What are recurring payments?

As subscription-based business models become increasingly prominent, businesses need to pay greater attention to the payment method they’re offering to customers. A well-executed payments strategy could make the difference when it comes to the success or failure of your business. That’s why it’s so important to get to grips with recurring payment processing, as quickly as possible. Find out everything you need to know about what recurring payments mean, right here.

What do we mean by 'recurring payments'?

First question: what are recurring payments?

Essentially, recurring payments are a type of repeating payment that’s authorised by a customer and taken automatically according to a predetermined schedule. Once the customer grants the merchant permission to take payment on a recurring basis, no more permissions are needed.

Examples of recurring payments include:

• Utilities and mobile phone bills

• Gym memberships

• TV streaming subscriptions

• Food delivery boxes

• Sports club memberships

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 for utilities such as electricity or water on a monthly basis are one example that is well suited to being made via variable recurring payments.       

What are the benefits of recurring payments?

There are a wide range of benefits, both for customers and merchants, associated with recurring payments.

1. Using a recurring payment processor to take payment is much more convenient than billing a routine charge repeatedly. All the work gets done at the front end, and after that, payment gets taken automatically, so your accounting team can spend time on other, more valuable tasks.

2. As customers don’t need to manually log in and enter details to make a payment every time, recurring payments are made that much faster.

3. Recurring payments ensure a prompt and reliable inflow of capital, helping to produce a healthier cash flow and lowering your collection costs. This puts your business in a better economic position and reduces the amount of guesswork required in your financial planning, as you know with a high level of certainty how much revenue you have coming in.

4. Guaranteed payments not only make it easier to predict cash flow for the business, but for the customer it also means no more payment reminders.

5. Both you and your customers can keep track of your payments from one centralised location. This also mitigates the need for potentially expensive debt collection.

Recurring payments have excellent business benefits, while also strengthening your relationship with your customers by making it much easier for them to do business with your company. If they’re satisfied with your product and they don’t need to spend any time on making payments, your customers will be much more likely to stick around for the long haul.

Are there any drawbacks associated with recurring payments?

Given that payment is made automatically with recurring payment processing, any erroneous bills can be a little more difficult to deal with. Rather than re-sending the bill, you’ll need to arrange a refund, which is likely to be more time-consuming. You may also need to prorate the bill, which, again, can be a lengthy and complex task. However, choosing the right recurring payment system can alleviate many of these potential downsides.

How to accept recurring payments

There are many different recurring payment processors that can help you to implement recurring payments, including major names like Stripe, Square, PayPal and GoCardless. So, how do recurring payments work? While different processors have different workflows, generally, they follow the same steps:

1. The customer chooses to pay on a recurring basis.

2. Then, they agree to your business’s terms and conditions and agree to the amount charged, the payment schedule, the fee structure, and the expiration date (if any applies).

3. Next, they’ll enter their payment information and allow your business to save it.

4. At this point, the recurring payments begin to take place. Here, like a credit card transaction, your payment processor contacts the card network and the issuing bank to confirm payment.

5. Finally, your customer will receive an invoice explaining the details of the payment. They may also receive an advance notification to warn them that payment is about to take place.

It’s important to take care when choosing which recurring payment system to go for. Does it have all the features you need? Will it integrate with your existing accounting/billing set-up? For many businesses, GoCardless is the right option.

Recurring payment processing with GoCardless

If you’re looking for a recurring payment system for your small business, GoCardless could be the ideal solution. It’s fully automated, which reduces the demands on your accounting team, and allows you to take recurring payments quickly and easily. Late payments are also effectively eliminated as GoCardless is a pull-based system that puts the business in direct control.

In addition, GoCardless provides customers with the opportunity to either create a custom integration with our API or utilise pre-built integrations with popular accounting tools like Xero and QuickBooks. Small businesses with international aspirations are also catered for, as GoCardless allows businesses to receive regular international payments from over 30 countries at the real exchange rate.

We can help

GoCardless is a global payments solution that helps you automate payment collection. Find out how GoCardless can help you with one-off or recurring payments.