What Is Recurring Payment? Definition, Types & Benefits – Essential Guide

A recurring payment, also sometimes called a recurring withdrawal, is a payment that is made on a regular basis. It can be used in many different scenarios, such as paying for a subscription to an online service or paying rent each month, or utility bills.

There are many different types of recurring payments, but they all follow the same logic: they’re made on a specific schedule, and the amount paid may vary over time.

Recurring payments are often used by businesses that offer subscriptions to their products or services. For example, if you wanted to subscribe to Netflix and pay your bill every month, this would be a recurring payment. If you wanted to join a gym and pay your membership fee every year, this would be another example of a recurring payment.

Generally, recurring payments are set up so that they are automatically charged to your credit card or bank account on a regular basis. This can be weekly, monthly, quarterly, or yearly.

Types of Recurring Payments

Now that you understand the recurring withdrawal meaning, let’s move on to what types of recurring payments you might encounter. There are two types of recurring payments: fixed recurring payments and variable recurring payments.

Fixed Recurring Payments

Fixed recurring payments are set up to withdraw the same amount of money from your account at regular intervals. For example, if you wanted to pay $50 a month for Netflix, every month, they would withdraw that same $50 regardless of how many shows you watch or download.

One benefit of choosing fixed recurring billing as a business is that you can easily predict how much revenue you’re going to get. It also reduces the risk of error, as the client is charged the same amount every month. Finally, a customer of a business with fixed billing might be more likely to stay with them due to payment transparency.

Variable Recurring Payments

So, what is a variable recurring charge meaning? Variable recurring payments are set up with an initial payment, and then the amount is changed with each subsequent payment based on how much service the client received or the amount of product they used.

A good example of a variable recurring payment is your cellphone bill, which might change depending on whether you stay within your limits or go over them. If you typically pay $100 per month, but you, for example, went abroad during the billing period, you will more than likely be charged an additional amount for data you used when in another country.

Just like fixed payments, this type also has several benefits for a business. For example, thanks to variable payments, a business can capitalize on those clients who tend to use their services more frequently.

How Does a Recurring Payment Work

Recurring payments are a pretty straightforward process and work similarly to direct debit, with the main difference being that the funds don’t come from the bank account but from a credit or debit card:

Receiving Authorization

First, you need to gain your customers’ authorization to charge them regularly – that will typically be included in the terms and conditions of the service you’re providing. You need to clearly state how much your customer will be charged, and if you’re using variable recurring payments, you need to list the basis on which the charge will be calculated.

This is also when the customer will provide you with their payment data, and it’s your responsibility as a business to store it safely.

Payment Scheduling

Once you get consent, you need to schedule future payments according to the frequency you have agreed upon with your customer – that could be weekly, monthly, quarterly, or yearly, or you can also set up custom intervals. Thanks to automation tools, you don’t have to do it manually.

Payment Processing and Confirmation

Once the established date arrives, the payment processor will initiate the charge by sending a request to the customer’s bank or credit card company. This is done without any action required on the customer’s side. After the transaction is approved, the funds will be taken from the customer’s account and deposited into your business account, and a confirmation of a successful payment will be sent to the customer.

Benefits of Recurring Payments

Wondering whether introducing recurring payments will be a good idea for your business? There are actually quite a few reasons why it is.

BENEFIT	EXPLANATION
Predictability	Recurring payments are automatic payments, which means businesses can predict and count on the income they generate from them every month. This makes it easier to manage expenses and budget accordingly.
Flexibility	Businesses can offer their customers different billing frequencies (monthly, yearly, etc.) and lengths (1 year, 3 years, 5 years, etc.). This type of flexibility is not possible with one-time payments.
Easy Setup	Once you have obtained authorization from your customer, setting up recurring payments is generally much simpler than manually processing each individual payment.
Easy Cancellation	As a business, you want to make sure that your customers have the ability to cancel their recurring payments whenever they deem necessary. This is generally easier than canceling one-time payments, which often requires contacting the merchant directly.
Security	Because recurring payments are processed automatically, there is less opportunity for fraud and errors. In addition, many payment processors offer added security features for businesses that process recurring payments.
Improved Customer Retention	When customers agree to make recurring payments, it shows that they trust your business and are committed to using your products or services long-term. This type of customer loyalty can be invaluable to a business and can help it grow.

Recurring Payments Benefits for Customers

While recurring payments have quite a lot of benefits for businesses, they’re also very beneficial for customers. – They are time-saving. By setting up a recurring payment, the customer does not have to worry about remembering to make the payment every month, it will be automatically deducted from their account. – They prevent the customer from endearing late fees and penalties. As the process is automated, the chances of forgetting payment and having to pay a late fee decrease significantly. – They offer convenience. Recurring payments can be set up within minutes. – They can improve one’s credit score. By setting up recurring payments on their credit cards, customer can improve their credit score. – They make budgeting easier. Since recurring payments happen every month, it’s easier to include them in your budget.

Potential Downsides of Recurring Payments

Aside from benefits, recurring payments might also have some downsides for both businesses and customers. While they might not be as significant as the advantages, it’s still important that we mention them.

For Businesses

When it comes to the downsides of recurring payments for businesses, we can find:

• Higher churn rate – Businesses that practice subscriptions and recurring payments tend to experience higher churn rates, as the customer is able to cancel the service at any time they wish.
• Potential issues with billing – Sometimes, you might experience an unexpected issue with the recurring payment – for example, the customer might not have enough money in their bank account for the charge to be approved.
• Disrupted cash flow in case of high cancellation number – If recurring payments are the main source of income for your company, and you suddenly experience an increased number of cancellations,

For Customers

Among potential downsides for customers, we can find:

• Forgotten charges – When you subscribe to several services, it can be very easy to forget which is which, and you might end up paying for something you’re no longer using due to forgetting to cancel the subscription – and while some businesses might offer a refund if you didn’t cancel in time, others don’t, making you lose money.
• Increased security risk – If you store your payment information with several businesses, you increase the chances of your data being stolen in a breach.

Recurring Payments – Best Business Practices

Here are some of the best practices your business can follow to ensure everything goes as smoothly as possible:

Obtain Clear Authorization

When it comes to recurring payments, obtaining clear customer consent and communicating with them is crucial. As a merchant, you should send your customers a digital receipt or a confirmation email stating how much and how often they will be charged, when the charges will begin, and how they can cancel the payment.

This will help minimize any misunderstandings and cancellations due to unclear terms.

Use Pre-Transaction Reminders

With so many subscription services and bills, it can be pretty easy to forget you signed up for something or have an upcoming bill – that’s why, as a merchant, the best practice would be to use pre-transaction reminders, informing your customer of an upcoming charge. You should especially do that if you practice variable recurring payments, if your fixed recurring payment has increased, or if the payments are far in between, for exampl,e once a year.

Offer Easy Cancelation or Management of Payments

As a business, you should ensure that your customer can easily cancel or modify their subscription. If canceling it is difficult, it might negatively impact your reputation, as an unhappy customer is more likely to leave a review.

Ensure the Safety of Consumer Information

Payment data is sensitive information, so you should do whatever is necessary to keep it safe. One way to do it is by using tokenization, where the customer’s card number is replaced by a unique token, although there are several other ways to ensure recurring payment safety.

Conclusion

If you want to set up a recurring payment, it doesn’t matter whether you’re a customer or a business; the process is relatively easy. Moreover, there are benefits to setting up a recurring payment system for both customers and businesses. Businesses can enjoy increased cash flow predictability, while customers benefit from not having to worry about making manual payments each month.

However, it’s also important to understand the potential risks involved in setting up a recurring payment system before deciding whether or not it’s right for you or your business. Hopefully, after today you understand well the recurring payment meaning and how it can be beneficial for your enterprise.

When introducing recurring payments to your business, it’s crucial that you work with a trustworthy payment processor, such as My Payment Savvy. With years of experience in the industry, we ensure every payment goes as smoothly as possible, ensuring your peace of mind and allowing you to have more free time to grow your company.

Get in touch with us today, and let us take care of your recurring payments with our advanced recurring billing payment platform!