Recurring billing: benefits & pitfalls
Accepting digital payments today is a “sign of good manners”, no matter what you sell. Depending on the type of business, you can configure the payment acceptance to get maximum profit of it. Recurring billing appears to be one of the most effective ways to pay for certain services. Such payment model aims to simplify regular payments and prevent customers from providing their credit card information more than once.
What does recurring billing mean?
Recurrent billing or payments by subscription are repeated or regular payments carried out within a particular schedule. Their uniqueness lays in the fact that customers enter their bank card data once, and that’s it. No further physical or virtual presence of the user is required. Such charge-offs are subject to a predetermined payment schedule. That is why they are also called scheduled payments or recurring charges. The schedule can be any (annual, monthly, daily, etc.), and the amount is usually fixed: users can agree with it or determine the amount independently. So, merchants require a cardholder’s permission once upfront and can keep on charging until this permission is withdrawn.
Is recurring billing suitable for my business?
Scheduled payments are available across a variety of products and services. Today, this billing model is especially worth implementing for businesses who sell products or services that people buy regularly. Here are the most common use cases:
- Subscriptions. Today subscription businesses prosper. Anything customers can imagine is at their fingertips. It includes streaming services, subscription boxes, and SaaS products (e.g., WordPress subscription).
- Membership Services. Gym memberships prevail, for sure. But it can also be a membership fee paid in social clubs or coworking spaces.
- Government & Municipal Services. Recurring payments appear to be extremely convenient when it comes to taxes, utility bills, loans, etc.
- Other monthly payments. This is all about services we use daily and often forget to pay for them in advance — the internet, cell phone accounts, and other online services.
How does recurring billing work?
A user registers on your website and enters the details of his bank card as during a regular purchase. After that, several steps must be taken to activate the recurring billing model.
Step 1. During the first payment, a user confirms that he wants to “subscribe” to the service and agrees to get charged periodically for the subscription fee.
Step 2. The customer’s bank card is linked with the account in your system.
Step 3. The payment information is encrypted and stored partially on the side of the acquiring bank, and partially on the side of the payment service provider. Payment data is entirely safe: a company selling a service does not have access to it. Different parts of the data are stored separately on the secure servers and are pulled together only at the time of charging.
Step 4. The necessary sum for renewing the subscription is automatically debited from the “linked” card at the end of the paid period. When charge-off happens, the bank card data is pulled from the parts stored on the side of the acquiring bank and the PSP and sent in payment. Charge-offs occur until the payer “unsubscribes” from the service.
Why are recurring payments important
From the customers’ point of view, recurring billing is an excellent opportunity to save time. They just select a particular service on your site and enter their card details once. And the service keeps payment details. Further, they can forget about the need to visit your website every month, select this service again and enter the card data during the next payment. Providing your clients with the opportunity to activate recurring billing, you save them from being left without your service at the most inappropriate moment. What’s more, you protect your business from losing the clients.
Benefits of recurring payments
Predictable cash flow. Charging your customers regularly, you know what you’ll receive and when, so your cash flow is more or less predictable. So, you can estimate the income and plan ahead.
Time & money efficiency. It’s a real win-win. Recurring payments solution eliminates manual management of payments, as all transactions are made automatically. You collect customers’ information only once, and then the payment process flows freely based on your business needs.
Conversion rates boost. Allow your customers to subscribe to multiple plans simultaneously and improve the overall business performance.
Decreased late payments. Automate invoicing and payment details and focus on your business. As payments are processed regularly, you don’t have to send out a bill every month. This is a beneficial feature for customers too — they don’t have to remember the dates for next payments and worry about late fee penalties (in case they are present).
Customer retention. Recurring payments solution contributes to stronger relations with your customers. Established relationship with customers in a subscription-based model increases the likelihood of using your services for longer.
The scheduled payment model aims to make the paying process convenient. The customer consumes services without having to worry about annual or monthly payments. However, this might become a disadvantage too.
Are recurring payments considered to be high-risk?
Since a cardholder has to give the approval for funds withdrawal only once, this payment model is considered high-risk. The main reason is that customers might merely forget about the subscription. In this case, once they notice the withdrawal, they might ask for a refund or charge their money back. This jeopardises the smooth running of a business. For instance, Visa and MasterCard monitor the level of chargebacks. The businesses with a high level of chargebacks risk being refused to process their Visa and MasterCard payments. So, make sure your customers fully understand what they agree to, opting for the recurring billing model. Have all the details described in the Terms and Conditions.
Money is a very “personal” thing. Payers worry about the security of their funds, even with a one-time payment, let alone multiple charge-offs. Therefore, it is necessary to inform customers who sign up for subscription payments as detailed as possible about the following:
- what are recurring billing limitations;
- how is this service activated;
- how is money debited;
- cancelling of the service;
- and even – how to get their money back.
Depending on the specifics of your business, you can monthly notify customers of the date and amount of the next charge-off. In case they’ve changed their mind and want to cancel the agreement, this notification will also serve as a reminder to do it.