Recurring payments are commonplace in commerce today. Most of us have phone plans, subscription services, and other memberships auto-paid every week or month. It’s efficient, stress-free, and eliminates the need for customers to remember when their payments are due.
It’s a win for business owners and customers alike.
By 2030, it’s predicted that the subscription economy will be worth $1.2 trillion globally. From $275 billion in 2022, that’s a steep rise to come in just a few years. But the leap still looks likely. Everything is turning subscription based.
We all have mobile apps, streaming services, and shopping subscriptions. Maybe a gym membership, too.
Whatever your industry, chances are there’s an opportunity to utilize a subscription model and recurring payments. This article covers all you need to know about the recurring payments solution and how to implement it into your business.
TL;DR
- Recurring payment processing lets businesses automatically collect recurring customer payments. Both parties benefit by removing the hassle of remembering when payments are due.
- Businesses have better cash flow, and customers avoid manual payment responsibilities. Customer satisfaction increases while business payment processing costs are kept low.
- Implementation is easy. Recurring payment platforms and payment processors facilitate automation, and merchants enjoy seamless recurring payment processing.
What is recurring payment processing?
Recurring payment processing is a model in which businesses can automatically collect recurring payments from their customers. This payment processing method helps businesses automate the collection and reconciliation process. Payments are received and managed more efficiently; best of all, you and your customers don’t have to think about it.
The most common form of recurring payment processing is subscription billing, where customers agree to a recurring payment plan to access goods or services. This model is often used by software companies, streaming services, and other businesses offering digital goods and services. Think Amazon Prime, Netflix, and the like.
Offline services, like gym memberships and weekly food delivery plans, commonly use recurring payment processing to process monthly fees.
In a nutshell, the customer sets up a payment plan with the business. The customer is then charged on an agreed-upon date and amount, and the payment is automatically taken and processed based on those terms.
How does recurring billing work?
Recurring payment processing, also known as recurring billing, is simpler than it may seem. When the customer signs up for the service and agrees to the terms, their payment details, such as credit card information or bank account info, are stored in a secure server. This payment data is tokenized and vaulted in a PCI-compliant environment. This replaces sensitive data with a non-sensitive “token,” moving the merchant out of the scope of handling raw card data.
This is done through a service known as a payment gateway. There is no need for you to do this manually. The whole process is automated for you.
Even the billing cycle is set up through the payment processing platform when the customer signs up. Manual involvement from the merchant is minimal. In some cases, it’s non-existent. The customer can make an online payment, enter their payment details into the system, and agree to the recurring payment terms.
The gateway initiates the transaction, but the subscription management engine (like Stax) is what maintains the logic of the “trial period,” “pro-rated upgrades,” and “dunning schedules” before sending the request to the gateway. Each subsequent purchase is made automatically on the predetermined payment schedule until the customer decides to cancel or modify the agreement.
The role of the payment processor
A payment processor is a third-party service provider that connects businesses to the necessary payment technologies. They do credit card processing and provide access to different payment options, like digital wallets and ACH processing. They ensure the payments work while ensuring data security during every transaction.
Leading processors provide KYC (know your customer) and AML (anti-money laundering) screening tools, which are essential for high-risk industries or large-scale subscription models to ensure compliance.The processing of payments is impossible without payment providers.
In recurring payments, payment processors play a pivotal role. They provide merchants of both large and small businesses with the necessary tools to set up recurring payment plans and manage customer data securely.
The process works like this:
- The customer enters their payment details into the system and agrees to the recurring payment terms.
- The payment processor securely stores this data and, upon receiving a successful transaction, notifies both parties – the merchant and the customer.
- When required, the payment processor collects payments according to predetermined terms stored against each customer.
- The merchant receives the money minus processing fees and other associated costs.
Credit card vs. ACH recurring payments
Recurring customer payments can be made through either credit cards or ACH (Automated Clearing House) transfers.
Credit card payments are processed faster and are preferred by small businesses, as they offer more protection against fraud and chargebacks. However, processing fees for credit card payments tend to be higher than those for ACH payments.
ACH payments take a few days to process, but while ACH lacks the real-time authorization of credit cards, it is highly secure when paired with modern account validation services. In fact, ACH is often preferred for high-value B2B transactions because it bypasses the risk of physical card theft and ”lost/stolen” card churn. . However, processing fees for ACH payments tend to be lower than those for credit cards.
In both cases, the payment processor acts as the intermediary between all parties involved in the payment processing process. The payment processor (like Stax) connects the merchant to the acquiring bank and the card networks (Visa, Mastercard).
The benefits of recurring payment processing
Recurring payment processing is a game-changer in making smoother, more seamless payments. It eliminates manual processes, reduces errors, and streamlines the purchasing experience.
Before this technology was available, both large and small businesses had to charge customers manually for recurring subscription payments. A dedicated employee would be responsible for executing every single one of these payments. If that were still the case today, many of the giant businesses we know and love would not exist.
The benefits for merchants are:
Cost and time savings
Automatic payments free up staff to focus on other business areas where they can increase productivity and innovation. They also reduce administrative costs associated with the manual process of payment collection.
Improved cash flow
Recurring payments eliminate businesses’ need to wait for customers to send in payments. Late and missed payments are reduced, and cash flow management is greatly improved. Stax Bill utilizes AI-driven smart retries, which analyze the optimal time of day and day of the week to re-attempt a failed transaction, significantly increasing recovery rates over static daily retries.
Reduced payments-related disputes
As payment processors help to automate the process, they reduce the risk of human error and, therefore, the number of disputed charges. Refunds are less likely, and merchant services providers have fraud detection capabilities that protect merchants from fraudulent activities.
Higher customer retention
Happy customers are a merchant’s best asset. Recurring payments simplify the payment process and make it more convenient for customers. As a result, the customer experience improves, and merchants have higher customer retention rates.
Recurring payment processing also offers several benefits to customers, including:
Convenience
Customers don’t have to worry about manually entering their payment information each time they need to make a purchase. With their card on file, automated payments simplify the process and make it as effortless as possible for customers.
Easy access to services
Recurring payments allow customers to easily access services and products continuously without constantly having to remember to make payments.
Better budgeting and cash flow management
Recurring payments help customers better manage their budgets, as they can set up their payments based on schedules that fit their needs. Merchants, in many cases, will offer weekly, bi-weekly, monthly, or annual subscriptions, helping customers take control of their finances.
Transparency
Automated payments allow customers to see exactly when and how much each payment is for. They are also able to easily adjust or cancel their subscriptions if needed.
What is recurring invoicing?
Recurring invoicing is similar to recurring payment processing but with a few differences. Instead of taking payments directly from the customer’s account, businesses send an invoice to their customers and allow them to pay on their own timeline. Recurring payments are a “pull” (merchant-initiated), while invoicing is a “push” (customer-initiated), which significantly impacts the predictability of your cash flow
This payment model is better suited for businesses that provide services or goods one-off rather than over a period of time. For example, a lawyer who bills their client for every hour worked would use recurring invoicing, while a gym that charges customers monthly would leverage recurring payments.
Recurring invoicing offers many of the same benefits as recurring payments, including streamlining manual processes and reducing the likelihood of errors or disputes. It also eliminates the need for businesses to constantly follow up with customers for payment.
In many business models, recurring invoicing and recurring payments will be needed. A good credit card processing provider will have the capabilities to facilitate and handle both.
The types of businesses that should use recurring payments
Any business supplying ongoing services or products at a consistent weekly, monthly, or annual price is a candidate for recurring payments. Some of the most typical use cases include:
Subscription boxes
Think of subscription businesses like Birchbox and Dollar Shave Club that offer subscription boxes with items tailored to the customer.
Digital content providers
Businesses offering digital content, such as streaming services, software licensing, software-as-a-service (SaaS) businesses, or mobile applications, are the most common use cases for recurring payments.
Other digital content examples include online education platforms like SkillShare or music platforms like Spotify.
Membership programs
Whether physical gyms or virtual membership programs, businesses offering membership programs typically have recurring payments. This would include shopping platforms like Amazon Prime.
Recurring donations
Organizations, such as charities and non-profits that rely on donations from members, also apply this type of solution to simplify donation gathering.
Utility bills
Most utility companies will have recurring payment solutions to help the business, the customer eliminates the recurring hassle of processing payments.
Rental agreements
Today rental payments are streamlined with payment solutions that allow realtors to automatically charge tenants monthly (or other time frames) without the need to chase after payments. Note: Collecting rent via recurring ACH requires adherence to NACHA’s WEB Debit rules, including explicit authorization mandates and account verification to prevent fraud.
Loan repayments
Finally, banks and other lending institutions often opt to use recurring payments for loan repayments. This helps to keep both the institution and the customer organized when it comes to making payments on time.
How to implement recurring payment processing?
To implement a recurring payment system, merchants need a payment processor equipped with the necessary features and capabilities to introduce an effective recurring payment solution. Those features and capabilities include:
- Security – Payment processors must be PCI compliant to provide the appropriate security protocols to protect customers’ financial data.
- Flexibility – A payment processor should be able to accept a variety of payment methods, including credit cards, debit cards, direct debit, digital wallets, and multiple currencies.
- Reporting/analytics – Merchants need access to reporting and analytics features to track payments, analyze customer data, and identify potential issues.
- Customer support – Merchants need to find a payment processor with reliable customer service to help them navigate any bumps in the road.
- Integrations – The payment processor should be able to integrate with other business systems through APIs, such as accounting software or ecommerce platforms.
Together these features ensure that merchants have an efficient, secure, and reliable recurring payment system.
Once you have such a solution, the process to implement it goes like this:
- Step 1: Sign up with your preferred platform and create your merchant account.
- Step 2: Set up the required payment fields, including a description of the product/service you are offering and the prices and/or fees associated with it.
- Step 3: Create a customer profile for each potential customer and provide essential information about them, such as their name, email address, contact details, and payment information. This will be automated when customers sign up to make an online payment.
- Step 4: Set up automated billing templates that will trigger payments regularly.
- Step 5: Test the system to ensure it is working as expected, and then begin collecting payments.
- Step 6: You don’t have to monitor this manually; Stax Bill includes a card account updater that automatically pings card brands to refresh expired or replaced card details before the next billing cycle.
- Step 7: Analyze the performance of your recurring payment solution and make changes as needed.
For an all-in-one billing solution with automated recurring billing, subscription management, payment gateways and management, subscription analytics, integrations, and more, go no further than Stax Bill.
Backed by Stax, Stax Bill lets you automate your billing for rapid growth while getting the best payment processing rates through member-based pricing.
Contact Stax Bill today to learn more.
Quick FAQs about Recurring Payment Processing
Q: What is recurring payment processing?
Recurring payment processing is a financial arrangement where a business automatically collects payments from customers at regular intervals. This model is commonly used in subscription services, allowing businesses to manage payments efficiently without manual intervention.
Q: How does recurring billing work?
Recurring billing involves storing a customer’s payment information securely and automatically deducting payments on a predetermined schedule. This process is facilitated by a payment gateway, which processes each transaction according to the terms agreed upon by the customer.
Q: What are the benefits of recurring payment processing for businesses?
Recurring payment processing offers several benefits for businesses, including improved cash flow, reduced administrative costs, fewer payment disputes, and enhanced customer retention by providing a seamless billing experience.
Q: How can businesses implement a recurring payment system?
To implement a recurring payment system, businesses should partner with a payment processor that offers features like security compliance, various payment options, reporting tools, and integration capabilities. This involves setting up automated billing templates and customer profiles to streamline the payment process.
Q: What types of businesses should use recurring payments?
Recurring payments are ideal for businesses offering ongoing services or products, such as subscription boxes, digital content providers, membership programs, utility companies, rental agreements, and loan repayments.
Q: What is the role of a payment processor in recurring payments?
A payment processor acts as an intermediary, ensuring secure transactions and facilitating the automated collection of payments. They provide essential services such as fraud protection, customer verification, and chargeback management.
Q: What is the difference between credit card and ACH recurring payments?
Credit card payments are processed quickly and offer more fraud protection, but they come with higher fees compared to ACH payments, which are more cost-effective but take longer to process.
Q: How do recurring payments benefit customers?
Recurring payments provide convenience by automating the payment process, allowing easy access to services, improving budget management, and offering transparency with adjustable payment schedules.
Q: What is recurring invoicing and how does it differ from recurring payments?
Recurring invoicing involves sending invoices to customers for payment on their own timeline, as opposed to automatically deducting payments. This model is suitable for businesses providing one-off services, like legal consultations, whereas recurring payments suit subscription-based models.
