Recurring payments: 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 from it. Recurring billing or automatic payments are among the most effective ways to pay for certain services. Such a payment model simplifies regular payments and prevents customers from providing their credit card information more than once.

What do recurring payments mean?

Recurrent billing or payments by subscription are repeated or regular payments carried out within a particular schedule. Their uniqueness lies 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.

Recurring charge-offs are subject to a predetermined payment schedule. That is why they are also called scheduled payments or recurring charges. The plan can be of any kind – annual, monthly, daily, etc. And the amount is usually fixed: users can agree with the amount or determine it independently. So, merchants require a cardholder’s permission and authorisation once upfront and can keep charging until this permission is withdrawn.

How to make recurring payments?

A user registers on your website and enters his bank card details as they do during a regular purchase. After that, they must take several steps 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 to 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 a 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.

What businesses should set up recurring payments?

Automatic payments are available across a variety of products and services. Today, this billing model is especially worth implementing for businesses selling products or services people buy regularly. Here are the most common types of recurring billing models:

• Subscription. Subscription businesses prosper, and almost anything customers can imagine is at their fingertips. It includes streaming services, subscription boxes, and SaaS products (e.g., WordPress subscription).
• Membership service. 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 highly convenient regarding taxes, utility bills, loans, etc.
• Other monthly payments. We use these services daily and often forget to pay for them in advance — the internet, cell phone accounts, and other online services.

Why recurring payments are important

From the customers’ point of view, recurring billing or automatic payments are 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 the payment details. Further, they can forget the need to visit your website every month, select this service again, and enter the card data during the next payment. Setting up recurring billing saves your customers from being left without your service at the most inappropriate moment. What’s more, you protect your business from losing clients.

Benefits of setting up 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. The 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.
• Late payments decrease. 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. It is also a beneficial feature for customers — they don’t have to remember the dates for the subsequent 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.

Choosing the best recurring payment model makes the payment 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 approve 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. It jeopardises the smooth running of a business. For instance, Visa and MasterCard monitor the level of chargebacks and refuse to process payments from companies with high chargebacks risk. So, make sure your customers fully understand what they agree to, setting up the recurring billing model. Have all the details described in your 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 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. If they’ve changed their mind and want to cancel the agreement, this notification will also serve as a reminder.

We at Corefy help businesses streamline payment processing regardless of their size or industry. Contact our team to find out what payment model suits your business best and how you can boost your profit with our payment orchestration platform.