What are Recurring Payments? Payments Explained

You may have seen the option to sign up for “auto-pay” on the bottom of your cable or phone bill. It’s becoming increasingly popular in just about every industry, and some companies are even offering a discount to incentify the billing feature even more. Recurring payments are on the rise, and it’s no secret why they are super convenient!

Both the merchant and the consumer benefit from the hassle-free process of auto-billing. Once authorization has been confirmed, payment information is stored in a database, and a schedule to deduct payments is established, both parties are able to go on about their busy lives. The consumer doesn’t have to worry about making late payments, and the merchant doesn’t have to waste precious time chasing down payments. 

As long as the funds are consistently available and the receipts are reviewed for accuracy, there is little to fret with setting up a recurring payment structure. As a merchant, knowing you’ll have steady revenue to count on from automated payments is invaluable. 

Recurring Payments Defined

Recurring payments are often referred to as recurring billing, automatic payments, or subscription payments. It’s all basically the same thing. A merchant automatically charges a consumer for goods or services on a schedule they both have agreed to. 

Before the schedule can be arranged, the merchant must go through the appropriate steps to get the consumer’s permission and information. The payment schedule varies with each service provider and can range from yearly, monthly, weekly, or even when a certain amount of funds are due. 

A business model that offers recurring payments is good for business. Not only for the convenience factor, but it allows the merchant and consumer to structure a payment relationship, which can lead to a higher customer lifetime value. Win-win for all!

The big goal for just about every business owner is to provide a good or service the consumer is so happy with, they’re willing to commit their money towards future experiences. Once that is accomplished, most customers are really happy to simplify their life and spend less time paying bills.

How do recurring payments work?

Recurring payments are set up so that a merchant has the ability to automatically charge a customer for goods or services on a regular schedule. The customer only needs to enter their payment information once; then the payment software takes care of the rest. This frees up time and energy for both the merchant and the customer.

The customer may choose to set up their recurring payments using a credit/debit card, direct debit from a checking/savings account via ACH, or a variety of newer payment methods such as digital wallets. Digital wallets, or e-wallets, are financial accounts that allow the user to store money, complete transactions, and track payment history from an array of vendors in one streamlined account. Popular examples include Apple Pay, PayPal, and Samsung Pay.

With recurring payments, the merchant and the payer are not required to be present. This automation requires little to no maintenance as the billing happens electronically. This payment method can save your business time and expenses typically used to manage payment administration

Should I use recurring payments?

As a consumer, recurring payments are a convenient way to stay on top of your bills. If the vendor offers auto-pay and you know the funds are consistently available, it’s a great way to check one more thing off your to-do list. It’s best to authorize recurring billing for payments that are around the same amount each month so you can quickly take action for any billing errors if they occur.

On the business side, recurring benefits are extremely beneficial if you have the right software. You’ll want to make sure to choose a payment gateway or processor that can facilitate automatic billing if that is a part of your business model. Payment processors today are extremely secure and must follow strict guidelines to keep sensitive information from being exposed. 

Recurring billing is not a new payment method, but it has been growing in popularity in almost every industry. Many local governments and municipalities offer auto-billing for water, electric, or tax purposes. A large number of people choose to have their health insurance automatically debited from their paychecks. Now the ever-growing popularity of subscription-based companies has taken auto-payments to another level. 

Subscription billing and recurring payments are closely related and industry leaders such as Netflix, Dropbox, and Pandora show just how well it helps to build lasting relationships with customers. You are connected with the customer for a much longer journey, and the business model works. If you’re not already a subscriber for a video streaming service or receiving monthly shipments from the latest subscription boxes, I’m sure you know someone that does.

Benefits of Recurring Payments

Recurring payments offer a business guaranteed revenue on a regular basis. As a merchant, you’ll be able to count on steady cash flow in your bank account each month. Predictable income makes it easier to manage your funds when the unexpected happens.

The payment processing software used to automate the billing process helps you receive your funds faster. The schedule is followed by the software, not the client’s timeline, therefore you consistently receive money when you’re supposed to. There is no risk of the payment being late, so you don’t have to waste time chasing it down.

Additionally, you can save time and money on billing administration because you won’t have to pay a staff to create and manage invoices. After the initial payment is set up, the software will handle everything unless you need to edit the bill amount or the user needs to change the payment type. This frees up your staff to focus on other business needs. 

Recurring payments are made electronically so the business will end up using less paper on invoicing and receipts. This is not only good for the environment, cutting down on paper waste, but also saves valuable funds that would otherwise be spent on paper, envelopes, and postage. The Chamber of Commerce completed a study of 5,589 U.S. companies and found that if they reduced their paper waste by 1%, it would save them nearly $1 billion.

Choosing a Recurring Payment Provider

Choosing a payment service can be overwhelming sometimes. With so many options to choose from, you’ll want to start by having a clear picture of what you need from a provider.

Each platform will have little differences that add up over time, and have the capability to make your life easier or harder, so it’s important to choose wisely. Three popular choices for running recurring payments are Square, PayPal, and Stripe.

Their pricing models are pretty competitive but Square scores highest for best overall service. Square is a powerhouse that can accomplish a lot of goals while staying user-friendly to the average small business owner. PayPal can hold their own with years of experience under their belt and is known as one of the simplest platforms to get started with. Finally, Stripe excels for tech-savvy startups that will be mostly based online.

All of them allow you to get started for free, and you can read some of our other articles to learn more details about each one. 

Summary

Recurring payments occur when a merchant automatically charges a customer for goods or services on a previously agreed-upon schedule. Schedules vary by vendor but are typically done monthly, annually, or when an account reaches a certain dollar amount.

Recurring billing has become very popular due to the convenience for all parties involved.  Some companies require it, and some offer a discount as an incentive for using the hassle-free payment method. Subscription companies such as Netflix have taken auto payments to an all-new high. 

The merchant must receive authorization from the consumer before processing payments, after that, they can automatically charge the payer’s account until receiving notice otherwise. Using specialized software, recurring billing is automated and frees up resources otherwise used for billing administration. 

Auto payments are also good for the environment since you use less paper on invoicing and receipts. Studies show that reducing paper waste will save your business a lot of valuable cash over time. 

Recurring billing is beneficial for both the payer and the payee because it saves time and energy on both sides. The consumer doesn’t have to worry about late fees, and the merchant doesn’t have to track down their customers for payment. 

It’s important to choose a payment processor that is capable of handling all of your business needs. Some are better suited for specific industries and offer more bells and whistles than others.

You can find more information on payment processors on our articles tab.  

 

Sources:

https://www.pcisecuritystandards.org/

https://directdeposit.org/

https://nymag.com/strategist/article/subscription-boxes-to-gift.html

https://www.uschamberfoundation.org/reports/trash-treasure-changing-waste-streams-profit-streams

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