Many businesses, from fitness centers to video streaming platforms and meal kit services, rely on subscriptions and recurring payments to generate revenue on a consistent basis. Those who employ a subscription or membership model rely on recurring payment services to keep things running smoothly and easily. As a business owner, you require a system that automatically processes recurring payments while also making one-time payments, refunds, and changes simple. Today’s guide will teach you all you need to know about recurring payments, including the benefits, drawbacks, and how it all works. We also looked at the top recurring payment providers to see what they did well and where they may have fallen short.
What is Recurring Payment?
A recurring payment is a payment mechanism in which monies are automatically withdrawn from a customer’s account at predetermined intervals to cover subscription fees for items or services. Payments are pre-scheduled, and clients are always informed of when they are made.
The SaaS industry, direct-to-consumer, e-commerce brands, online learning providers, health and fitness clubs, and streaming services are all examples of subscription businesses that use the recurring payment paradigm.
What are the Types of Recurring Payments?
There are two types of recurring payments:
#1. Regular or Fixed Payments
Customers who make fixed or regular payments are charged the same amount each time. Regular recurring payments include gym memberships and magazine subscriptions.
#2. Irregular or Varied Payments
The amount charged with variable or irregular recurring payments is susceptible to alter dependent on the customer’s usage of the product or service. Electricity and other utility expenses, for example, vary from month to month dependent on consumption.
How Do Recurring Payments Work?
Recurring payments are deducted from customers’ bank accounts automatically using their payment cards or other ways such as ACH and Direct Debit fund transfers. A merchant account and a payment service provider are required for the business to accept these payments.
A merchant account is a type of bank account that enables businesses to receive payments from the accounts of their consumers. The amount debited from the customer’s account is initially placed in the merchant account before being transferred to the business’s bank account.
The payment service provider manages all parts of payment processing, from collecting recurring payments on merchants’ behalf and securely processing them through depositing the funds in the firm’s bank accounts.
What are the Benefits of a Recurring Payment For Your Business?
There are some compelling advantages to recurring payments:
#1. Cut down on late payments and collection time.
Late payments are costly to organizations because they harm both revenue and customer relationships. With recurring payments, you may configure the system once, and rest assured that payment collection will be automated depending on your chosen schedule. Your company will spend less time hunting down consumers for payments and having difficult conversations about late payments, giving you more time to focus on other important business duties.
#2. Reduce your effort.
The cost and labor associated with manual invoicing and payment processing are reduced when recurring payments are automated. All you have to do is set up the initial payment plan once, and the program will manage payment processing for you. Only when adjustments to the payment method or amount charged are required will you be required to intervene.
#3. Enhance customer relations
Customers like recurring payments since they only have to submit their billing information once. Recurring payments take over and debit funds from their bank accounts on the specified billing dates. Customers do not need to set up payment reminders or enter payment information every billing cycle. Recurring payments, when done correctly, can foster a sense of goodwill between the business and its customers, maintaining a strong client relationship.
#4. Protect yourself from scams.
The payment information provided by clients is securely stored in the servers of the integrated payment gateways that process recurring payments. They prevent fraud through technologies such as tokenization and best practices such as Payment Card Industry Data Security Standard compliance (PCI DSS). These fraud detection and prevention solutions not only protect cash from dishonest motivations but also strengthen the business’s trustworthiness among customers and save resources that would otherwise be spent on detecting and resolving fraudulent transactions.
What Kind of Business Can Benefit From a Recurring Payment?
In today’s world, the recurring revenue model is driving growth in industries ranging from personal grooming to pet food, and it applies to enterprises of all sizes and types.
#1. Utility companies
Offering a recurring payment option for taxes and utility bills such as electricity, gas, water, and phone bills ensure that they are collected on time. In this context, ACI Worldwide payment solutions are a fantastic example. It offers scheduled auto-payment alternatives to US federal taxpayers who make personal income or business tax payments to the IRS (IRS).
#2. Membership organizations
Many membership-based businesses, such as gyms, learning courses, and co-working spaces, employ recurring payments. Customers are charged a certain price for their subscriptions on a monthly or yearly basis.
#3. Subscription-based companies
The subscription model is increasingly being used by a wide range of enterprises. It can be found in services such as newspapers and streaming media, as well as box deliveries such as Blue Apron and Dollar Shave Club and SaaS products such as Adobe and WordPress.
#4. Finance Services
In personal financial services, recurring payments can be used to pay general insurance, loan repayments, or mutual investments at regular intervals by deducting a set predetermined amount from the customer’s payroll account. The financial service provider does not have to manually follow up with customers to ask how much they want to debit from their bank account each month under this arrangement.
How Do You Accept Recurring Payments?
Your payment processing solution will have a large impact on the success of your recurring payment strategy. The processor or platform should make transactions more convenient for your customers and team members, as well as remove any frictions that may impede the billing process. When selecting a payment provider, keep the three factors listed below in mind.
#1. Check that the payment supplier is in compliance.
One of the most important characteristics to look for in a payment processor is its level of compliance. Accounting standards and rules, such as the PCI/DSS regulations, must be followed by the processor. It should also adhere to other statutory restrictions regarding taxes and refunds.
#2. Check that all of the features you require are present.
To automate the entire operation, the payment provider should integrate with all relevant and current applications. Everything from billing and invoicing to revenue recognition must be included. The processor should also include reporting capabilities, different payment ways, and top-tier encryption and security features.
#3. Align with long-term business objectives
Finally, the application should be in line with your present and future business objectives in terms of cost, customer and employee experience, and overall strategy.
Costs of Recurring Payments
- Possibility of a scam. Without the customer present, recurring payments frequently happen. Because the customer is not physically able to grant authorization each time a credit card is charged, the risk of fraud increases. It is also possible to steal credit card information.
- Fee increases. Because card-not-present transactions are more likely to be fraudulent, many payment processors charge businesses more to accept recurring payments and invoice payments. Calculate your projected monthly credit card processing charges to determine how different rates may affect your overhead.
Top Recurring Payment Services
#1. Stripe
Processing Fees:
- 2.9% plus 30 cents per transaction for internet transactions.
- In-person transactions are charged 2.7% + 5 cents.
- 3.4% plus 30 cents for transactions entered manually.
- For international cards or currency conversion, the fee is 3.9% plus 30 cents.
Stripe billing plans:
- Stripe Invoicing Starter plan charges 0.4% for every paid invoice.
- Stripe Invoicing Plus plan: 0.5% per paid invoice.
What we enjoy about it: For recurring payments, Stripe enables businesses to save credit card and ACH information. It also assists merchants in retrying previously failed payments and sends email reminders to customers whose payment methods have expired. You can avoid service disruption by paying 25 cents per update if you want the system to automatically update the information when a customer’s card expires or is replaced.
Customers can also alter their membership data and billing information, as well as pause and resume subscriptions, using a customer-facing portal. When you utilize Stripe Checkout, you can also set up subscription self-enrollment for clients on your website.
#2. Square
Payment Processing
- For in-person purchases, the processing cost is 2.6% plus 10 cents (2.5% plus 10 cents with the Retail Plus plan).
- Online transactions or invoices without a card on file will be charged 2.9% plus 30 cents.
- For manually typed transactions or card-on-file invoices, the fee is 3.5% plus 15 cents.
What we enjoy about it: You can save a customer’s credit card or ACH debit information on file with Square in order to process payments automatically.
You can send out recurring invoices that allow clients to initiate payments or charge them automatically on predetermined dates. Square allows you to build checkout links that allow customers to pay once or set up recurring payments. The link can be added to websites, social media posts, and newsletters.
Setting up recurring payments with Square is easy, and it can be done using the PC dashboard or the mobile app.
#3. Paypal
PayPal payment processing costs
- 2.29% + 9 cents per transaction for in-person and QR code transactions.
- For manual entry card transactions, the fee is 3.49% plus 9 cents.
- For invoicing transactions, the fee is 3.49% plus 49 cents.
What we enjoy about it: Customers can set up recurring payments through PayPal using a credit card, an invoice, or a QR code, and each method of payment has its own processing fee.
PayPal allows consumers who pay for subscriptions to retry failed payments, but only under certain conditions. You can also add a subscription payment button to your website to allow clients to opt into automatic payments; but, you’ll need to be able to input HTML code to add the button, so a basic understanding of technology is required.
Accepting recurring payments using PayPal does not require a specific plan, so there is no additional monthly price to be concerned about. This means that you only pay fees when you perform a transaction.
Setting up recurring payments via PayPal is simple, and there is a full guide to assist you through the process.
Recurring Payment Services: What You Need to Know
You should first evaluate the needs of your business before selecting a recurring payment service. How many customers do you have, and how much revenue do you make? These are crucial beginning principles for determining the best platform and strategy. You should also think about the connectors you require with other business technologies. Most people will want a platform that works well with their accounting software and, most likely, their CRM. Integrations enable greater automation, freeing up a business owner’s time to focus on building the business rather than managing payments.
Will obtaining a new debit card result in the cessation of recurring payments?
When consumers obtain a new debit card, established recurring payments will be refused. To effectively handle future recurring payments, the business will need to receive the new card information.
Is It Safe to Use Recurring Payment Services?
The best recurring payment services, like other types of online service platforms, should have many degrees of protection. When selecting this type of software, check for security features such as two-factor authentication (2FA) or multifactor authentication (MFA), documentation demonstrating frequent security updates and patches, intrusion detection, user activity monitoring, data encryption, and privacy protection. Look for components such as fraud protection and Payment Card Industry Data Security Standard compliance (PCI DSS).
What Are the Best Practices for Establishing Recurring Payment Services for Customers?
When setting up recurring payments, be sure to set up reminders for when the recurring payments will occur, offer consumers a variety of payment schedules, provide a straightforward cancellation option, and ensure that your payment system is safe and routinely updated.
Conclusion
Customers and businesses both benefit from the recurring payment system. It not only improves the client experience by removing the friction associated with repeated manual payments and delays, but it also assures the business’s cash flow is stable. If you run a business that collects payments from the same customers on a regular basis, the recurring payment model is worth considering.
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