Any business, no matter what sector it is based in, relies on a steady flow of income from customers. For many merchants this income is generated through multiple individual sales, with the payments themselves delivered through means ranging from cash to credit and debit cards or the use of digital wallets. While this model prioritises flexibility it can also lead to some uncertainty when it comes to cash flow. If external factors cause customers to want less of your product during a particular month, for example (i.e. fewer sun hats sold because it was the wettest August on record), then the amount of income generated will drop markedly, with many overheads – such as wages, rents and operating costs – staying as high as ever. A desire to eliminate this kind of uncertainty and volatility is just one of the reasons why recurring payments are becoming so popular.
How recurring payments work
If you subscribe to Netflix, are a member of a local gym or have grocery boxes delivered every month then you’re already aware of how recurring payments work from the customer's point of view. In one sense the use of recurring payments is another sign of automation revolutionising the way in which businesses of every kind operate, since a recurring payment is one which is automatically taken from the account of a customer without any input from the customer. The model works like this:
The customer gives their authorisation for the merchant to take funds automatically from a chosen account at regular intervals, such as weekly or monthly. The payments will be given in return for goods or services which are provided by the merchant on an on-going basis.
The deduction of a set amount from the account will automatically take place on predefined dates until the customer withdraws their permission, thus cancelling the recurring payment, or the subscription on which the payment is based comes to an end.
Types of recurring payment
There are two main categories of recurring payment:
Fixed recurring payments – these are payments which involve the customer being charged the exact same amount each time the payment leaves their account. A subscription to a service which delivers shaving equipment every month, for example, would be one which involves a fixed recurring payment.
Variable recurring payments – these are payments which can alter each time they are taken on the basis of the amount of the product or service which the customer has actually purchased. Recurring payments which are taken for the use of utilities such as electricity or water on a monthly basis are examples of the kind which are likely to be variable recurring payments.
The process of taking recurring payments
In order to offer recurring payments to their customers, a merchant has to have a merchant account in place and must be working with a payment service provider. The merchant account is a specialised business account which takes the payment direct from the customer account and then transfers it to the merchants account, while the payment service provider deals with various technical aspects of taking recurring payments, such as processing the payments securely and depositing the funds in the merchant’s account.
With these two factors set up, recurring payments can be collected automatically from customer’s bank accounts via a number of methods:
Through a payment card
ACH (Automated Clearance House) payments
Direct debit transfers
The advantages of working with recurring payments include the following:
A reduction in late payments and the wasted time involved in chasing them
A cut in the processing time and labour associated with manual payment collection
An enhanced customer experience
We can help
If you’re interested in finding out more about recurring payments, or any other aspect of your business finances, then get in touch with our financial experts at GoCardless. Find out how GoCardless can help you with ad hoc payments or recurring payments.