues until the subscription or recurring payments expire.
Recurring payments can be used in many different circumstances, including:
The biggest benefit of recurring payments is the convenience offered, saving time and hassle for customers and merchants alike. Following are some of the key benefits:
With recurring payments, the customer does not have to re-enter the payment information each time payment is due. The entire process can be automated and there is no need for any manual tasks. The administrative tasks for the merchant are also significantly reduced, freeing up time for other business-growth tasks.
The payment services provider stores the customer’s payment information securely and offers full protection against fraud. Because the consumer does not have to re-enter the information, they are not risking anyone watching them and gaining access to their credit card or other financial information. The merchant as well can rest assured that each transaction will go through as safely and securely as the first one.
Customers love convenience and offering them the ability to use recurring payments will make them love your site. Recurring payments means customers only have to enter all of their information one time, knowing that the payment will be processed each month (or other interval). They don’t need to remember to pay a new invoice each billing cycle, but rather they can just rely on the fact that it’s all taken care of.
No merchant wants to waste valuable time tracking down delinquent customers and chasing late payments. Once a recurring payment is set up, there’s no room for error and you can sit back and watch the payments come in on the designated date.
When you use Pay.com as your payment service provider, you can offer your customers a wide array of payment options. All of the backend logistics are taken care of by Pay, ensuring that all transactions are processed quickly and securely. Your customers get a smooth, seamless purchasing experience and you get the money in your bank account quickly.
The same process is true for both one-off and recurring payments. Once the customer enters their information the first time and authorizes the recurring charges, Pay.com’s system stores the data securely. When the time comes for each subsequent payment, there is nothing that you or the customer have to do - the system simply charges the card (or other payment method), sends the customer a notification and receipt and you receive your income.
When you sell a subscription or other product that requires recurring payments, you must make the terms and conditions very clear. Included in those terms should be a process for what happens if the customer wishes to cancel the subscription, either in the middle or when the proscribed term is over. Depending on the terms, if a customer chooses to cancel they will notify you, and it is your responsibility to amend the system and make sure that the remaining charges are not made.
In some cases, the customers may turn directly to the credit card company or other payment method provider to cancel the recurring payments. If this happens, then the next time you try to process the charge, it will fail.
It is also, of course, possible for you, as the merchant, to go into the backend of your payment system at any time and cancel a recurring payment should the need arise. If, for example, a customer is going on vacation and wants to pause the shipment of a subscription box, you can also freeze the recurring payments for a specified amount of time and then resume.
Offering your customers the option to use recurring payments for subscriptions, memberships or other purchases that require ongoing payments is a great way to ensure a predictable cash flow for your business. The level of convenience that recurring payments affords to both merchant and customer alike will improve the overall customer experience and make your administrative process more efficient. Of course, recurring payments are not possible in every line of business, but if it is something that can work for yours, it is worth a try.