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Recurring Payments: What You Should Know And How To Set up

Recurring payments allows predictable cash flow and a streamlined checkout experience.

The business model that has catapulted DropBox, Salesforce, Spotify, and Netflix to become lucrative titans in their industries can be mostly attributed to subscription or recurring payments. 

Based on the latest e-commerce consumer research led by McKinsey & Company, it was reported that 46% of Americans had subscriptions for online video streaming services like Hulu and Netflix. The research also said that as much as 15% of online shoppers had subscribed to one or more companies to receive products on a repeated basis by way of monthly boxes.  

It was also discovered that the “subscription e-commerce market” has seen a growth of more than 100 per cent every year for the past five years. The largest players were retailers that had produced an excess of $2.6 billion in sales in the year 2016, which was a considerable leap from a scant $57 million back in 2011.

What Is A Recurring Payment?

Back in the day, it seemed that the only businesses that offered recurring payment plans were subscriptions for magazines and gym memberships. However, this has radically changed as more and more industries are jumping on the wildly popular subscription economy bandwagon. 

So what, exactly, are recurring payments?  Recurring payments (which also go by subscription payments) happen when a customer allows a merchant to charge their debit or credit card on a repeated basis for any services or goods on a predetermined schedule. This schedule can be daily, weekly, monthly, or annually.

Recurring payments can be set up easily by using a payment service provider. These companies are equipped with “all-in-one payment solutions” to manage all facets involved with e-payments. This can include gathering and processing recurring payments for customers, handling all the payment security, and finally depositing all funds into the merchant’s business account. 

For example, when a customer purchases an item online, they may “opt-in” to participate in recurring payments during the first part of the checkout process. After this is completed, payments will be processed regularly, without the customer or merchant needing to take any further action. Typically, customers will receive a notification, informing them that the payment has been processed.

When a recurring payment is processed, the payment processor gets in contact with the merchant’s bank, also known as the acquiring bank, as well as the customer’s credit card network such as MasterCard or Visa. 

The credit card network then gets in contact with the issuing bank (the bank that issued the customer’s credit card). This issuing bank makes sure that the purchase is not fraudulent and there are funds available to cover the purchase. Once the transaction is approved, the credit card network relays the information to the payment processor. Typically, the payment processor places a hold on the funds for up to two business days to make sure the charges are not fraudulent. Finally, the money is then released into the merchant’s account. 

The Benefits For Customers And Merchants

It has been well established that adopting a recurring payments model for your business is highly lucrative, but there are even more perks and benefits.  

First of all, your customers stand to receive significant value by way of its convenience. How? The entire recurring payment process is completely automated and hence, effortless. Customers are not forced to go through the whole checkout process by re-entering their payment information at every billing cycle. As soon as an “automatic payment plan” has been established, it’s done. The funds will be removed from the account automatically, without the need for the customer to take further action.

Merchants can also benefit from adopting recurring payments model for many reasons.  First, recurring payments expedite transactions. Since “automated billing” occurs electronically, it requires zero maintenance. The costs involved in acquiring your new customers is a one-off expense, however, you will profit repeatedly. 

You as the merchant will also discover that your sales cycle will become shorter and less costly. You don’t have to hunt down your payments or waste time having to create invoices. The automated system can create all of this for you. It only requires you to set up the first payment schedule and for your customer to accept the prearranged billing dates. Once that is done, the funds will be deposited automatically into your business bank account. 

Recurring payments also saves both you and your customers precious time as it drastically reduces the time spent on “payment administration”. Also, when you are able to build a solid relationship with your “returning” customers, you will see a drop in “customer service time” and its expenses. 

Finally, and most importantly, recurring payments eliminates the guessing game on your finances. As a merchant that has adopted automatic billing, you can depend on the ongoing revenue that is practically guaranteed. With this “reliable cash flow”, you are free to manage your current assets and plan your financial future with ease. 

Popular Payment Service Providers

In order to make recurring payments work for your business, you will need a merchant account provider or a payment service provider. Take a look at some of these big players to choose which is best for your business:

  • Square – Through its free invoicing software, Square Invoices, you can create a recurring invoice and allocate it to the customers who have a card on file. 
  • Stripe – By using the Stripe Billing feature, you simply go into your account dashboard and attribute a pricing plan for a service or product you desire to collect recurring payments for. After that, you assign a customer to that pricing plan.
  • PayPal – In order to take advantage of recurring payments feature via PayPal, you will need to sign up with PayPal Virtual Terminal or the Payments Pro Account. Once set up, you simply create the recurring charge amount and assign it to the specific product or service. This is also done in your account dashboard. 

Recurring Payments Drawbacks

Although the benefits greatly outweigh any negatives, it is important to be aware of  certain drawbacks relative to recurring payments. Just because it is mostly an automated system, it does not mean that merchants are completely off the hook when it comes to certain administrative tasks. For instance, merchants will need to chase down customers to update their payment information if their credit card happens to be expired or if the issuing bank declines the recurring charge. 

This is why merchants must be sure to have their systems set up properly to facilitate the consumer’s ability to manage their billing information and preferences online. A “well-designed system” can also automate any payment information and invoicing for recordkeeping.  Billing systems also come equipped for customers to easily check their account information, modify their payment information, opt-out of a service once a free trial expires, and even cancel their subscription. 

Another drawback with recurring payments is that consumers will find it difficult to correct a billing error. Since the customer is not receiving a bill that clearly shows the mistake, in which they can halt payment until it is corrected, the incorrect amount is withdrawn outright, which requires more time to get a refund. That’s why it is best to agree to withdraw the same amount at the same agreed upon time to catch any billing errors. 

A Quick Recap

Recurring payments happen when a customer agrees to allow a merchant to charge their debit or credit card on a repeated basis for certain goods and services for a specific amount on a predetermined schedule. 

The subscription-based business model has experienced tremendous growth in recent years and has led to tremendous success by industry giants like Netflix, Spoftify, and Salesforce. 

There are many benefits to adopting the recurring payments model for both consumers and merchants. Consumers enjoy a streamlined checkout process. Merchants can enjoy a more expedited transaction process and a guaranteed cash flow. 

If you want to see your profits soar, seriously consider adopting the recurring payments business model. If any of the aforementioned industry giants give any indication, there is tremendous room for growth. Regardless of the industry you find yourself in, there is a potential for success.