- Recurring payments are a payment model where customers allow merchants to automatically remove money from their bank accounts on a regular billing schedule in exchange for products or services.
- This payment solution has become popular across several industries, including ecommerce, fitness, streaming services, subscription-based, and utility companies.
- There are numerous advantages to using recurring payments as merchants, such as saving time, reducing paper waste, and increasing payment data security.
What Is A Recurring Payment?
A recurring payment is a payment method in which the customer authorizes the merchant to automatically remove funds from their accounts regularly to pay for products and services. Merchants must receive customers' permission before implementing recurring payments. Once consent is given, merchants will automatically deduct the agreed-upon amount at predefined intervals, such as weekly, biweekly, or monthly, until the customer cancels their subscription or expires.
Types of Recurring Payments
There are two primary types of recurring payments – fixed and variable. If your business is considering offering recurring payments, it's helpful to understand how these payments are different. Depending on the products or services provided, one payment type may be more suitable for your customers' needs than the other.
Fixed (regular) recurring payments occur when customers are charged the same amount for every billing cycle. The amount does not change regardless of the products or services received for a billing period. Common examples of fixed payments include:
- Gym memberships
- Magazine or newspaper subscriptions
- Streaming services like Netflix or Disney+
Variable (irregular) recurring payments occur when the amount customers are charged according to their usage or quantity of products and services. Thus, the amount may vary for each billing cycle. Billing can be classified as usage-based or quantity-based within this variable category. Common examples of this recurring payment type include:
- Electric bill
- Fresh food deliveries
- Phone bill
- SaaS products
Who Uses Recurring Payments?
Recurring payments have become a popular option for businesses across various industries. This includes everything from utility to fitness companies.
- Ecommerce – subscription-based companies, such as Hello Fresh (fresh meals), Birchbox (makeup), and Barkbox (dog toys), send customers a box of goods for each billing cycle. The payment cycle is typically monthly or quarterly.
- Entertainment – content streaming services like Amazon Prime and Disney+ use recurring billing as their primary payment model. Customers can choose to be charged monthly or yearly.
- Fitness – gyms and yoga studios typically use a recurring payment model, in which customers are charged a set membership fee on a monthly or yearly basis.
- Publishing – newspaper and magazine companies typically charge subscribers every month. These subscriptions are for both print and digital content.
- Wineries – wineries may offer special wine club subscriptions that include various wine bottle selections every month or quarter.
The Benefits of Recurring Payments
Business owners juggle many hats daily, from strategizing new products/services to responding to customer inquiries and concerns. A significant benefit of recurring payments is that it makes the billing process much more convenient than manually requesting payments (paper or digital) from every customer each billing cycle. If a merchant has hundreds to thousands or more customers that need to make ongoing payments, this can quickly get out of hand with a manual payment approach. Indeed, most customers prefer not to reenter their card information more than once, set reminders to pay bills each month, or worry about late fees. In turn, this seamless payment solution can help improve customer relationships and retain existing customers. For merchants, they can enjoy knowing ahead of time what their revenue looks like, which can help them plan business objectives and spending.
Instead of requesting customers' payment information for each billing cycle, merchants can save time and energy by implementing recurring payment models. To set up automatic billing, merchants will request permission from customers, receive their payment data, set up the payment cadence, and manage any payment type or amount changes. Once the billing is set up, business owners can automatically receive funds straight to their merchant accounts for each billing date. Merchants can use the extra time to grow their businesses, retain customers, and develop new products or services.
Decrease Late Payments
Businesses depend on a steady cash flow to operate, which is one reason why customers are charged fees for late payments. Late payments also harm customer relationships because businesses may charge late fees or cancel future products or services to a customer depending on the number of late payments. To help prevent these late payments, merchants can set up recurring payment schedules. This payment model will help establish consistent, timely payments so companies don't have to guess how much cash flow is coming in each month or quarter.
Reduce Costs and Waste
Like other green business practices, recurring payments are an effective solution to reduce costs and paper waste. One survey discovered that small businesses using digital billing saved 40 to 50 cents for every bill. To illustrate this, consider that just 20 bills mailed out to customers equals almost 7 pounds of paper annually. Other costs and pollutions include the production and transportation of the paper, which is 171 pounds of greenhouse gases emitted, 63 gallons of wastewater, and 5 gallons of gasoline. On a bigger scale, a company that mails out 500,000 paper bills each month, which cost $0.05 per bill, can save $25,000 a month by switching to digital billing.
Keep Payment Information Secure
Companies that accept recurring payments can help securely manage customers' sensitive payment details. Avoiding paper bills will reduce duplication, circulation, and potential unauthorized access of confidential information to third parties. Indeed, paperless billing means that merchants no longer rely on an intermediary like the USPS or FedEx to deliver billing statements to customers and checks to businesses safely. Instead, companies can use recurring payments to receive payments instantly and automatically from customers. Additionally, customers don't have to deal with the hassle of providing their cardholder data for each billing cycle.
While there are several benefits of recurring payments, merchants need to keep in mind that there are some drawbacks. For example, there is a potential for involuntary churn, which means customers may have their subscriptions canceled due to a failed payment. These failed payments can be caused by a card on file expiring or a card being replaced after it was lost or stolen due to credit card fraud. An estimated 20 percent of customers have missed a subscription payment due to an expired card, while 41 percent of cardholders have replaced their expired, lost, or stolen card.
To avoid the costs and disruptions of failed payments, merchants should consider using an account updater service. At TokenEx, our account updater software automatically updates credit card details on file whenever a customer's card is lost, stolen, upgraded, or expired. Payment automation will help merchants establish a seamless payment experience for customers who will be more likely to stick with a business that provides a hassle-free approach to automatic payments.