What are recurring payments? Examples, benefits, and strategy

Recurring payments apply to anything from essential fixed costs to leisure and entertainment expenses. Customers can simply “set and forget”, making them one of the most convenient ways to pay. With convenience more important than ever for online consumers, the rewards for implementing recurring payments are clear to businesses. 

And let’s not forget the cash flow benefits they bring to businesses by providing a steady revenue stream and allowing for more accurate forecasting. 

So, what do businesses need to know to implement recurring payments effectively? Keep reading to discover everything about this payment option, including use cases, their benefits, potential drawbacks, and how businesses can use them to set themselves up for success.

What is a recurring payment?

A recurring payment is a payment that is automatically charged to a customer's credit card or bank account periodically. Online merchants will typically use card-on-file transactions for a recurring payment meaning they will store the cardholder’s payment details with their consent, in order to withdraw due funds in the future.

Recurring payments aren’t a new concept, but today, we’re seeing them growing in popularity in a wide range of industries. Now let’s look at the use cases - traditional and innovative - for subscription payments.

Types of recurring payments

There are two main types of recurring payments: fixed and variable recurring payments. 

Fixed recurring payments 

This is a payment type where the customer is charged the same amount in each billing cycle. They’re commonly used for subscription services with a fixed monthly price, such as Netflix or gym memberships. 

Variable recurring payments

This is a payment type where the amount changes with each billing cycle depending on customer usage. They’re commonly used for utilities such as water and electricity bills. 

Recurring payment examples

• Household bills like water, electricity, gas, TV, and phone and internet services
• Subscription fees for streaming services and digital goods platforms like Netflix, Spotify, and Amazon Prime
• Subscription fees for monthly product boxes like GlossyBox, HelloFresh, or Gousto
• Traditional media subscriptions like The New York Times or The Telegraph
• Membership fees to fitness and wellness centers, gyms, spas, country clubs, and social clubs
• Software as a Service (SaaS) like Slack, Zoom, and Adobe
• Financing plans like buy now, pay later (BNPL)

Learn more: What are prepaid subscriptions?

How do recurring payments work?

1. Customer subscribes

As soon as a customer subscribes to a recurring billing model, the automated process begins. At this stage, the customer can select their preferred payment method if there’s a choice. They must then provide their payment details and accept the terms and conditions, which gives the business permission to charge them repeatedly – according to pre-agreed terms on the frequency and amount. 

The customer’s payment details are saved in a payment gateway so all future payments can be processed securely. The gateway protects the customer’s bank and billing information. 

2. Billing cycle starts

Once the acquiring bank, card network, and issuing bank have approved the transaction, the payment gateway processes the payment by transferring the money to the business's bank account. 

3. Receipt is sent/ Payment is confirmed

Payment confirmation and a corresponding invoice is sent from the company to the customer, usually via email. And then the cycle repeats for as long as is scheduled. 

Benefits of recurring payments for businesses

The ability to support recurring payments is one of the most important online payment system features. Here are some ways a business can benefit by accepting recurring payments online and offline:

Stabilize cash flow

Maintaining a healthy cash flow can be a struggle, even for the most profitable enterprises. Not only do recurring payments ensure reliable cash flow for businesses, but they also give businesses more insight into their future volume of sales and conversions, allowing them to make more calculated and effective decisions for the future. 

In these ways, recurring payments are extremely valuable as a steady revenue stream. 

Read more: What is unearned revenue?

Improve customer experience and retention 

When companies offer recurring payment plans, they create better customer experiences. Cardholders don’t have to re-enter their payment details regularly, which can be a time-consuming task, especially in the on-demand economy. 

They also make it easier for customers to budget for what they’re buying, and make paying for a service more of an afterthought – because their “set and forget” nature requires no action after the initial sign-up. This level of convenience goes a long way in developing a loyal customer base and helping businesses attract both new and returning customers.

Eliminate late payments

Automating payments makes it easier for customers to pay on time, reducing the risk of late payments or missed bills. By setting a solid payment schedule, funds will always be withdrawn at the agreed-upon time, relieving customers of some of the responsibility of managing their ongoing expenses.

Save time and resources

Recurring payments save businesses time and energy on billing and collections tasks. They make chasing customers a thing of the past, as the system takes care of everything. 

In this way, recurring payments allow companies to focus on their core business activities. When you don't have to worry about billing and collections, you can focus on what you do best: running your business.

Increase business productivity

When accounting teams don’t have to focus on collections because of a recurring payment plan in place, they can shift their energy into finding solutions and improvements for other aspects of a company’s finances. 

Similarly, marketing teams will have less pressure to re-engage existing customers, allowing them to focus on expanding the customer base instead. The number of active subscriptions can also serve as one of a company’s KPIs to hit, making recurring payment options an effective productivity tool.

Learn more: How payment continuity powers recurring revenue

Potential drawbacks of recurring payments

Although there are several benefits of using recurring payments, there are also drawbacks to consider before deciding if this type of payment is right for your business.

Risk of failed payments

Customers typically pay with credit cards when they opt for a recurring payment plan. For businesses, that can present several downstream risks. For instance, since all credit cards come with an expiration date, there is a likelihood that the customer’s credit card could expire during a payment cycle—unless an account updater is used. 

Additionally, if a cardholder goes over their credit limit or places a lock on their card because of fraud, the transaction could be declined. This would require businesses to follow up with their customers to correct billing errors, which can be a complex and timely process.

Anything that draws the customer’s attention back to their recurring payment risks them questioning whether they still wish to pay for it. In many cases, they will continue, but in some, it can act as a reminder to cancel the subscription if this was something they were already considering. 

Prorated billing

If a customer cancels their subscription halfway through the billing cycle or opts for add-ons that would change the total cost, businesses will often have to prorate the bill accordingly. Prorated billing can be a difficult process for merchants, however, it ensures that customers feel they are paying a fair price for the products and services they’ve received.

Read more: What is Annual Recurring Revenue?

High churn rate

With the recurring payment model comes the risk of a high churn rate because customers can cancel their subscriptions anytime. If they cancel before completing the scheduled billing cycle, this can affect your projected revenue and corresponding business plans.   

Recurring payments success strategies for businesses

Before implementing this payment method, businesses must understand how to manage recurring payments effectively. To minimize friction and maximize success, we’ve added a few tips to help you get the most out of recurring payments.

Make paying easy

To reduce the risk of isolating potential customers, merchants must first ensure that paying online is simple for customers. This means providing clear instructions on how to ensure that their chosen payment method is accepted and presenting a seamless checkout experience with as few steps as possible.

Provide more payment options

Every consumer is unique, each differing in their preferred method of payment. That’s why it can be beneficial for businesses to provide their customers with a variety of choices beyond credit cards, like direct debit, digital wallets, and alternative payment methods like cryptocurrency.

Offer different payment tiers

Having multiple options also applies to recurring payment plans. Creating different payment tiers lets customers choose the one that best suits their budget and preferences. It’s also worth exploring how annual plans at reduced rates versus monthly plans at higher rates perform against each other.

Leverage fraud prevention tools

Card schemes, such as Visa, Mastercard, and American Express, have fraud checks that you can use. These include:

• Address Verification Service (AVS): compares the cardholder’s provided billing address to the one held by their issuer. After cross-referencing its numeric values, e.g. street number or ZIP code, the scheme sends a response code, indicating a full match, partial match, or no match. 
• Account Name Inquiry (ANI): compares the cardholder’s provided name with the one held by their issuer. ANI checks can be performed during a customer’s first customer-initiated transaction (CIT) with your business, as well as in subsequent merchant-initiated transactions (MITs).

PSPs also have built-in fraud detection tools. For subscription businesses, the risk of fraud is highest at the point of the first CIT – when the customer subscribes. 

The best solution is to partner with a PSP with extensive anti-fraud tools. Checkout.com’s Fraud Detection uses machine learning to track transactions for fraudulent behavior and analyze data from its entire network to spot new and existing fraud trends. 

Keep customers in the loop

People value transparency from the companies they’re loyal to. Sending customers regular updates about the products or services they’re using will help cultivate better connections and provide them with a sense of ownership and community involvement.

Ensure card-on-file details are valid

To minimize the risk of any potential friction, there are measures businesses can take to navigate managing payment errors and outdated payment information. This helps you stay one step ahead of the game. 

Businesses with recurring payment models rely on revenue from repeat customers and therefore must focus on a payment continuity strategy, which should ensure card-on-file details are valid before a transaction request is made. 

How do you go about this? One way could be to email customers to confirm their payment details are up-to-date before their upcoming subscription renewal. Another way could be to use automation technology such as Checkout.com’s Real-Time Account Updater Service, which contacts customers to get their updated payment information. 

Taking these steps early on can help give a business a leg up down the line.

Choose the right payments service provider (PSP)

Multiple partners are required to start accepting recurring payments, such as a payment gateway and acquirer. Or, you could work with a PSP like Checkout.com that has a full end-to-end offering and can be both – and more. 

When deciding which PSP to pick, here are some questions you could ask:

• Are they global? Do they support multiple languages, currencies, and regional payment methods? 
• Will they integrate with your existing website or redirect your customers to a different payment page? 
• Do they offer reporting features?
• Are they compliant with PCI-DSS and other regulations? 
• How strong are their fraud prevention and security features? 

PSP intelligent payment routing features, like Checkout.com’s Intelligent Acceptance, help increase MIT payment conversion by combining advanced AI, global network data, and deep payment expertise. 

Another PSP feature to look out for is dunning, which is the process of systematically communicating with customers to remind them about overdue payments or failed transactions, then attempting retries after a set interval. It’s a critical component of subscription-based and recurring payment models to make sure businesses can recover missed payments. 

How to set up recurring payments with Checkout.com

Given the benefits of recurring payments, it's no wonder that more and more businesses are using them to improve their cash flow and customer experiences.

With Checkout.com, you’ll benefit from one platform to manage all your subscription payments. Our Unified Payments API will speed up your payment processing, improve your customer experience, and give you more data. Our global network means you’ll be able to offer a great recurring payments experience in all your markets, and Fraud Detection is always built in to protect your customers’ details. 

Learn how to accept recurring payments with Checkout.com today.