A Complete Guide to Recurring Payments

Comfort is providing business services, knowing that you’ll have a steady cash flow over the course of time.

Convenience is being able to automatically complete your due payments every month, without having to waste your time on manual transactions.

Recurring payments provide that comfort and convenience for merchants and their customers, respectively.

This is a complete guide to recurring payments, highlighting the benefits for all interested parties, noting a few drawbacks, and explaining how to set up such payments.

Recurring Payments Explained

A recurring payment is a transaction that occurs at specified intervals, through which a merchant automatically charges a customer for a predefined amount of money.

The merchant must receive official permission from the customer to be allowed to collect funds from their accounts or credit cards.

Once the customer authorizes the merchant, the latter becomes eligible to charge the account or card in question until the customer terminates the permission.

CheckoutGate Intel: It’s not enough just to stop using merchant’s services if you don’t want them to collect funds from you anymore. You also must cancel the authorization so that they don’t continue billing you for the services in question. Always double-check whether one includes the other.

Recurring Payment Types

A recurring payment can be a fixed/regular transaction or a variable/irregular transaction.

Fixed recurring payments typically occur at the same time on a predefined schedule for a set amount of money. Financial institutions (more details below), subscription businesses, and membership sites are the common users of recurring payments.

Variable payments, on the other hand, the sum charged to the consumer varies from month to month. There is a billing agreement and authorization between the merchant and the consumer, but the amount isn’t always the same. Instead, it’s based on the number or amount of consumed services or products. Utility companies often use variable recurring payments.

Who Are Recurring Payments For?

The explanation above screams subscription-based businesses when it comes to the users of recurring payments.

And this is correct: merchants that collect regular subscriptions rely on recurring payments.

Streaming services, delivery companies, and publishing houses widely collect recurring payments. They often offer discounts for annual payments, as incentives for users to stay their loyal customers and pay a higher sum in advance.

What’s more, businesses that base their operations on memberships also charge fixed amounts of money through automatic billing.

Utility companies also allow their customers to pay bills through recurring payments. Internet, cable TV, and electricity providers are only some of the entities that encourage such billing. It’s a more convenient option for the customers because it helps them pay their overheads on time. Merchants, on the other hand, don’t waste time and money on sending reminder notices.

Finally, banks, insurance companies, and other organizations within the financial industry rely heavily on recurring payments. You know how the bank collects the same monthly installment from your bank account on the same day of the month? This occurs because you authorized them to do so when you were signing your loan contract. The same goes for insurance policies, some private pension schemes, etc.

Consumers who agree to recurring payments prefer convenient and smooth transactions that allow them to enjoy certain services and products. However, it’s not always as smooth as it may seem up to this point.

How Does a Recurring Payment Unfold?

This is what happens when a merchant and a consumer enter a recurring payment agreement:

1. The consumer decides to start using a certain service and subscribes to it, accepting the terms and conditions.
2. The consumer submits the relevant payment information. It can be a bank account number, credit card, or another payment method. Digital wallets and other alternative payment methods available globally are also eligible for recurring payments.
3. The payment data is stored within the payment gateway for following automated payments.
4. The money is forwarded to the payment processing company.
5. Once approved, the funds are credited to the merchant account.
6. The consumer receives the payment invoice and a notification that the transaction has been completed (once everything is settled).

How Can Merchants Benefit from Recurring Payments?

The popularity of recurring payments speaks in favor of their benefits for all interested parties. A recent report published by the European Central Bank shows that EU citizens prevalently use direct debit recurring payments – the amount is transferred directly from their bank accounts –  for telephone and internet bills. The utility bills come second, insurance third, and mortgages/loans fourth.

Both merchants and consumers find something valuable in such agreements that yield the following advantages:

• Smooth cash flow. Every merchant that successfully establishes a subscription-based business can count on smooth cash flow. And if their incentives for one-time annual billing are thought through, their budgeting will get even better.
• Curbed churn rate. Even kids today know that acquiring a new customer is more expensive than retaining an existing one. In that light, recurring payments help merchants reduce the churn rate. Once the consumer has authorized a merchant to bill them regularly, they’re more likely to keep using those services for a longer time.
• On–time payments. ‘Don’t make me think’ is a common phrase that people use on the web today (check out the eponymous book by Steve Krug). In other words, people want their digital services smooth and simple. And what is smoother and simpler than an automatically collected payment for a happily used service?
• Positive customer experience. We’ve highlighted above that once the payer’s data has been stored within the payment gateway, it remains there for future recurring payments. In that sense, the overall customer experience is improved, better than the one in which you have to enter your payment information every single time you want to make a payment.

What Are the Potential Drawbacks?

Recurring payments come with certain issues, more common for merchants than for customers, as follows:

• Chargeback expenses and billing errors. A subscription goes seamlessly when both parties want to nurture the relationship in question. However, customers often forget to unsubscribe from a service – and this is the most common source of payment disputes. The consumer thinks they shouldn’t be charged for the following month, and the merchant might beg to differ. If the merchant declines the refund request, the consumer might file an official chargeback with the issuing bank, which incurs additional expenses for the merchant.
• Extra costs. There’s no free lunch and there are no free online transactions. Banks, payment service providers, and card companies all charge certain fees to carry out online payments. In the case of recurring payments, there might be some extra costs due to higher risks. For instance, the chargeback probability explained above is one factor that might lead to higher fees for this payment service; another factor is the industry risk level. If a service is more likely to cause more expenses to a payment provider or bank, they’ll impose higher fees.
• Service downtime. You can’t tell for sure that payment will be automatically processed even if all the official prerequisites have been met. For example, the consumer doesn’t have enough funds in the relevant account, card, or digital wallet, and the payment can’t be completed, so they can’t continue using the service in question until they make the payment. Merchants can reduce such a risk by sending an automated reminder a few days before the payment date.

Setting up Convenient Recurring Payments

A merchant that wants to receive recurring payments will have to approach their overall payment policy differently than the one not interested in these operations.

Here are some practical suggestions meant to ensure a better payment experience for merchants and, consequently, for their consumers.

Meeting PCI Compliance Requirements for Payment Security

The online payment ecosystem isn’t safe from fraud, scams, and data theft. With innovative tech options emerging on the Web horizon, merchants must stay cautious and keep their assets safe.

This is where PCI Compliance steps in – the rules regarding cardholder data storage and usage, adopted by the main card companies and monitored by the International Payment Data Security Standard (PCI DSS) Council.

Merchants should regularly audit their technical measures to ensure they’re always PCI-compliant. Payment partners can help you mitigate risks and check all the boxes regarding this compliance.

Adopting Clear Rules and Policies

There are fewer issues with recurring payments if the general terms and conditions are clear and concise. It’s vital to define how cancellations, subscriptions, and refunds are carried out, while highlighting all the relevant tiers, prices, and costs that the consumer will have using your services.

Also, avoid complex language, misleading explanations, and ambiguities to cut out potential misunderstandings.

Opening a Merchant Account

We’ve explained above why payment providers have introduced a high-risk merchant account.

Regardless of the risk level of your industry, it’s extremely important to open a merchant account through a provider that can handle all your operations at acceptable costs.

Always state in advance that you want to accept recurring payments because it could require a different procedure of verifying and opening a merchant account.

Conclusion

Recurring payments are handy because they offer comfort and convenience. Merchants and customers alike opt for such transactions to enjoy the benefits of automated billing stated above.

Still, recurring payments might lead to recurring issues, from chargebacks and downtime to additional costs. CheckoutGate can help you with your recurring payments while mitigating security risks. Contact us and have your merchant account opened in the shortest time possible: https://acceptpaymentsnow.typeform.com/to/NbSkFD7R.