Recurring payment processing is a convenient way for customers to pay for products and services. It has been gaining in popularity, and more businesses use recurring payments each year.
Indeed, recurring payments grew by more than 350% during the last 7.5 years, and it is predicted to continue growing.
The International Data Corporation predicts that by 2020, half of the world’s 2000 largest businesses’ growth will depend on their ability to create digitally enhanced products and services.
A merchant who wants to keep up with the changing times and grow their business needs to cope with these emerging digital payment trends. A recurring payment is one payment scheme that can help a business gain new customers and retain old ones.
What is a Recurring Payment?
Recurring payment or recurring billing is a payment scheme wherein a business or a merchant automatically charges a customer for services or products on a predetermined schedule. The payment schedule usually falls on the same day of the month, so the customer already knows the due date when payment is expected to be made.
For a recurring payment to be possible, the business or merchant needs to have the customer’s payment information. It is also crucial for the customer to have agreed to the recurring payment. Once this information is in the merchant’s possession, recurring charges can be made to the customers’ accounts without the customer’s consent.
Recurring payment is a convenient way of automatically paying charges for products or services that customers regularly pay, like utility bills, gym membership fees, phone bills, or cable subscriptions.
Benefits of Recurring Payments
There are plenty of reasons why more people are opting for recurring payments. Recurring payments are beneficial both for merchants and consumers.
Convenient Payment Method
As mentioned above, you only need to set up recurring payments once. There is no need to repeatedly provide your information to the vendor each time you need to make a payment for consumers. Since the consumer’s information is already on record, it eliminates the customer’s possibility of accidentally providing inaccurate information.
A customer can avoid missed or late payments by availing of recurring billing. This can help avoid any inconvenience that a late or missed payment might cause. It can also prevent damaging one’s credit ratings.
Avoiding missed or late payments is also economical. Late or missed payments incur penalties that a customer can easily avoid with a recurring payment.
On the side of the merchant or vendor, this helps prevent the potential loss of funds. Late and missed payments also incur administrative costs that a merchant incurs in chasing a missed or late payment.
Better Customer Experience
Recurring payments can lead to a better customer experience. Instead of allotting time to obtain payment information, merchants can focus on the customer’s needs and buying experience. This can help make a customer feel more valued and encourage customers to recommend a business to others.
How Recurring Payments Work
For a merchant or vendor to process recurring payments, they need either a merchant account or a payment service provider. They can also have both. A vendor accepts payments via electronic means through a merchant account or a payment service provider.
A payment service provider is responsible for all aspects of electronic payments. They are responsible for the processing, security, and depositing of the payments to the vendor’s registered bank account.
A merchant account is a type of bank account where credit card and debit card payments are coursed to. Most merchants prefer a payment service provider because a merchant account cannot handle recurring payments’ processing and security. Merchants will have to find separate service providers to handle the processing and security of funds.
A merchant can use a recurring invoice to process recurring payments. A recurring invoice gets automatically issued to a customer when a set day arrives. Once a recurring invoice gets issued, payment gets automatically taken from the customer’s registered payment method.
For online shops, customers are usually provided with an option to avail of a recurring payment option. This typically happens during the checkout process. Succeeding payments are then automatically processed without the customer having to input payment information again.
Types of Businesses That Can Use the Recurring Payments System
Subscription services are mostly media-related products and services. This can include subscriptions to magazines, newspapers, or podcasts. Popular subscription services also include streaming services like Netflix and Amazon Prime.
Subscription services also include productivity programs like WordPress or anti-virus programs. Recurring payments for subscription services are often every month. The recurring date of payment usually falls on the same day that the subscription started.
Businesses that have monthly membership fees can benefit from recurring payments. Recurring payments are an efficient way of charging for membership fees, especially for those with large memberships. Examples are fitness centers, social clubs, sports clubs, and professional organizations. Some of these businesses have monthly recurring membership fees while others charge annual fees.
Government and municipal services
Utility bills and taxes are payments that consumers make regularly. Recurring payments can help ensure that essential services get paid on time. This can help avoid any inconvenience caused by late or missed payments.
These are individuals who charge for their time professional skills, and knowledge. These include fitness trainers, cleaning services, and legal services.
What You Need to Start Accepting Recurring Payments
The first thing that a merchant or vendor needs to do is to set up a Merchant account. Businesses that accept credit card or debit card payments already have this.
A merchant account is an account issued to a merchant by an acquiring bank. The purpose of a merchant account is to accept funds from business transactions such as payments for products or services. Merchant accounts are covered by the rules and regulations set by card associations like Visa or MasterCard.
A vendor needs to pay fees for the use of a merchant account. The fees depend on the provider of the merchant account. Some have monthly fees, while others get a percentage of every transaction.
The other thing that a merchant needs to start accepting recurring payments is a payment service provider. Several companies offer such services. A merchant needs to get in touch with a payment service provider that the merchant wants to partner with.
Some of the most popular payment service providers include PayPal, Square, QuickBooks Payment, Stripe, and PaySimple.
Each of these payment service providers has its process of sending out recurring invoices. Be sure to compare each payment service provider so you can carefully weigh their advantages and disadvantages.
How Much Does It Cost to Make Recurring Payments?
Having an active recurring payment setup is convenient for any business. It frees up human resources that a vendor or merchant can use on other essential tasks. However, recurring payments have a cost.
The majority of payment service providers have recurring payment processing fees. These fees are usually a small percentage of the total amount of a transaction. Payment service providers have their credit card processing fees. On top of this, some payment service providers also have account fees.
For example, if you have QuickBooks as a payment service provider, their fee is 2.9% plus 25 cents per transaction. If a customer pays $100, the fee will be $2.9 plus 25 cents or $3.15.
Some payment service providers do not have monthly fees. Some payment service providers counter this by having a monthly fee but lower per-transaction fees.
How to Accept Recurring Payments
The way that a merchant accepts recurring payments depends on the payment service provider that they use. To give you a better idea of how this works, here are examples of payment service providers and how you can accept recurring payments using their systems.
With PaySimple, recurring payments are integrated into their online sales platform. PaySimple lets merchants use a wide variety of online tools. These are tools that a merchant can use to manage and accept recurring payments.
Customers can opt-in to a recurring payment scheme by filling up an online form on PaySimple. It is also possible for the merchant to set this up on behalf of a customer.
A merchant can set up billing schedules that will indicate the day when a monthly payment is automatically processed.
PayPal recurring payments can either be subscriptions or recurring invoices.
Merchants can create subscriptions that they can send to customers. The merchant needs to enter the complete details of the product or service that a customer is subscribing to. The subscription also contains other details, such as pricing and taxes. The completed subscription is then sent to the customer’s PayPal account.
For recurring invoices, the merchant needs to create a New Invoice and choose the recurring option in the Frequency drop-down menu. The merchant also needs to enter customer details and product or service description and then send it to the customer’s PayPal account.
How You Can Make Your Payment Processing Easier
Make it a Standard
Make recurring payments a standard payment method whenever it is possible. This is especially helpful for merchants with a limited workforce. Recurring payments eliminate the need to invoice each customer that you transact with manually.
Ensure Easy Sign-ups
Customers shun enrolling in recurring payments that have complicated registration procedures. Make the process as painless as it can be. This will encourage more customers to avail of recurring payments.
Standard Billing Period
Create a standard billing period for your customers. Some merchants have weekly, monthly, and yearly billing periods. Weekly billing periods are too short, while yearly billing periods are way too long.
A monthly billing period is more reasonable. It also aligns with the billing period that other merchants use, making it easier for a customer to remember.
Setup Proper Customer Orientation
Not all customers are familiar with recurring payments. Merchants need to take the time to adequately explain to customers what recurring payments are. It should be clear to customers that they will get automatically charged regularly.
Properly orienting customers will help merchants avoid customer complaints or refund requests.
Merchants should take advantage of modern payment solutions if they want to stay competitive.
Payment solutions like recurring payments make the purchasing experience easier for both merchants and customers.
Recurring payments are especially useful to businesses that have limited human resources. With automatic or recurring payments, merchants can devote their time to other business aspects that require their attention.
Merchants can also improve customer experience with the help of recurring payments. Instead of spending time on payment processing, merchants can devote time to establishing camaraderie with customers or enhancing the business’s aspects which can result in a better customer experience.
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