What is a recurring payment?
Recurring payments are regular automatic payments made by customers to businesses for goods or services on a recurring basis. A recurring payment model allows businesses to automatically charge customers according to a pre-determined schedule. A streaming service provider billing customers as per a monthly schedule is an example of a recurring payment model.
To accept recurring payments, the merchant must first get the customer's approval for future payments upfront. After receiving permission and collecting the customer's payment details, the merchant can then automatically make recurring charges to the customer's account without the need for additional approval. This authorisation stays in place till either of the two parties ends the arrangement.
Utility bills, subscription plans, insurance premiums, and loan repayments are some common examples of recurring payments.
Recurring payments are often discussed alongside terms such as subscription payments, automatic payments (autopay), recurring billing, and standing orders. While these terms are closely related, they refer to different aspects or methods of recurring transactions. Subscription payments are a common application of recurring payments but not the only one. Autopay is a broader term that generally refers to any arrangement in which a bill is paid automatically when it becomes due. Recurring billing is the process of charging customers automatically at regular intervals. And standing orders refer to bank instructions to transfer a fixed amount at regular intervals.
Recurring payment vs one-time payment
The main distinction is that a one-time payment is a single, final transaction. It requires a fresh authorisation every time it is made. In contrast, recurring payments are processed under a single authorisation provided by the customer upfront.
Businesses that use recurring payments
Recurring payments are widely used by the following businesses:
- Subscription-based businesses, such as streaming platforms and software-as-a-service (SaaS) providers
- Media companies offering subscriptions for newspapers and magazines
- Freelancers and consultants offering retainer-based ongoing services such as social media strategy, website maintenance, and accounting services
- Telecom companies and other utility firms supplying essential services
- Educational platforms providing online classes, webinars, and e-learning material
- Cloud storage providers
- Fitness centres that run on monthly or annual memberships
Benefits of recurring payments
The benefits of recurring payments include:
Fewer late payments
Payments are automatically collected on a fixed schedule, which reduces chances of customers missing due dates and delaying payment.
Predictable revenue stream
With payments arriving at fixed intervals, businesses have a clearer picture of the revenue they can expect during a given period than they would with one-time payments. This predictability makes it easier to forecast cash flow and plan finances effectively.
Enhanced customer experience
Recurring payment models benefit not only businesses but also their customers. By reducing friction in the purchasing process, they create a smoother customer experience. This convenience boosts customer satisfaction and can foster long-term loyalty, helping businesses improve customer retention.
Lower administrative burden
With a recurring payments model, time-consuming tasks such as invoicing, payment collection, and payment reminders can be automated. This streamlines the billing process, reduces administrative workload, and frees finance teams to focus on higher-value activities instead of chasing invoices and following up on overdue payments.
How recurring payments work
Setting up recurring payments starts with the customer signing up for a service and giving their consent to being charged on a regular basis. The customer also provides the necessary payment information, such as credit card or bank account details.
The payment details are securely stored by a payment processor or payment gateway on behalf of the merchant. Encryption and tokenisation protect the sensitive information, ensuring compliance with security standards such as the Payment Card Industry Data Security Standard (PCI DSS).
Next, the merchant charges the customer's account on the billing date. The transaction is handled by the payment service provider, including verifying payment details, transferring funds from the customer's account to the merchant account, and updating records. After a successful payment, the customer receives a notification confirming the same with details such as payment amount and date included. This process repeats with each payment cycle.
Types of recurring payments
Recurring bill payments fall into three broad categories based on how payment amount is decided with each billing cycle. They are:
Fixed recurring payments
A fixed recurring payment is one in which the amount charged remains the same across billing cycles. For example, a gym membership fee or SaaS subscription. It is also called a regular recurring payment.
Variable recurring payments
In a variable recurring payment structure, the amount charged changes from one payment cycle to the other depending on factors such as usage or service level. As a result, it is also called irregular recurring payments. There are 2 ways in which variable recurring payments determine pricing:
- Metered pricing charges customers on how much of a service they use. For example, power bills determined by the amount of electricity consumed
- Quantity-based pricing charges customers based on the amount of a product or service they consume, using a pre-agreed unit of measurement and rate. For example, a software subscription that charges per active user in an account. The bill amount goes up if more users are added and decreases if users are removed
Hybrid recurring payments
This recurring billing model combines a fixed recurring charge with a variable, usage-based component. Customers pay a predictable flat fee each billing cycle for a pre-defined level of usage or access. If they exceed that limit, they are charged an additional fee based on consumption. For example, a monthly mobile data plan with the flexibility to scale usage for an additional fee.
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Challenges of recurring payments
Despite their many business benefits, recurring payments also come with their fair share of challenges. These include:
Failed payments
While recurring payments are a deterrent against missed payments, they cannot completely stop payment failure. Issues caused by expired cards, insufficient funds, or payment cancellation by customers can lead to failed payments that, in turn, result in immediate revenue loss for businesses.
Payment processing complications
Recurring payments are not immune to payment processing complications. Common problems include payment gateway time-outs, network failures, and payments being declined by the customer's bank or payment processor due to reasons such as fraud checks or unusual spending patterns. In some cases, transactions require additional authentication and if the recurring payment system lacks the capability to handle this, the payment may fail.
Difficult to correct billing errors
Billing errors in recurring payment systems – especially in variable billing structures – can be difficult to resolve. Even when customers identify an incorrect charge, automatic payment processing may result in the amount being deducted before the issue is addressed, and refunds may take time to process. It is essential that businesses ensure their recurring billing systems are designed with error detection and correction mechanisms.
Security vulnerabilities
Recurring billing requires strong security measures to safeguard sensitive customer data. Inadequate protection can expose the payment system to fraud, data breaches, and unauthorised access.
Infrastructural requirements
To be effective, a recurring payment system should include robust subscription management, automated payment retry mechanisms, and the ability to securely update and manage payment methods to ensure continuity of service. In addition, support for multiple currencies is an essential feature as it allows businesses to serve a global audience while helping customers avoid excessive foreign exchange fees.
Pros and cons of recurring payments
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Get paid faster with Aspire
Singapore businesses can rely on Aspire to bring predictability, security, and control to their payment processes. Our accounts receivable platform allows you to create and send tax-compliant invoices with payments tracked and matched to invoices to simplify reconciliation. You can also receive payments through multiple methods, including credit and debit cards and bank transfers, while automated reminders help reduce late or missed payments. Aspire helps businesses get paid 4 times faster.
In addition, Aspire’s multi-currency corporate cards can be used for recurring payments. These cards come with spend controls and real-time visibility to help you manage ongoing expenses more effectively.
Conclusion
Automatic recurring payments are essential for maintaining predictable payment schedules and reducing missed or delayed transactions. They give businesses a clear understanding of expected revenue at any given time, enabling informed financial planning and stronger cash flow management. By leveraging technology to minimise payment failures and support multi-currency transactions, businesses can further enhance the reliability, efficiency, and global reach of their recurring payment systems.
FAQs
What are recurring payments?
Recurring payments are automatic payments made by a customer to a business at fixed intervals.
What is an example of a recurring payment?
An example of a recurring payment would be making monthly payments for a subscription-based service.
What are the disadvantages of recurring payments?
While recurring payments help reduce missed and late transactions through automation, they are not without challenges. Payments can still fail due to processing issues such as system glitches or gateway time-outs as well as customer-related factors like expired cards or insufficient funds. In addition, a reliable recurring payments system requires significant investment in robust security measures and capable technological infrastructure.
What are the different types of recurring payments?
There are three types of recurring payments – fixed recurring payments in which the same amount is charged every payment cycle, variable recurring payments where the amount charged depends on usage or consumption, and hybrid recurring payments that combine a fixed base fee with an additional variable component based on usage.
Can a recurring payment be reversed?
Yes. To reverse a recurring payment, the customer must cancel the subscription or service immediately, contact their bank to dispute the charge, and reach out to the merchant to receive a refund.
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