With so many services switching online, recurring payment systems have seen a surge in growth. They’re used for everything from gym memberships to streaming subscriptions, and can be a handy way to have your payments taken care of.
In fact, recurring payment systems are an ideal solution for both customers and merchants. They provide a smoother customer experience with no need to remember dates to pay or repeatedly enter details, and businesses benefit from an ensured, stable flow of cash.
So, how do they work? In our quick guide to recurring payments, we cover what recurring payments are, the pros and cons for consumers and merchants, and how to set them up.
What is a recurring payment?
A recurring payment, also known as a continuous payment authority (CPA), means that a customer has agreed to allow a merchant to take payment on a recurring basis, in exchange for a service or item.
This is typically carried out weekly, monthly or annually, and only stopped when the subscription ends or the customer terminates the payment. This means that the customer doesn’t have to worry about missing a payment, and the merchant is reassured that they will be paid on time.
Though it’s fairly similar to a direct debit service, they work a little differently. With a recurring payment, you directly give a business permission to take money from your account using your card details, whereas direct debits are arranged with the bank. If you’re interested in merchant services that can organise direct debits, check out our SmartDebit review.
Some hallmarks of recurring card payments are:
- Being asked for your card (rather than bank account) details.
- The terms and conditions specify that you agree to the merchant using your details to take recurring payments.
Pros and Cons of Recurring Payments
Recurring payments offer benefits for both the merchant and customer. Whether your company has a membership or subscription scheme, they’re beneficial for any business that regularly collects payments from customers.
Pros for Merchants
✓ Reduce late and missed payments – Particularly for small businesses, late payments can have a huge impact on revenue and day-to-day running. Forget uncomfortable calls to customers – once the system’s set up, it collects all the payments for you directly into your merchant account.
✓ Customer retention – Most customers enjoy the hassle-free set up of recurring payments, as they can continue to enjoy products or services without remembering to pay at a specific time each month.
✓ Cut down on effort – It can be time consuming and stressful handling invoicing and payment processing manually. With a recurring payment system, you only need to get involved if you’re adding payment methods and altering the recurring payment amount.
Cons for Merchants
❌ Upfront costs – Some recurring payment systems have significant upfront costs in order to integrate their model with your system. It’s worthwhile researching thoroughly before signing any deals.
Pros for Customers
✓ Hassle free – There’s no need to make notes of when various payments are due as they come out of your account automatically.
✓ No late payments – If you’re using a recurring payment method to repay loans or a debt, you won’t face the risk of any late payment fines as the lender will take the money themselves.
✓ Refunds – If you have evidence that you’ve tried to cancel your recurring payment and the money gets taken out of your account anyway, your bank has to issue a refund.
Cons for Customers
❌ Easy to forget about – You wouldn’t make a manual payment for a service you don’t want or use anymore, but it’s fairly easy to forget about recurring payments. If you have numerous recurring payments coming off, you could lose track and end up wasting money on services you don’t need.
❌ Can be difficult to cancel – Though it’s pretty simple for some services to cancelled with just a few clicks, some may require you to get in touch with the company directly.
❌ Could affect your credit or account limit – As payments are taken automatically, it could take you into your overdraft or a negative balance.
How to set up recurring payments
As the customer, it’s relatively simple to set up a recurring payment. You’ll usually be asked to provide the 16 digit number on the front of your card, confirm the terms and conditions, and then be notified of the date of the recurring payment.
For a merchant or business, it’s slightly more complicated. Before arranging your recurring payments, it’s best to research the companies that offer recurring payment services. However, it’s most commonly done through a Payment Service Provider (PSP).
PSPs like PayPal and Square combine your payment gateway and a merchant account, handling the transaction from start to finish. The process to set up recurring payments may vary depending on the provider you go with, but it will generally follow the same principle:
- Log into your PSP business account.
- Create a new plan.
- Provide details for the service or items your subscription includes.
- Decide on the type of plan – either fixed pricing or quantity based.
- Select the pricing and decide whether to charge a set up fee.
- Choose a billing cycle (usually weekly, monthly or annually).
- Confirm your new subscription plan.
- Turn it on.
Once it’s set up, your subscription plan is ready to roll out. Be sure to make your customers aware it’s available, and if it’s the first time using one for your business, you can even offer free trials or discounts as an incentive.
Recurring payments are a great solution for so many business needs, offering greater security, saving time and improving cash flow. Whether you’re a law firm, creative freelancer or generally deal with contracted work, recurring payments can take away the hassle of chasing up payments.