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What is a recurring payment?

What is a recurring payment?

Author

Imogen Walker

Date

03 Feb 2023

Read time

3 Minutes

Category

Payments

Recurring payments have drastically become a popular business model. And it’s no wonder when you look at the perks. We’re not just talking you’re typical lending businesses; subscription services have seriously taken over.

But why is that? Well, when it comes to optimising the checkout experience, aka the secret to success for every modern-day e-commerce business, it is done in a number of ways:

  1. Frictionless, customer authentication methods
  2. One-click payments  
  3. Automated online payments

What do these three features have in common? They are often linked to recurring payments!

With more and more regulations being continuously rolled out in the payments space, and with the shift in customer behaviour focusing more and more on convenience, it’s not surprising that this is the stand-out business model that’s exponentially growing. Taking after the likes of Netflix, Spotify and Amazon Prime, subscription/recurring business models are becoming increasingly popular as automated online payments become the preferred way for customers to pay.

This blog will cover what we mean by recurring payments, take you through the key need-to-know points about recurring billing and how this automated payment type is on the rise.

What’s in this article?

  • What are recurring payments?
  • Examples of recurring payments
  • The difference between recurring payments and subscription services
  • Benefits of recurring payments

What are recurring payments?

Firstly, what do we mean by recurring payments?

Recurring payments are defined as any transaction where the customer consents to have their card details stored or use previously stored details to make a transaction. In other words, a contract of sorts is established between you, the merchant, and your customer so that they’re now a part of your subscription service. So, once this has happened, you can then schedule a transaction to be automated and pulled from your customer’s account or card at regular intervals.

Examples of recurring payments

Recurring payments can either be fixed or variable depending on the business model. The main business examples you will often see recurring payments being used for include:

  • Utility bills
  • Gym membership
  • Entertainment subscriptions
  • Subscription boxes, like food or beauty boxes

The difference between recurring payments and subscription services

It’s much easier to think of a recurring payment as part of a tool used in the overall subscription service. A subscription service is more like the business model and the recurring payment is the method used to collect the funds. A subscription payment plan can also come with additional features on top of the automated billing function, offering customers a range of plans.

These additional features help to combat one of the biggest causes of churn – failed payments. When it comes to recurring billing, merchants can often encounter this due to do not honour codes. These typically occur at the checkout stage because the customer experiences one of the below:

  1. Insufficient funds
  2. Card verification issues
  3. Failure to update card details

Failed payments can lead to unmanageable cash flow and, ultimately, a whole can of worms being opened that you’d rather avoid. Now, this is the part where we tell you there’s an easy resolution and there is… It’s those extra features we mentioned!

How do recurring payments work?

The process begins when a customer subscribes to a service or product that involves regular payments. The merchant, equipped with the customer’s payment details securely stored, initiates the transaction on a scheduled basis – be it monthly, quarterly or annually.

At the predetermined intervals, the merchant’s billing system automatically triggers a payment request to the customer’s chosen payment method, whether it’s a credit card, bank account or another authorised form of payment. This request is processed through a payment gateway, which securely facilitates the transfer of funds from the customer to the merchant.

Benefits of recurring payments

One of the biggest benefits of recurring payments is how convenient they are. Its purpose of being an automated way of paying for a service so that once it’s set up the customer rarely needs to do anything makes it such an attractive option.

Here are the key features that make this happen:

Account Updater

Using an account updater tackles all three frustrations mentioned above at once. With this tool, recurring payments are no longer interrupted by invalid card numbers, cancellations and other reoccurring problems when processed. In fact, this feature completely prevents them from happening at all. The account updater will automatically replace out-of-date information with the correct details, abolishing all potential friction in the payment journey.

Card Tokenisation

You may be worried this retention of customer details is not a secure way to deal with your customer’s data. This is where card tokenisation comes in.

Card tokenisation is a process by which card data is substituted by a token representative in the first transaction your customer makes. This is a very secure way for customers to allow you to store their data and enable:

  • Retention of tokenised data for future use
  • The secure transfer of money at set intervals

It also allows for that all-important one-click payment functionality which guarantees a seamless checkout experience for your customers.

Scheduler

The use of a flexible scheduler is a great way for you to establish a cash flow strategy that eases the stress that comes with taking recurring payments. When using a payment provider, like Total Processing, you’ll be able to manage and schedule payments to prevent unintentional subscription cancellations and encourage more successful payments to be made. This is a smarter way to retain customers but also allows you to stay in charge of the flow of funds.

All these features make up the smart, automated recurring billing model for your business that’ll unlock more conversions and successful payments. It’s a simple solution to offer your customers the personalised, easier billing system they demand to stay with you in the long term. 

For the customer, the beauty of recurring payments lies in the hands-off nature of the entire process. Once they’ve initially authorised the scheduled payment, they can enjoy the uninterrupted benefits of the service without the need for manual involvement in each transaction. This not only simplifies their user experience but also reduces the likelihood of late payments or service disruptions.

Merchants, on the other hand, benefit from the predictability and consistency of cash flow. With the ability to customise billing cycles and intervals, they have the flexibility to align their revenue model with the nature of their business, whether it’s a subscription-based service, software licensing or any other ongoing offering.

What’s next?

Now we’ve gone through the amazing technology that is recurring payments and subscription billing, let’s talk about the process of getting set up and managing your transactions. Keeping with the running theme of this blog, it’s pretty simple! All you need is a payment provider, like Total Processing, that offers both a payment gateway and a recurring billing service all-in-one. And there you have it. All these great features and software are at your disposal for automated conversions.

Check out our managing recurring payments blog for all the details. Or, why not download our ultimate guide on recurring payments for everything you need to know.


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