What Is Recurring Payment? Definition, Types & Benefits – Essential Guide
TABLE OF CONTENTS
- Recurring payments are regularly scheduled payments, often used for subscriptions or regular expenses, and can be either fixed or variable in amount.
- Both consumers and businesses benefit from recurring payments, offering businesses predictable income and improved customer retention, and consumers time-saving convenience and improved credit scores.
- The process of setting up or canceling recurring payments is straightforward, but some companies might make the cancellation process harder to discourage it.
- Recurring payments need proper management to avoid issues such as forgotten payments or fraudulent charges, which involves regular reviewing of charges and prompt cancellation of unused subscriptions.
A recurring payment 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
There are two types of recurring payments: Fixed and variable. 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 will withdraw that same $50.
Variable recurring payments are set up with an initial payment, and then the amount is changed with each subsequent payment. A good example of a variable recurring payment is your cellphone bill.
Typically, your phone data plan might be for $100 a month, but if you go over the allotted amount of data on that plan, then your bill will be higher than $100. The same is true if you are paying for an allotted number of minutes or texts and you use more than that.
How To Set Up a Recurring Payment
Recurring payments can be set up with most major credit cards and some debit cards. The process is similar to setting up a normal payment, except you will have the option to select how often you want the payment to happen.
Once you have provided your card information and chosen an amount, you can select the frequency of the payment. Most companies will offer weekly, monthly, or yearly options. Choose which one works best for your budget and income.
You may also have the opportunity to choose whether this should be an ongoing payment (meaning it will continue until you cancel it) or if there should be a specific number of payments (meaning it will end after a set number of transactions).
Once you have provided your payment details, you will be able to confirm and finish. You may receive an email or some form of confirmation to let you know that your subscription has been set up properly.
How To Stop a Recurring Payment
Canceling your recurring payments should not be a difficult process unless, of course, the service provider makes it difficult to do so. Some companies are known to make customers jump through hoops in order to discourage them from canceling, which is a shady but legal practice.
If you’ve signed up for a subscription service, the best way to avoid recurring payment issues is to pay close attention during the setup process and make sure that billing has not been set to recur automatically unless you want it to.
If you do find yourself in a situation where you need to cancel your recurring payments, follow these steps:
- Contact the company and explain that you would like to cancel your subscription. Make sure to have your account information so they can easily locate your profile.
- The customer service representative will likely try to convince you to stay with the program by offering discounts or special deals, but politely decline their offer and reaffirm that you want to cancel your subscription.
- If they continue trying to persuade you, ask for a supervisor so someone else can help process your request more quickly.
- Once everything is squared away, make sure that confirmation of the cancellation has been sent.
Benefits of Recurring Payments
Recurring billing offers a few key benefits to both consumers and businesses. These benefits are as follows.
Benefits of Recurring Payments for Businesses
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.
Businesses can offer their customers different billing frequencies (monthly, yearly, etc.) as well as different lengths (1 year, 3 years, 5 years, etc.). This type of flexibility is not possible with one-time payments.
They require less effort to set up
Once you have obtained authorization from your customer, setting up recurring payments is generally much simpler than manually processing each individual payment.
They can be canceled at any time
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.
They’re more secure
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.
They Improve 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.
Benefits of Recurring Payments for Consumers
Consumers stand to benefit from recurring payments in several ways. Here are some of the most common benefits of making recurring payments:
They save time
Making a payment once and having it automatically processed at regular intervals can reduce the amount of time customers spend paying their bills each month.
Fewer late payments/penalties
Recurring payments allow consumers to avoid late payments and associated penalties by automating the payment process.
They’re more convenient
Recurring payments are convenient for consumers because they can be set up online, typically in a matter of minutes. Some businesses even offer the option to set up recurring payments over the phone or through a mailed form.
They improve credit scores
Recurring payments are a great way for consumers to improve their credit scores. That’s because consumers can set up recurring payments on credit cards and other revolving debt, which helps them avoid missing payments and the resulting late fees. In addition, credit card companies prefer to see regular use on accounts, which is another reason why recurring payments can help improve credit scores.
They make budgeting easier
Consumers can use recurring payments to make budgeting easier by setting up a calendar that includes when they will receive income and when the payments will be made. For example, if someone is paid monthly, they might set up all of their monthly recurring payments to be made within days or weeks of receiving their paycheck. This way, they’ll know exactly how much money they have for discretionary expenses.
They provide a break on subscriptions
Consumers may also be able to take advantage of a break on subscriptions by using their recurring payment feature. For example, some gyms offer a discount if members set up automatic payments from their checking account or credit or debit card.
Best Practices for Recurring Billing Accounts
Recurring billing can be a great way to streamline your finances, but it can also become a hassle if you don’t keep on top of things. Here are some best practices for managing your recurring billing accounts:
Keep Track of What You’re Paying For
It’s easy to set up automatic payments and then forget about them until they come out of your account each month. But this can lead to problems if you don’t remember what the payment is for or if the company changes its name or product offerings.
Keeping a list of all your recurring charges will help you stay on top of things and make sure that everything is still relevant to you.
Review Your Charges Regularly
Nobody likes getting hit with a surprise charge on their credit card. That’s why it’s important to review your charges monthly, or even more often if you prefer. If you see something that seems unfamiliar, investigate it right away.
The company may have changed its name or the service you’re paying for. Or it could be a sign of fraud, especially if there are multiple suspicious charges from different companies on your statement.
Report Fraudulent Charges Immediately
If you notice a recurring charge that seems fraudulent or you no longer want, call your credit card company immediately. They may be able to help you figure out what’s going on, and they’ll usually take the charge off your account right away.
Cancel Unused Subscriptions
It makes sense to cancel any unused subscriptions. This will also help you keep track of which recurring charges are still relevant, so you can focus on those and make sure they’re accurate.
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 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.