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A recurring payment is an automated billing system where a customer authorises a business or service provider to charge their credit card, debit card, or bank account regularly for products or services.
The payment occurs at consistent intervals for the same amount, often weekly, monthly, or annually, without the need for manual input from the customer each time it is made.
Whether it's a monthly subscription to a streaming service, a gym membership, subscription box services, magazine subscriptions, or an insurance premium, the recurring payments business model have become an integral part of modern financial management.
In this article, we will explore what recurring payments are, how they work, their benefits and their applications in everyday life.
Types of Recurring Payments
There are two main types of recurring payments, fixed recurring payments or variable recurring payments.
Fixed Recurring Payments
Fixed recurring payments charge the customer a specific amount at regular intervals for a set amount of time. The price of the subscription does not change based on the level of consumption of the product or service.
Examples of this business model include gym memberships or streaming service subscriptions.
Variable Recurring Payments
Alternatively, variable recurring payments fluctuate based on usage and consumption. The payment due is dependent on the cost of the products or services consumed.
This is common with pay-as-you-go mobile phone contracts, in which consumers are charged based on the number of minutes or data used.
How Do Recurring Payments Work?
Automated recurring payments act as an agreement between the customer and the business. Let's explore the process.
Customer Authorisation
When signing up, customers authorise the service provider to charge their chosen payment method (generally a credit card or debit card) on a recurring basis, in exchange for a subscription to a product or service.
Payment Processing
After a customer subscribes, the business will need access to a merchant account (sometimes provided as part of a payment processor's services) to receive payments.
Recurring payment processors conduct the transaction through a secure payment gateway to protect the customer's payment information.
Once processed, funds are transferred to the merchant account, usually after a brief settlement period (1-3 days).
Confirmation & Receipt
Once the payment processing is complete, an invoice is sent to the customer on every billing date, in line with the predetermined payment schedule.
When subsequent payments are made, the customer will be instantaneously notified of the transaction status.
Automatic Renewal
Recurring payments are automatically debited according to a predetermined billing schedule until the subscription is terminated or its expiration date.
This can enhance customer satisfaction as it removes the need for them to manually input their payment details for each payment cycle.
Automatic renewal payment processes not only enhance user experience and allow for financial planning, but provides a steady cash flow for businesses.
Recurring Payments vs Direct Debits
Direct debits give businesses the authority to charge a customer directly from their bank account, charging customers as soon as payments are due.
The subscription business model differs from direct debits in a number of ways:
- Source of Funds: Whilst direct debits are taken directly from a bank account, recurring card payments are charged to the credit or debit card account.
- Payment Timing: Recurring card payments offer immediate or next-day clearance, whereas direct debit payments may take several business days to process.
- Cancellation: Customers can cancel a direct debit through the bank, however recurring payments must be closed with the subscription provider themselves.
Benefits of Recurring Payments for Businesses
The use of recurring payments can offer a number of benefits for businesses alike, from increased operational efficiency to ensuring financial stability.
Here are some of the key benefits to the adoption of a recurring payment model.
Predictable Cash Flow
Once the recurring payments model has been set up, the collection of funds will be automatically deducted according to the predetermined schedule, agreed with the customer.
This allows subscription businesses to benefit from a steady stream of income, allowing for resources to be focused on customer acquisition. This steady cash flow enables businesses to better plan and forecast their finances.
Improved Customer Retention
Subscription payments offer deeper customer insight versus one-off payment models.
Service providers have the opportunity to develop a greater understanding of their consumer's preferences, tailoring their products and services according to consumer needs.
In turn, they can benefit from improved customer retention and loyalty.
Increased Operational Efficiency
Recurring payments are an automated process, saving company time, effort, and resources.
This payment method removes the need for businesses to chase failed payments, payment delays, or send reminders to each customer for each payment - allowing them to dedicate time towards scaling and business development.
Better Customer Experience
Recurring payments enable customers to predict when and how much they need to pay in exchange for a business' product or service, offering a better customer experience.
Regular recurring payments are more convenient because customers only need to enter their billing information once, giving the perception of saved time and effort.
As such, it reduces the work a customer has to do to access a product or service.
Benefits of Recurring Payments for Customers
A recurring payment plan offers several compelling benefits for customers, a few are listed below:
Convenience
Once the original payment plan is established, consumers no longer need to log into their bank or enter their billing information each time they wish to purchase a product or service - saving both their time and energy.
Budgeting & Planning
Recurring payments enable customers to keep track of their payments in one place, making it easier to budget and keep track of their finances. Customers can plan purchases and set aside money for other expenditures.
Seamless Subscription Services
Recurring payment models keep subscriptions rolling until the contract ceases. As such, consumers don't need to set a reminder to pay outstanding bills or enter their payment information, allowing for a more seamless subscription service.
Common Uses of Recurring Payments
The recurring payment model can drive growth in a number of industries, some examples are listed below.
Subscription Services
Recurring payments can be used for subscription services, such as newspapers and streaming media.
In these instances, customers are usually charged a fixed amount for the service at monthly or yearly intervals.
Memberships
Many membership-based businesses use fixed recurring payments, including gyms and co-working spaces.
In exchange for an agreed fee, they get access to the service or institution.
Utilities & Telecom
Recurring payments can be used to ensure utility bills such as electricity, gas, water and phone bills are paid on time.
This is useful in keeping on top of billing dates and avoiding late payments.
Insurance
Customers can also use recurring payments to regularly pay for their insurance premiums, opposed to making a large one-off payment.
At periodic intervals, the authorised amount will be deducted from a customer's account and automatically transferred to the insurance company.
Instalment Payments
Recurring billing can also be used to repay a specific amount by a specific date - making instalment payments.
This allows customers the option to spread the cost of purchases over an agreed period.
Unlike subscriptions, these do not run on an ongoing basis, but instead expire when the total amount is paid.
Famous examples of instalment payments include Buy Now, Pay Later providers such as Klarna and Clearpay.
Risks & Challenges of Recurring Payments
Like any billing model, the recurring payments process incurs some risks and challenges.
Payment Failures
For the most part, recurring payments work efficiently. However, any billing process is exposed to issues such as failed payments, insufficient funds, or late payments.
Such payment failures can be resolved through quick communication with the customer, offering multiple and flexible payment options and using a suitable payment processor.
Customer Retention & Churn
Curating products and services requires significant effort. Over time, the novelty of these services can wear off.
Customers have the ability to cancel their subscriptions at any point - resulting in a loss of recurring revenue for businesses.
Offering exceptional customer support and personalised incentives, can increase customer satisfaction, increase retention, and reduce the churn rate.
Chargebacks & Disputes
The most common reason for disputes is that the terms of the subscription are not clearly communicated to customers, such as the billing cost and frequency, cancellation policies, or the promotion details.
Failure to accurately bill customers may contribute to cancellations and chargebacks, reducing revenue and resulting in chargeback fees.
To prevent any issues, businesses can send an invoice in advance of each billing cycle and be sure to update customer payment information such as their card number or billing address.
Compliance & Security Concerns
For a business to benefit from automatic payments, they will need to adhere to the rules enforced by card brands and regulatory bodies, some of which concern the handling of sensitive consumer data.
Failing to be compliant will likely result in the loss of a business' merchant account, as well as their ability to process transactions, threatening revenue.
Therefore, it is essential to use a payment provider who offers full regulatory compliance.
Fraud
Due to its digital nature, recurring payments are susceptible to security loopholes like cyber-attacks, fraud and identity theft crimes.
Choosing a payment provider who offers advanced security features will reduce the risks significantly.
Subscription Fatigue
Subscription fatigue is the feeling of frustration and overwhelm that consumers experience by finding themselves overrun with subscription services and products.
This issue is often associated with the surge in streaming services within the media and entertainment industry, though it poses a risk across many industries.
High Cancellation Rates
With household budgets tightening as a result of the rising cost-of-living crisis, discretionary spending is at an all time low. As such, budget squeezes may result in high cancellation rates.
Another reason for subscription service cancellation is likely due to low usage, this is especially prominent in fixed recurring payment models (in which the level of consumption does not change the billing amount).
This is becoming increasingly evident with 31% of UK consumers having cancelled or removed at least one streaming service in the last 12 months. A further 39% of UK consumers reported that they are likely to cancel at least one subscription in the next 12 months.
International Payment Issues
International clients can bring the added challenge of accepting payments in multiple different languages and currencies. This can make communication with customers more difficult when payment issues occur.
One way to mitigate the issue is by using a recurring payment platform that accepts payment in multiple currencies, facilitating cross-border transactions.
How to Accept Recurring Payments as a Business
Implementing a recurring payment model can be a great way to grow as a business, but setting up recurring billing requires careful consideration.
Firstly, a business must choose the right pricing model for their product or service. Should the recurring payments be fixed or variable?
Then, the service provider must be compliant with legal and financial regulations when setting up recurring payments. Laws and regulations will depend on the location and nature of the business.
Transparency is imperative to customer satisfaction. Consumers should fully understand the terms of their subscription, as well as the pricing. This should reduce the risk of future chargebacks and disputes.
Lastly, investing in a reliable gateway is important. Systems that offer automation, security, and integration with a service provider's existing systems will ensure that a business can successfully accept recurring payments.
Payments Made Simple with Cardflo
Recurring payments have become the backbone of many business models.
By automating the billing process, businesses can maintain a steady cash flow while customers enjoy seamless transactions, freeing them from the hassle of manual payments.
However, success depends on choosing the right payment infrastructure, ensuring compliance and offering a transparent experience to customers.
For businesses looking to streamline their payment processes and reduce churn, Cardflo provides an all-in-one solution that integrates automation, security and scalability. With Cardflo, businesses can focus on growth while maintaining efficient and reliable recurring payments.
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