fbpx Skip to content.
Back to All Articles Next Article
16 Jul 2024 Article

The Ultimate Guide to Recurring Payments

image

Recurring payments have become a crucial component and cornerstone of modern business operations, particularly for subscription-based services. They provide a streamlined, efficient mechanism for managing payments without requiring constant manual oversight. By implementing recurring payments, businesses can ensure a steady and predictable cash flow, which is crucial for effective forecasting and planning.

Unlike traditional payment methods, recurring payments are not dependent on cards that can expire — meaning they offer a more reliable and consistent payment solution. Mastering the art of recurring payments has become essential in today’s subscription-based economy. According to our 2024 Instant Economy Payment Insights report, 27% of respondents had taken out a digital subscription in the past six months.

In this guide, we will delve into the intricacies of recurring payments, their benefits, and how they can transform business operations. Topics to be discussed include:

  • What are Recurring Payments?
    • The Benefits of Recurring Payments
    • Recurring Payment Use Cases
  • How Do Recurring Payments Work?
  • Recurring Payments vs. Card Payments
  • What are Variable Recurring Payments?
  • Embracing the Future of Payments with Brite

What are Recurring Payments?

Recurring payments are automated, scheduled transactions authorised by the customer to occur at regular intervals, typically monthly. These payments are critical for businesses that rely on ongoing customer relationships, such as subscription services, memberships, and any model necessitating regular payments.

At their core, recurring payments eliminate the need for manual intervention each billing cycle. Once the customer has provided their payment information and consent, the business or its payment processor can automatically charge their account at the agreed-upon intervals. This automation not only simplifies the payment process for customers but also ensures that businesses receive timely payments, thus maintaining a steady cash flow.

The Benefits of Recurring Payments

One of the primary benefits of recurring payments is their ability to offer predictability and stability. Traditional payment methods, such as manual invoicing or one-time card payments, often come with the risk of human error, missed payments, or delays. Recurring payments mitigate these risks by establishing a consistent billing cycle, which is particularly beneficial for businesses with fixed service fees.

Additionally, recurring payments are not reliant on physical cards, which can expire, be lost, or stolen. Instead, they can be set up using bank account details, which change far less frequently than card details. This reliability reduces the likelihood of payment interruptions and ensures a more continuous and dependable revenue stream.

Businesses that utilise recurring payments can also significantly reduce their administrative burden. Automating the billing process means that companies do not need to spend time and resources on manual payment collection, follow-ups on missed payments, or addressing payment disputes. This efficiency allows businesses to focus on their core activities, such as product development, customer service, and strategic growth.

Recurring payments are essential for businesses aiming to enhance customer experience and retention. Customers appreciate the convenience of automated payments, which saves them the hassle of remembering to make monthly payments. This convenience can lead to higher satisfaction and loyalty, as customers are less likely to cancel services due to payment issues.

Recurring Payment Use Cases

Subscription-Based Businesses:
Companies offering subscription services, such as streaming platforms, gym memberships, and software-as-a-service (SaaS), can benefit immensely from recurring payments. These payments ensure that customers are billed automatically, reducing the likelihood of missed payments and enhancing revenue stability.

Budget Forecasting:
Recurring payments assist businesses in predicting cash flow more accurately, aiding in better budget planning and resource allocation. With a predictable income stream, companies can make more informed financial decisions and investments.

Automation Benefits:
Automating payments reduces administrative tasks, lowers the risk of missed payments, and minimises the cost of manual billing processes. This automation allows businesses to focus on core activities while ensuring payments are processed seamlessly.

How Do Recurring Payments Work?

Recurring payments involve multiple stages, each crucial to ensuring safe, secure and smooth transactions.

Customer Authorisation:

The process begins with customer consent. The customer agrees to a recurring payment plan by providing their payment details, such as bank account information or credit/debit card details.

This agreement often involves the customer accepting terms and conditions that outline the payment schedule, amount, and duration.

“Customer authorisation is the foundation of any recurring payment system,” explains Bo Liljefors, Chief Product Officer at Brite Payments. “Without explicit consent, businesses cannot proceed with automating the billing process.”

Setup and Automation:

After obtaining customer authorisation, the business or its payment service provider sets up the recurring payment schedule in their billing system. This automation ensures payments are made at regular intervals without manual intervention, including sending payment reminders, generating invoices, and processing payments on scheduled dates.

Bo emphasises, “Automation is key to reducing administrative overheads and ensuring timely payments. It allows businesses to focus on their core operations rather than chasing payments.”

Processing and Compliance:

The payment is automatically processed through the chosen payment method during each billing cycle. For bank account transfers, this may involve direct debits or standing orders. For card payments, the details are securely transmitted to the acquiring bank for processing.  Compliance with regulatory standards such as GDPR, PSD2, and PSD3 ensures secure and transparent transactions.

“Compliance with regulations is non-negotiable,” Bo asserts. “It ensures that customer data is protected and transactions are secure, which is essential for maintaining trust.”

Security Measures:

As highlighted by Bo, “Security is paramount. Businesses must implement strong encryption and tokenisation to safeguard customer data and prevent breaches.” Security measures protect customer data and ensure secure transactions. These include encryption, tokenisation, and adherence to PCI DSS (Payment Card Industry Data Security Standard). 

Notifications and Reporting:

Customers typically receive notifications via email or SMS each time a payment is processed. As Bo Liljefors illustrates, “Transparent communication with customers through notifications builds trust. Meanwhile, detailed reporting also enables businesses to analyse payment trends and improve their processes.”

Recurring Payments vs. Card Payments

When comparing recurring payments and traditional card payments, several key aspects must be considered: reliability, cost, security, administrative efficiency, flexibility, and scalability. Understanding these differences is crucial for businesses looking to optimise their payment processes and improve customer retention.

Churn Rates and Reliability:

“The consistency of bank account details over card information significantly reduces the risk of payment failures and customer churn,” notes Bo Liljefors, CPO at Brite Payments. “This stability is particularly beneficial for subscription-based businesses that depend on consistent revenue streams to maintain operations and growth.”

Unlike traditional card payments, where customers need to update their information whenever a card expires or is replaced, recurring payments linked directly to bank accounts offer a seamless experience. This reduces the administrative burden on customers and minimises the risk of losing subscribers due to expired or lost cards.

Cost Differences:

One significant advantage of recurring payments over card payments is the cost. As Bo illustrates, “Direct bank transfers are more cost-effective than card payments, especially for high-volume transactions.” Lower fees, of course, mean higher profit margins for businesses, and as Bo points out, “this cost efficiency allows businesses to allocate more resources to growth initiatives.” 

In Sweden, in particular, the cost savings from using direct debit infrastructure are particularly notable compared to card payments. Bo elaborates, “Recurring payments are competitively priced for Sweden’s existing direct debit infrastructure. Compared to cards, the savings can be significant. This allows businesses to invest the saved funds into other crucial areas such as customer service, product development, and marketing.”

Security and Fraud Prevention:

Recurring payments via direct bank transfers are often more secure than card payments. Bank transfers employ robust security protocols, such as strong customer authentication (SCA) and two-factor authentication (2FA), significantly reducing fraud risk. Card payments are more susceptible to skimming, phishing, and other fraudulent activities. Enhanced security fosters greater trust and confidence from customers.

“Security protocols like SCA and 2FA are essential for reducing fraud in bank transfers,” Bo explains. “These measures are more robust than those typically used for card payments, offering greater protection for both businesses and customers.”

Administrative Efficiency:

Automating recurring payments reduces administrative overheads. Businesses do not need to send reminders or chase late payments, as the system automatically processes payments on the due dates.

The efficiency of recurring payments allows businesses to focus more on core activities rather than on payment collection and management. Additionally, automated payments reduce the likelihood of human errors, further enhancing operational efficiency. 

Flexibility and Scalability:

Bo highlights, “The flexibility of recurring payments allows businesses to adjust to customer needs and scale effortlessly. This adaptability is vital for maintaining customer satisfaction and supporting growth.” He also notes that the ability to easily adjust payment terms based on customer preferences helps retain customers and enhance their overall experience.

In terms of scalability, Bo mentions, “As businesses grow, their payment needs evolve. Recurring payment systems are designed to handle increasing transaction volumes without requiring substantial additional resources. This scalability ensures that businesses can continue to provide efficient and reliable payment processing as they expand.”

What are Variable Recurring Payments?

“Since Direct debit and card-based recurring payments, there hasn’t been much innovation in the recurring payments space” – J.P. Morgan.

As outlined by Open Banking, Variable Recurring Payments (VRPs) or dynamic recurring payments as they are known in mainland Europe, is a “pioneering payment instruction” that lets customers safely connect payment providers to their bank account. VRPs allow for varying payment amounts while still maintaining the recurring payment schedule. This flexibility is particularly useful for businesses where the payment amount can change based on usage or other factors.

Benefits of VRPs

  1. Greater Flexibility

VRPs ensure payments align accurately with service usage, leading to higher customer satisfaction and retention. This flexibility is particularly useful for utilities, telecommunications, and other services where monthly usage can vary.

Bo explains, “A mandate allows merchants or any type of service to collect funds with consumer consent at variable amounts. It can be for utilities or an easier payment process when shopping online.”

  1. The ‘Sweeping’ Feature

A key component of VRP is “sweeping,” which refers to the automatic transfer of funds between accounts owned by the same person or business. This can help maintain balance, avoid overdraft fees, or maximise interest earnings. Common use cases include transferring excess funds from a current account to a savings account or moving money to prevent overdrafts.

VRPs represent a significant advancement in the recurring payments landscape. By allowing for flexible payment amounts, VRPs cater to businesses with fluctuating service usage, such as utility companies or telecom providers. This flexibility enhances customer satisfaction and ensures that payments are accurately aligned with actual usage, reducing the likelihood of billing disputes.

The high level of automation and control makes VRPs a valuable tool for businesses and consumers, and the sweeping feature further enhances their appeal. This enhances the overall efficiency and reliability of payment processes.

However, as noted by Bo, “Banks need to invest [in the technology] to facilitate this.” Bo adds: So far, we’ve seen some development in the UK, but it’s on a small scale and mainly between accounts that a customer owns.” This indicates that while the payment infrastructure is advancing, it might be a while before widespread adoption occurs across different markets. 

Embracing the Future of Payments with Brite

Recurring payments are indispensable for modern businesses, offering a host of benefits that include improved cash flow, reduced administrative burdens, and enhanced customer satisfaction. By automating the payment process, companies can ensure timely, consistent revenue streams while minimising the risks associated with manual billing and traditional payment methods.

The implementation of recurring payments enables businesses to focus on their core operations. They no longer need to chase late payments or manage complex billing cycles. This efficiency not only supports better financial planning and resource allocation but also fosters a more reliable and predictable income.

Furthermore, VRPs represent a significant advancement in the payments landscape. By allowing for flexible payment amounts and incorporating sophisticated security measures, VRPs cater to a broader range of business needs and customer preferences. As Bo Liljefors, Chief Product Officer at Brite Payments, highlights, the future of recurring payments is being shaped by technological advancements and evolving customer expectations.

As the digital payment landscape continues to evolve, businesses that adopt and master these innovative payment solutions will be well-positioned to thrive. Embracing recurring payments and staying informed about the latest developments in payments will enable businesses to enhance their operational efficiency, improve customer retention, and achieve sustainable growth.

Let’s navigate the future of payments together — for more insights and to explore how Brite Payments can support your payment needs, visit our recurring payments page.

Recurring payments contact sales experts image for mobile.
Recurring payments contact sales experts image for desktop.