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What do you mean by recurring payments and how does this work?

by | Feb 14, 2022 | Uncategorized

What do you mean by recurring payments and how does this work?

Recurring payments include repeat billing payments, such as subscription fees and membership fees. A recurring payment can be for a one-off amount, or it can be for a regular amount, such as a weekly, monthly, or annual charge for the services used. In all precedents where recurring payments are set up. You must have appealed authorization from the cardholder to take repeat payments. Recurring payments are sustained via the Paysafe Customer Vault API and Card Payments API. Merchants can use the Customer Vault API to generate a customer profile and link a card or payment method to the profile. The 5 Star Processing platforms return a payment token that can then be included in ensuing payment authorization and settlement requests, without requiring the merchant to collect card details again from the cardholder. 

Various types of recurring payments

Before we dive into the nitty-gritty of how recurring payments work. We will cover the two main types of billing categories such as –

. Fixed recurring payments

Recurring payments that are fixed are when the same amount of money is collected from the user during each billing cycle. Since the price does not increase or decrease between cycles, this system is the most endless and stable. With this model, you can stay at ease knowing that you will receive your payments on time. For example, if you have signed up for a magazine or newspaper subscription, or even your favorite streaming service, you are billed through fixed recurring payments.

. Variable recurring payments

With variable or irregular recurring payments, the bill is reliant on the usage of the customer. This happens with water and electricity bills as the charge is based on the consumption that one uses. This is an irregular payment process because the amount payable may vary (increase or decrease) throughout the month or billing cycle. 

How do recurring payments work?

Recurring payments can be through electronic transfers. To accept these payments, your business needs to have a merchant account and a payment service provider. A merchant account is an account to which the customer’s funds are transferred after payment and before they enter your business account. These funds are analyzed by a third party and in 1 to 2 days the money gets sent automatically to you. A payment service provider is also essential to complete recurring payments. These are the companies that assist you to accept electronic payments from various customers. PayPal is one of the most prominent examples of these. Some of the processors have differing workflows. But here is a quick breakdown of the main steps that recurring payments go through such as –

. Customer select options – Customer may choose this option within the website or app. The customer adopts the recurring payment option in their account or payment settings. 

. Terms and conditions – The customer will usually accept the terms and conditions presented after selecting the recurring payment opportunity. The terms and conditions generally include agreeing to the amount charged, payment frequency, and if there are any expiration dates on the recurring payment.

. Bank information entered – The customer will enter their credit card or bank data, which is then securely saved within the invoicing software.

. Funds transferred to the payment processor – Once the customer uses the service and makes a payment, the funds are then transferred to the payment processor.

. Funds approved – The payment processor will then contact the acquiring and issuing bank, as well as the customer’s credit card network. Once that is approved, the funds are then released into the merchant account. 

. Invoice sent – For every billing cycle, the customer will receive an invoice that acquaints them with their payment and that it has been successfully refined. You can even set it up to that the customer gets notified ahead of time that they have an upcoming payment anticipated.

When should one use recurring payments?

Small businesses with clients that pay a set or similar amount every month are prime candidates for recurring payments. Some of the common business scenarios in which offering clients the opportunity of recurring payments makes sense are such as –

. Service-based small businesses bill their clients for a set number of working hours each month.

Software providers bill their clients for a set monthly licensing fee to use their providers.

Businesses that endeavor their clients set monthly service packages. For example, a freelance digital marketing consultant who charges an individual a set fee each month for social media management.

Businesses that endeavor monthly maintenance packages to clients. For example, a freelance webmaster charges a flat monthly fee to sustain their client’s website.

Various benefits of recurring payments 

Recurring payments can be helpful for your business and your customers in various ways such as –

. Save time for customers so they do not need to manually log into a system and enter credit card or bank account details or write a check to make a payment.

Ensure that your business is getting paid on time and customers are not having to set payment reminders.

Benefit your business to predict the cash flow.

Endeavor you to retain more customers to your website.

Keep a single record of all payments a customer has completed and owes.

Help to automate the entire recurring payment process.

Wrap Up

Recurring payments ensure you on-time payments for both your business and customers. They make the lives of your customers easier while also saving your team time and elaborating customer loyalty.