Recurring payment: what it is and how it works

Does your business need a recurring billing?

Recurring payment: what it is and how it works. Source: shutterstock.com

Businesses, related to regular payments usually face the problem of providing banking card data, hence sensitive information integrity.

Today PaySpace Magazine would like to consider what recurring billing is, how it can be useful for your business, and what risks relate to that very type of payments.

What is it?

Recurring billing is when a merchant automatically charges a cardholder for specified goods or services on a prearranged schedule. Recurring billing requires the merchant to get the cardholder’s permission one time up front, then continues until the cardholder withdraws permission
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Recurring billing is one of those payment models, which aim to streamline regular payments. This payment model prevents the client from being required to submit their banking card data more than one time.

A merchant asks a cardholder to provide their personal data and card details in order to withdraw money for provided goods/services. Thus, if a salesperson decides to use such a payment model, it will be enough for a cardholder to provide sensitive data only once. Then, if a client agrees with all terms and conditions, funds will be charged automatically on the basis of the agreed terms (weekly, monthly, quarterly, yearly, etc).

Recurring billing prevents the client from being required to submit their banking card data more than one time. Source: shutterstock.com

Recurring payment model works out not for all types of businesses. It fits those that are considered to have subscription payment patterns. It mostly applies for such businesses as:

  • Any type of delivery service;
  • Different internet services (SEO websites, plagiarism checkers, statistics websites, etc);
  • Adult entertainment;
  • Cable/satellite TV providers;
  • Internet service providers;
  • Mobile network operators, etc.

First and foremost the aim of recurring billing is to facilitate the payment process. If a client uses some goods and services on a regular basis, this payment model will ease their lives and get them out of any worries associated with regular (weekly/monthly/etc) payments for the provided service.

First and foremost the aim of recurring billing is to facilitate the payment process. Source: shutterstock.com

Nevertheless, nothing is perfect. This payment model has disadvantages as well. The most significant weak point of recurring billing is the fact that it is considered to be a high-risk payment model, and here is why:

  • A client can merely forget about the service subscription

You may wonder how this point has happened to be first on the list, but it is the most common reason for recurring billing-related problems. A lot of clients just forget about the service they subscribed once (or just overlooked the terms and conditions). Then, one day, they wake up and notice that their credit card account has been charged for “something they haven’t ordered”. Consequently, most of these cases end up with a refund or chargeback request.

A client can merely forget about the service subscription. Source: shutterstock.com

There is no salesman who wants to face a chargeback. In other words, a chargeback request is a nightmare of any merchant. Most major card-issuing institutions (like Visa, or MasterCard) track the number of chargeback requests a certain business has. Thus, merchants with a high level of chargebacks (the ones that exceed the allowed threshold limit) can be refused to process their Visa and MasterCard payments.

  • Users negligence towards the details

Once you entered the agreement, you can’t correct mistakes instantly. It doesn’t work as an ordinary payment, when in the case of noticed mistakes, you can call off the payment and correct all misprints. Recurring payment works in another way, so a client will be charged no matter what. Only after a customer has been charged, can they request a good old abovementioned refund/chargeback.

Only after a customer has been charged, can they request a good old abovementioned refund/chargeback. Source: shutterstock.com

Types of recurring payments

Recurring billing may be divided into two general types on the basis of the payment model:

1. Regular recurring payments.

The name says it all: this type of recurring billing implies regular withdrawals, on the terms agreed beforehand. Therefore, payments are tied to a particular timetable. For example, you pay for cable TV monthly, hence you will be charged the agreed sum every first day of the month throughout the year (at the end of the year you’ll be proposed to enter into a new agreement).

2. Irregular recurring payments.

In this case, a client pays for some particular goods/service on a stipulated date, or on the basis of goods/services received, and it entirely depends on the business type. In other words, a salesman doesn’t charge a customer daily, monthly, or even yearly. It all depends on the nuances of the agreement between a salesperson and a client.

It all depends on the nuances of the agreement between a salesperson and a client. Source: shutterstock.com

Should I use it?

We’ve considered some “bad sides” of recurring billing. Now it is time to emphasize its “good sides”. So, how it can help your business?

  • Customer retention. A subscribed client will more likely become a regular customer.
  • Saving time. There is no need to request the customer’s data more than once. Thus, you save your and the client’s time.
  • Income anticipation. Using this payment model helps you anticipate your revenue in a more accurate way. One way or another, the maths will not suggest precise numbers, but you will have the overall picture.

SEE ALSO: EXPLAINED: How cashback works

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