What is a recurring payment?

In today’s rapidly paced eCommerce industry, businesses are increasingly turning to recurring payments as a promising revenue stream. Juniper Research has revealed the transaction value of recurring payments will reach US $13.2 trillion worldwide in 2023 and is projected to rise to over $15.4 trillion in 2027.

Whether you’re a subscription-based merchant or a start-up, understanding what recurring payments are and how they work is vital for sustainable business growth. In this article, we’ll explore the different types, how they compare to direct debits and how they can benefit your business, among other things. Let’s dive in, shall we!

What is a recurring payment?

Recurring payments (also known as recurring billing or automatic payments) are repeated transactions where a customer authorises a merchant to charge their debit or credit card on a regular basis to cover the cost of a product or service. This is according to a predetermined schedule that the customer agrees to with the merchant. Recurring payments are in effect until the customer retracts their permission to automatically charge their card or the subscription expires.

Such payments are typically applied for services that require periodic payments, including magazine subscriptions, gym memberships, subscription delivery boxes for groceries or beauty items and utility bills, to name a few things.

Types of recurring payments

Recurring payment models can be classified into two different types:

Fixed, regular or subscription payments

Fixed recurring transactions involve the customer being billed the exact same amount each time their card is charged. Examples of fixed recurring payments could be a gym or sports club membership, or a meal plan subscription service that is charged monthly.

Variable, irregular or standing order payments

This type of recurring payment results in the customer being charged different amounts for each scheduled payment, depending on the usage of products or services. Variable recurring payments are applied for expenses such as electricity, water or other utility bills where the amount that needs to be paid can be altered based on how much the customer consumes.

How do recurring payments work?

As the name suggests, the recurring payment model is repetitive. In most cases, it is also automatic and straightforward to set up. Here’s a rundown of how this form of payment works:

1. Once a customer opts into the recurring billing system, the process is set in motion, which also includes specifying the frequency of the billing cycle – whether it will be monthly, quarterly or annually. The customer normally provides their payment details (credit or debit card or digital wallet information) and authorises the merchant to charge them regularly.
2. The customer is also required to accept the terms and conditions associated with the recurring payment model before their card is charged.
3. To make an initial transaction, the merchant securely stores the customer’s payment details in their payment gateway for subsequent recurring transactions to occur. This usually involves encryption and tokenisation to ensure the customer’s personal data is safely collected as per PCI DSS compliance. This also means the customer doesn’t have to enter their payment information again. The recurring payment will then be charged until the subscription is cancelled.
4. Based on the agreed billing schedule, the merchant’s payment system automatically processes the transaction using the customer’s stored payment data. During this step, the merchant’s acquirer, the card schemes and the customer’s issuer authorise the transaction before the funds are transmitted to the merchant’s bank account.
5. Following a successful transaction, both customers and merchants receive payment confirmation. The customer may receive an email receipt and the merchant’s system records the payment. The merchant also notifies the customer in advance through email about the transaction status, including when the upcoming payment will take place or any follow up instructions, if the payment fails. The business also sends an invoice and receipt to the customer for the billed amount.
6. Customers should also be able to manage their recurring payment arrangements. This includes updating their payment method, changing the billing frequency or cancelling the subscription if necessary. This means businesses can keep their customer payment details up-to-date, decreasing the chances of a payment failing.

Recurring payments versus direct debit – What’s the difference?

While recurring payments and direct debit both describe the automatic transfer of funds, they serve different purposes in transaction processing, each with their unique traits. As explained earlier, the recurring payment model encompasses scheduled, automated transactions that take place at intervals and are linked to a customer’s debit or credit card.

On the other hand, direct debit equally refers to a type of payment where a merchant pulls funds directly from a customer’s bank account. However, it differs from recurring payments in the sense that the merchant requires the customer to provide formal authorisation, often in the form of a signed mandate.

Now that we have introduced both concepts, let’s dig further into their key differences:

• Ways of authorisation and set up – In recurring payments, the customer initiates it and offers consent to the merchant to withdraw funds from a nominated debit or credit card. By contrast, direct debits require the customer to formally authorise the merchant to bill them. After the customer authorises this, merchants can deduct funds directly from the customer’s bank account.
• Timing and speed – Recurring payments clear faster than direct debits, with the former happening immediately or the following day. Direct debit, however, can take a few business days for initial transactions to clear.
• Levels of flexibility and control – Recurring payments are more flexible, as the customer has greater control over it and can cancel or change their subscription more easily. Direct debits, by contrast, are stricter and involve specific processes to modify or cancel. This also implies that merchants have more control over timing and payment collection.
• Safety and security – When a payment fails to be processed on a customer’s debit or credit card, due to an expired or stolen credit card, it can be more cumbersome to resolve and may lead to losses for the merchant. With a direct debit, on the other hand, the main issue is insufficient funds. In this case, funds will be transferred as soon as enough money is available in the customer’s account to cover the transaction amount, resulting in reduced failure rates.
• Cancellation – Recurring payments allow customers to cancel subscription services through the merchant or their card issuer, while direct debit enables customers to revoke their payments through their bank.

What are the advantages of recurring payments?

Recurring payments provide numerous advantages for both merchants and their customers, which include:

• Higher and more consistent revenue – With recurring payments, merchants don’t need to depend on intermittent and irregular customer orders. Instead, they bill and collect funds from customers automatically and on predictable grounds. This can enable them to increase their profit margins and build a sustainable, steady cash flow.
• One-time setup for customer satisfaction – Merchants only need to collect payment information once from customers and then the transactions are automatically processed on each due date. This means that with recurring billing, customers don’t have to keep making the same payment again and again — it’s automatically carried out for them. This can save them time and, overall, delivers a more convenient customer experience.
• Customer loyalty – Merchants who use recurring billing models are better placed to nurture lasting relationships with their customers, instead of making a one-off sale. This can, ultimately, help establish customer loyalty.

How emerchantpay can help

Recurring payments offer convenience to customers by automating regular payments and delivering steady revenue streams to merchants. However, both customers and merchants should be aware of their rights and responsibilities over recurring billing arrangements, including cancellation policies and dispute resolution processes.

As a Level 1 PCI compliant payment service provider and acquirer, we’re dedicated to understanding your business model and catering to your needs. By working with us, you’ll benefit from expert support and a robust product offering, which covers recurring payments. With our support, you’ll be better placed to provide your customers with frictionless and safe payment experiences.