Skip to content

Recurring Payments Defined

Recurring payments are beneficial and time efficient for both merchants and customers.

Taking the center stage of the most popular and convenient business model today is the “subscription-based model.” If you are familiar with innovative streaming services such as Spotify, Amazon Prime, and Netflix, then you can see why this business model is taking the world by storm. It is through the subscription model that customers can enjoy uninterrupted service by paying automatically on a monthly plan. This is known as a recurring transaction. 

What Is A Recurring Transaction?

A simple definition for a recurring transaction or recurring payments is that they are automatic transactions that take place on a pre-specified date upon signing up for a subscription. Some prevalent examples of where recurrent payments are used include utility bills, gym memberships, and online lessons, just to name a few. The schedule is usually predetermined by the customer. 

With more and more companies striving to compete on an ever-growing and global scale, the need for an expedited, convenient billing process is more important than ever. Startup companies who are trying to build their customer base will find that recurring payments can eliminate the worry of finding returning customers to purchase their goods and services on a regular basis. 

Customers benefit from recurring payments in that they don’t have to worry about keeping track of their monthly bills, or again, missing their favorite product or service due to lack of payment. With recurring payments, the subscriber is guaranteed to receive their product or service each and every time (until they cancel). 

Merchants benefit from recurring payments in that it makes their revenue more calculable, as they are well aware as to what payments will be coming in. Also, there will be no need to deal with collections. Finally, it really paves the way for effective customer retention. 

How Does It Work? 

The fastest and easiest way to set up recurring payments is by using a trustworthy payment service provider. These companies offer comprehensive payment solutions that include collecting and processing recurring payments, e-payments, handling all aspects of the security of payments, and finally depositing the money into the merchant’s business account. Here is a simple breakdown of the steps in recurring payments processing:

  1. A customer lands on the merchant’s website and chooses the recurring payment option as the payment option.
  2. The customer accepts the terms and conditions of the recurring billing process at checkout which includes: amount charged, payment schedule, fee structure, and expiration date. 
  3. Customer keys in their payment information and authorizes the merchant to save their data on the website for invoice purposes.
  4. In order for the recurring payments to work, they need to go through the following process: payment processor contacts acquiring bank, client’s credit card network, and the issuing bank. Once all three approve the translation, the funds are then deposited into the merchant’s account. 
  5. Now, each time the merchant processes the recurring payments based on the predetermined terms, the customer receives notification that the payment has been processed. Other businesses give customers a notification prior to processing the payment that their payment will be processed soon. 

In a Nutshell

As the subscription economy is experiencing explosive growth, there is much to be said about what customers are now wanting. Customers don’t want to just purchase random products for the sake of it. Rather, they would prefer to purchase products that have been tried and true and fit both their wants and desires. They also want to dictate when and how often they want these products. They are willing to pay for all this through recurring payments.

As a result, many new companies are launching in various sectors, offering their products and services using this subscription model. If companies learn how to develop this part of their business, they too will experience the great rewards of “recurring revenue”.