A recurring payment refers to a financial arrangement in which a customer authorizes a business or service provider to automatically deduct a predetermined amount of money from their account at regular intervals. These intervals usually occur weekly or monthly, but scheduling can be customized according to a business’s needs.
There are two primary types of recurring payments:
With fixed payments, customers are charged the same amount at each interval. Examples of fixed payments include monthly streaming service subscriptions, gym memberships and insurance premiums.
With variable payments, the amount customers are charged changes from one payment to the next, often based on the customer’s usage. Examples of variable payments include utility bills, mobile phone bills and metered services.
Customers can use a variety of payment methods to make recurring payments, including checking and savings accounts, credit cards, debit cards, digital or mobile wallets or any other alternative payments method.
How do recurring payments work?
Let’s address how recurring payments work from both the customer’s perspective and from a merchant’s or biller’s perspective.
Customer’s perspective
From the customer’s perspective, making recurring payments is fairly simple. A customer signs up for recurring payments through a merchant’s or biller’s website, mobile application, point-of-sale system or another channel. During the signup process, they provide their payment credentials, which are securely stored by either the merchant or biller or a third-party processor. The customer agrees to the merchant’s or biller’s terms and conditions and authorizes them to charge their account at regular intervals according to an agreed-upon payments schedule.
From there on out, either the company’s billing system or payment processor initiates transactions at scheduled intervals using the customer’s stored credentials. In many cases, merchants and billers will notify customers via email or push notification before processing a payment so that the customer may review the upcoming charge and ensure they have sufficient funds to pay it. If the payment fails due to insufficient funds, expired credentials or technical issues, the merchant may follow up with the customer and attempt to process the payment again.
With this system, customers have the ability to adjust their recurring payment schedule or cancel their subscription at any time, often through the merchant’s or biller’s website or by contacting the customer support team.
Merchant’s or biller’s perspective
Things are a little more complex from the merchant’s or biller’s perspective. To get started, a business needs to work with a third-party payments service provider (PSP) to implement a payments processor, also known as a payments gateway. The payments gateway enables the merchant to capture and store customer credentials for recurring payment processing. This gateway is integrated with the merchant’s or biller’s payment systems through an application programming interface (API) for automated payment processing.
When a customer makes a purchase with a business, the gateway encrypts their payment credentials and the transaction details and securely sends them to the PSP. The PSP then communicates with the relevant payments network to verify the transaction and ensure the customer has the necessary funds. If the transaction is approved, the PSP authorizes it within the payments gateway, enabling the gateway to process the payment and the issuer to settle the funds. This entire sequence is repeated every time a merchant or biller initiates a recurring payment.
What kinds of businesses use recurring payments?
From retail and higher education to tech and government, organizations across all industries make use of recurring payments. Common examples of both fixed and variable recurring charges for these and other industries include:
Subscription-based services, such as magazines and newspapers, online streaming services, subscription box deliveries, cloud storage platforms and SaaS solutions
Membership services to gyms, community centers, co-working spaces, professional associations, wellness programs, cultural institutions, nonprofit organizations and VIP clubs
Government and municipal services, such as property taxes, water and sewer bills, waste management, parking permits, business licenses and public transit passes
One-to-one services, such as personal training, tutoring services, nutritionists and dietitians, legal counsel, daycare, music lessons, dog walking, and counseling or therapy services
Businesses that offer buy now, pay later programs or other forms of short-term customer financing
Consumer financing programs that enable customers to automatically make the minimum payment due (such as credit cards) or a regular installment payment (such as auto loans or mortgages)
What benefits do recurring payments offer?
Both businesses and consumers reap the rewards of recurring payment processing — let’s take a look at just a few of the ways these groups stand to gain.
Business benefits
Recurring payments set reliable payment schedules, building more predictability into merchants’ and billers’ cash flows and enabling them to better manage liquidity and create more accurate financial forecasts
With a steady revenue stream comes improved resource allocation. The predictability recurring payments offer enables businesses to better plan staffing, inventory and production based on expected revenue
Recurring payments are typically automated, saving merchants and billers the administrative effort and expense of manually invoicing and processing payments
Subscription-based models and recurring payments have the potential to increase customer retention rates. Customers who are satisfied with a subscription-based product or service are more likely to continue using it, reducing the need for organizations to constantly acquire new business
Since recurring payments are automated, businesses can reduce the risk of late or missed payments that is common with manual billing
Consumer benefits
Recurring payments automate bill payments, subscriptions and memberships, saving consumers time and effort. Rather than needing to remember specific due dates or make manual payments, funds are automatically deducted from customers’ accounts, also reducing their risk of incurring late fees
In the case of subscription or utility payments, recurring payments prevent service disruptions caused by late or missed manual payments
Recurring payments are a predictable expense, allowing for more sustainable financial planning. Consumers can budget more effectively because they know exactly when and how much they will be charged for products or services
Many businesses offer rewards, such as special offers or discounts, to customers who sign up for recurring payments
Recurring payment processors often have built-in anti-fraud and security capabilities, such as tokenization and encryption to protect customers’ sensitive payments information
What risks are associated with recurring payments?
As with any form of payment, accepting recurring payments does come with a degree of risk. All recurring payments are inherently card-not-present (CNP) transactions, which tend to be more vulnerable to fraud than their card-present counterparts. Additionally, storing customer payment credentials presents a security risk because data breaches or cyberattacks can lead to the theft of sensitive financial information. Many PSPs try to offset these vulnerabilities by charging merchants and billers more to accept recurring payments.
The good news is that businesses can avoid much of this risk by implementing robust security measures, including point-to-point encryption (P2PE), tokenization, strong customer authentication (SCA), customer profiling and machine learning. Businesses that invest in advanced fraud management capabilities not only enjoy a stronger security posture and better overall reputation, but also compliance with key regulations, such as the Payment Card Industry Data Security Standard (PCI DSS) and the revised Payment Services Directive.
Another potential risk merchants and billers face is that customers may experience issues with their payment methods, such as expired credit cards or insufficient funds, leading to payment failures. These failures can disrupt cash flow and cause gaps in revenue. To solve for this problem, businesses should clearly communicate billing dates to customers when they set up recurring payments, send customers payment reminders a few days prior to deducting funds from their account, enable auto-retry for failed payments and provide consumers with multiple payment options.
Some PSPs offer account update services, working behind the scenes to add new account information when cards expire or are replaced due to being lost or stolen, thereby ensuring that future payments are processed successfully.
Do businesses need to pay recurring payment processing fees?
In addition to the upfront investment cost, many PSPs require businesses to pay a small percentage of each transaction in exchange for their payment processing services. This percentage — as well as any other associated fees — varies from one PSP to the next, so it’s important that merchants and billers research and evaluate their options before partnering with a provider.
How can businesses set up recurring payment processing?
The first step to setting up recurring payments is to partner with a PSP to implement a payments processor. Payment processors, or payment gateways, enable companies to capture and store customer credentials for accepting and processing recurring payments. Once the payments processor is live, it needs to be integrated with a business’s various channels to automatically process payments.
In addition to a payments gateway, businesses will also need to implement billing software to generate invoices, establish recurring billing schedules and monitor payments. Certain PSPs offer all-in-one platforms that provide not only payment processing capabilities, but also billing and security, so that merchants and billers have only one relationship to manage.
How does ACI Worldwide support recurring payments?
ACI Speedpay — our electronic bill payment and presentment solution — makes it easy for both merchants and billers to establish online, automated recurring payments. As easy to set up as it is for consumers to use, ACI Speedpay supports a wide range of payment methods, allows for one-click enrollment and features built-in security capabilities to safeguard customers’ sensitive payment details.
