The commerce landscape—whether it’s retail, services or software—is moving faster than ever. That’s why businesses are constantly seeking innovative ways to streamline operations and enhance customer experiences.
We can see this trend in action in the realm of payment processing with the advent of recurring payments, also known as automatic payments. Industry data shows that subscription-based businesses are growing 3.7x faster than companies in the S&P 500.
So, let’s dive into the realm of recurring payments and how they can benefit your business.
TL;DR
- Recurring payments refer to a financial arrangement where a customer authorizes a business to charge their account at regular intervals for products or services.
- There are a few types of recurring payments to be aware of, which one your business uses will depend on the business model and need for recurring or automatic payments.
- Recurring payments provide greater predictability for cash flow and allow businesses to plan for future revenue more accurately.
What are Recurring Billing and Payments?
Recurring payments are a financial arrangement where a customer authorizes a business to charge their account at regular intervals for products or services.
There are many benefits of recurring payments, such as providing a seamless and automated billing process and allowing customers to place orders easily on a recurring basis without having to update their payment information. Recurring billing and payments are commonly used for things like paying for a gym membership, utility bills, streaming services like Netflix and Hulu, subscription payments, magazine subscriptions, and many more.
Recurring payments play a major role in ensuring a steady and predictable recurring revenue stream for businesses. This method not only simplifies transactions but also fosters a sense of convenience for customers where they simply need to set up their accounts with the correct billing information and payment details.
How Do Recurring Payments Work?
The recurring payment process involves a series of well-coordinated steps, starting with customer authorization and agreement setup. Once authorized, payment service providers take the lead in automating payments within the payment gateway. For subscription businesses, the customer’s account should also include options for subscription management where they can adjust the frequency of deliveries, pause or cancel the subscription, update card information or bank account information, and more.
Role of payment gateways and processors
Payment gateways and processors act as the backbone of recurring payments. These platforms facilitate secure transactions, encrypt sensitive data, and ensure the seamless flow of funds between customers and businesses.
Customer authorization and agreement setup
Customers grant businesses the authority to charge their accounts by providing authorization through various means. This may involve explicit agreements during the initial purchase or opt-in options for ongoing services.
Scheduling and automating payments
Automation is a key feature of recurring payments. Once the customer agreement is in place, payments are scheduled to occur at predetermined intervals, reducing the burden on both parties to manually initiate transactions. With a subscription business model, recurring payments are timed at a pre-determined billing cycle in agreement with the customer.
Handling payment failures and retries
Payment failures are an inevitable aspect of any payment system. Recurring payment systems are designed to handle such situations by employing automated retries, so you don’t have to spend as much time on the dunning process.
Updating customer payment information
As customers may change their payment methods or card information over time, it’s crucial for businesses to have mechanisms in place to easily update this information to avoid disruptions in the payment process. When customers receive a new credit or debit card, knowing how to quickly update the payment information helps address the potential for failed payments.
Types of Recurring Payments
Fixed recurring payments
Fixed recurring payments involve a consistent amount charged at regular intervals. This model is common in subscription businesses where customers pay a fixed fee for access to products or services or when a payment plan is set up so the customer can pay for a large purchase over time with recurring payments.
Variable or usage-based recurring payments
In contrast, variable recurring payments fluctuate based on usage or consumption. This model is often seen with utility bills where customers are billed based on their actual usage.
Subscription-based models
Subscription businesses leverage recurring payments to provide ongoing value to customers. Subscription-based models range from ongoing deliveries to monthly or annual subscriptions from SaaS companies.
Hybrid models
Hybrid models combine elements of fixed and variable recurring payments, offering businesses the flexibility to adapt their billing strategies based on the nature of their products or services.
Why Accept Recurring Payments?
Consistent revenue streams are crucial for financial stability in any business. Recurring payments offer predictability, allowing businesses to plan ahead and invest in growth initiatives confidently.
Relatedly, recurring payments provide businesses with a clearer picture of their financial health. This visibility aids in accurate forecasting and budgeting, empowering businesses to make informed decisions for future growth.
Plus, there’s the fact that customers appreciate the convenience of recurring payments. This business model often leads to increased loyalty and customer retention. By streamlining the payment process, businesses can focus on delivering exceptional products or services, thereby enhancing customer satisfaction and retention.
Challenges in Recurring Payments
One of the significant challenges in recurring payments is managing customer churn. Businesses need strategies in place to retain customers and prevent revenue loss due to subscription cancellations.
Also, as payment regulations evolve, businesses must stay vigilant to comply with various payment standards and laws. Keeping track of various state and country laws can be tough, so choosing a payment processor that ensures compliance is key to addressing this challenge.
Implementing and maintaining a recurring payment system also involves technical complexities. Businesses need robust systems and processes to handle issues such as failed payments, security concerns, and data management. Even when stored card information is tokenized, businesses must prioritize cybersecurity best practices to encrypt and secure sensitive information—this means having proper infrastructure and investment in technology is key.
Best Practices for Implementing Recurring Payments
Choose the right payment gateway
Selecting a reliable payment gateway is critical. It should offer seamless integration, security features, and support for various payment methods. Your payment processor is your business partner and ensuring a secure checkout and offering convenient solutions should be their priority.
Ensuring security and compliance
Security is paramount in recurring payments. Implementing encryption, adhering to industry standards, like the Payment Card Industry Data Security Standards (PCI DSS), and staying compliant with regulations protect both businesses and their customers.
Providing flexible payment solutions
Offering customers flexibility in payment options enhances their experience. Businesses should consider accommodating debit and credit card payments, digital wallets, and other emerging payment methods. Most forms of payment, including mobile wallets, PayPal, ACH transfers, and many more can be set up as a recurring payment with your payment processor.
Automating payment reminders and notifications
Automated reminders and notifications help reduce late payments and make your life easier. By keeping customers informed, businesses improve transparency and build trust.
To prevent disruptions in service, businesses should have mechanisms in place to prompt customers to update their payment methods or details proactively. Gentle reminders to your customers to update their bank account or card information can make a huge difference in keeping subscriptions running smoothly.
Integration with Business Systems
CRM and customer data management
Integrating recurring payments with Customer Relationship Management (CRM) systems ensures a holistic view of customer interactions, allowing businesses to tailor their services based on individual preferences. For example, Stax has several useful API integrations to leading CRM tools, such as Hubspot, Xero, Wave and more.
Accounting and financial reporting
Seamless integration with accounting systems streamlines financial reporting, making it easier for businesses to track revenue, expenses, and overall financial health. Stax is an all-in-one payment platform and is able to integrate with leading accounting software, so business owners are able to have a holistic view of expenses and income.
Inventory management in subscription-based models
For businesses with subscription-based models, integrating recurring payments with inventory management systems ensures accurate tracking of product availability and timely fulfillment. For example, with eCommerce subscriptions, having an accurate view of inventory will ensure you’re alerted before a product is out of stock so your customers aren’t left disappointed.
What’s Next for Recurring Payments?
The future of recurring payments may witness the integration of emerging technologies like blockchain and artificial intelligence. These innovations can enhance security, automate processes, and provide even more tailored customer experiences.
As payment regulations evolve, businesses must stay agile to adapt to changes. Compliance with emerging and existing standards, such as the PCI compliance framework will remain a key focus for ensuring the sustainability of recurring payment models. Further, compliance with data privacy standards means your business must protect personal information and collected data in compliance with various laws.
Ready to Learn More?
Understanding the intricacies of recurring payments and staying updated with emerging trends, helps you unlock the full potential of this payment model. Hopefully, the insights above helped you better understand recurring payments and how to properly implement them.
Ready to learn how Stax can help your business accept all payments and grow with you as your needs evolve? Get in touch!
FAQs about Recurring Payments
Q: What are recurring payments?
Recurring payments are automatic payments that a merchant sets up to charge a customer’s credit card or bank account for goods or services on a prearranged schedule. This could be on a monthly, quarterly, or annual basis, depending on the agreement.
Q: What is an example of a recurring transaction?
An example of a recurring transaction is a monthly subscription fee for a streaming service like Netflix or Spotify. These apps collect payments every month as long as users continue using the service.
Q: What is an example of a non recurring payment?
A non-recurring payment is a one-time transaction that doesn’t repeat. For example, buying a piece of furniture online or paying for a hotel room. Once the transaction is processed, there’s no expectation of the payment happening again unless the customer initiates another purchase.
Q: What is the difference between AutoPay and recurring payment?
Recurring payment and AutoPay are similar concepts and often used interchangeably. Both involve automatic transactions from a customer’s account to pay for ongoing services or bills. However, AutoPay is more commonly associated with automatic bill payments for utilities, credit cards, or loans, where the amount might vary from one period to another, based on usage or outstanding balance.
