What is recurring payment? Definition, types and benefits

From magazines and utilities to digital software and services, the subscription business model is more popular than ever. The popularity of the subscription model is due to the regular cash flow and other benefits that come with recurring payments.

As it benefits both businesses and customers, recurring payments are gaining momentum around the world. On the other hand, business owners receive their payments on time and reduce administrative costs related to late payments.

On the other hand, customers do not need to open and act on their invoices each billing cycle. Once a recurring payment system is set up, funds are automatically deducted from customers’ accounts at the specified time, saving them from potential late payment penalties.

But there’s more to a recurring payment system than just automation. This guide will explain how recurring payments work and how they benefit your business.

What does recurring payment mean?

A recurring payment is a payment model in which customers authorize a merchant to automatically withdraw funds from their account at regular intervals for goods and services provided to them on an ongoing basis.

Once customers grant the authorization, the amount will be automatically deducted at pre-determined intervals until the customer withdraws their authorization or the subscription expires.

What are the types of recurring payments?

Recurring payments can be classified into two categories:

Regular or fixed recurring payments

With fixed or recurring payments, customers are charged the same amount each time. Gym and magazine subscriptions are examples of regular recurring payments.

Irregular or variable payments

With variable or irregular recurring payments, the amount charged is subject to change depending on the customer’s use of the product or service. For example, your electricity and other utility bills change each month based on consumption.

How do recurring payments work?

Recurring payments are automatically collected from customers’ bank accounts through their payment cards or other methods such as money transfer. To accept these payments, the company must have a merchant account and a payment service provider. Jocardless is a solution to this.

A merchant account is a type of bank account that allows businesses to accept payments from customer accounts. The amount debited from the customer’s account is first deposited into the merchant’s account and then transferred to the company’s bank account.

A payment service provider handles various aspects of payment processing, from collecting recurring payments on behalf of merchants and processing them securely to depositing amounts into merchant bank accounts.

Although different recurring payment processors have different workflows, they generally follow these steps.

• The customer chooses the recurring payment method from the list of options.
• The customer accepts the terms and conditions associated with the recurring payment option.
• To make an initial payment, the customer enters their card details and they are securely stored on the payment gateway page for subsequent transactions.
• An invoice will be sent to the customer on each billing date, according to the predefined schedule.
• Then, just like a normal credit card transaction, once the receiving bank, the credit card network, and the issuing bank approve the transaction, the recurring payment occurs and the funds are transferred to the merchant account.
• Each time a recurring payment is made according to a predetermined billing schedule, the customer is notified of the status of the transaction (and follow-up instructions if the payment fails).
• Thus, the customer does not have to enter the payment details again. The subscription fee will be charged until the subscription is cancelled.

How can recurring payments benefit your business?

Recurring payments offer undeniable advantages:

Reduce late payments and collection time

Late payments are bad for business because it affects both revenue and customer relationships. With recurring payments, you can set up the system once, and rest assured that collecting payments will be repeated automatically based on your predefined schedule.

Your business will spend less time chasing customers for payments and having awkward conversations about late payments, freeing up more time for other essential business tasks.

Reduce effort

Automatic recurring payments reduce the cost and effort associated with manual billing and payment processing.

You only need to set up your initial payment plan once, then the software will process the payment for you. Your intervention will only be required when changes need to be made to the type of payment or the amount billed.

Improve relationships with your customers

Recurring payments are more convenient for customers because they only have to enter their billing information once. Recurring payments take the money and deduct it from their bank accounts on the appropriate billing dates.

Customers do not need to schedule reminders to pay bills due or enter their payment details each billing cycle. If used well, recurring payments can create a sense of goodwill between business and customers, ensuring a healthy relationship with customers.

Fraud defense

Integrated payment gateways that process recurring payments securely store payment information provided by customers on their servers. They protect themselves against fraud through methods such as coding and best practices such as Payment Card Industry Data Security Standard compliance.

Fraud detection and prevention technologies not only defend funds against fraudulent motives, but also enhance a company’s image of trust with customers and save resources that can be spent on researching and resolving fraudulent transactions.

What companies can use recurring payments?

In today’s world, the recurring revenue model is driving growth in various industries, from personal care to pet food, involving companies of all sizes and types.

utility providers

Offering a recurring payment option to pay taxes and utility bills such as electricity, gas, water and phone bills helps ensure that they are collected quickly.

Membership companies

Many types of membership-based businesses use recurring payments, including gyms, vocational training classes, and co-working spaces. In this case, customers have to pay a fixed amount for their membership at monthly or yearly intervals.

companies by subscribing

A wide range of companies are now using the subscription model. It can be found in services like newspapers, broadcast media, SaaS products like Adobe, WordPress, and many more.

financial services

Recurring payments can be used in personal financial services, where a certain fixed amount is deducted from the customer’s salary account and then transferred to pay for general insurance, Repayment of loans or mutual investments at regular intervals.

Thanks to this arrangement, the financial service provider does not need to manually follow up with customers to ask them how much they want deducted from their bank account each month.

Conclusion

The recurring payment system is suitable for both clients and companies. Not only does it improve customer experience by reducing friction between frequent manual payments and delays, but it also ensures a stable cash flow for the business.

If you run a business where you collect recurring payments from the same customers, it’s worth trying out the recurring payment model.

Try Jocardless Today let’s see how it helps you collect recurring payments and makes the whole process a breeze.