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Recurring Payment Guide

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More and more businesses are adopting recurring payments guides. Whether merchants are a business catering to other businesses or consumers, subscription-based pricing is becoming the preferred source of revenue.

Almost every type of product or service has started to incorporate a subscription model for their offering. It used to be a gym membership, Netflix, etc. Now, everything from the basics such as shaving supplies, chocolates, office software such as Excel or Zoom, to a monthly luxury watch service, all are offering subscription-based pricing to attract customers.

There are numerous advantages of recurring payments for merchants. Businesses with recurring payments have more predictable revenue streams, offering a reliable source of cash flow periodically so businesses can easily focus on growth. This pricing model is also a great test for customer loyalty as they are willing to shell out money on an ongoing basis. These reasons nurture into another benefit, such businesses attract investor attention and capital to scale quickly.

Given these dynamics, we explore in-depth what recurring payments are, the different types of businesses that use them now, their advantages, and how merchants process them.

What are recurring payments?

Recurring payments are periodic automated charges to a customer’s bank account, credit cards, or digital wallets, set up to pay for continuous goods or services provided.

Simply put, instead of a one-time procurement of a good or a service, a customer pays for a subscription offering on an ongoing basis. Examples of recurring payments are your Netflix service, a newspaper, a software subscription, or a wealth management offering from a brokerage that a customer may have signed up for.

How are recurring payments handled?

Merchants can set up recurring payments by collecting the credit card, bank account, or digital wallet details of their customers and securely saving that data. Regardless of the mode of payment, the merchant would need account information and customer authorization for open-ended recurring payments to be processed, meaning with no end date.

There are a few ways in which recurring payments are processed. For credit card transactions, the card would be authorized by the customer as a ‘card on file’ granting the merchant permission to process the first and all future recurring payments with their payment processor.

Another option is a payment gateway. This can be done through a standalone gateway or one that is integrated with your payment processor.

Businesses have also used their accounting software to process recurring payments. For example, QuickBooks has an option to enter sales receipts to process a credit card payment and save it as “Make Recurring” allowing the user to set a recurring schedule for the payment with the stored credit card.

Numerous payment service providers (PSP) aka payment aggregators such as Stripe and Paypal offer recurring payment options as well. So do eCommerce platforms such as Shopify and digital wallet platforms such as Braintree.

There are also a host of third-party subscription management services that manage recurring payments on behalf of merchants along with all the other quirks of recurring billing, such as rate changes, cancelations, and issues arising with the account on file for a customer. However, it is important to remember that such service offerings are considerably more expensive than traditional merchant account providers.

One of the most convenient (and cost-efficient) ways of setting up recurring payments is ACH (Automated Clearing House). ACH is a fund transfer system used by banks for low-value U.S.-based transactions. Merchants have their payment processor bill customers for automated recurring ACH payments for either debit or credit card payments.

ACH is fast becoming the preferred method of processing subscription-type recurring payments and offers faster transfer of funds at a lower cost. The benefits of ACH and its adoption are only going to improve as NACHA, the self-regulatory body overseeing ACH, introduces guidelines to process ACH payments faster.

Advantages of recurring payments

The biggest advantage of recurring payments for merchants is the stability of the cash flow they offer. Once a business can be scaled to a certain threshold of cash flows where it no longer causes anxiety about survival, business owners can focus their attention on other aspects of the business; product development, raising funds, developing their team, etc.

One of the greatest tests of businesses with recurring payments is customer loyalty. If businesses can keep their customers paying on an ongoing basis for their product, it offers tremendous insight into the quality and stickiness of that product.

Since such businesses can easily be bootstrapped and survive on their own, businesses can be very selective in the type of funding they choose. This often results in higher demand to buy into their business among investors resulting in a higher valuation. As an ultimate feedback loop, such business models are more attractive to the most talented investors and venture capital teams that can then offer their expertise to further scale and grow the business.

Another great advantage of recurring payments is that businesses no longer have to use paper invoices to send out payment reminders or follow-up for collections. Recurring payments are automatic, so less interaction on billing issues and a reduction of processing errors. You save time and money and can focus on the business.

The recurring payments business model cannot be ignored. What used to be applied solely for gym memberships is increasingly becoming the de facto standard of doing business and guaranteeing a steady income stream. It can speak volumes on the proof of concept of the products if the business can continue to build a loyal customer base. As companies move to adopt the strategy given the success experienced by business owners and preference by investors, it is vital for merchants to learn the benefits of recurring payments, how they are processed, and how to leverage these benefits to grow their business.

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