What are the steps that you will need to take in order to accept recurring payments and manage your subscription-based business?
The number of businesses using a subscription-based model has been increasing rapidly over the last few years - in fact, according to a recent report by SAP, 53% of all software revenue will be generated from subscriptions by the end of 2022.
But recurring payments aren't limited to software companies only - the subscription economy has grown more than 435% in the last 9 years, growing 5-8x faster than traditional businesses according to a report by Zuora.
With these statistics in mind, it's becoming very clear that the world is moving towards subscription-based models which are highly convenient for both companies and users.
In this article, we will discuss how to accept recurring payments as a business. So, without further ado, let's dive right into it!
What are recurring payments?
Recurring payments are payments in which the merchant, authorized by the customer, will charge the customer's credit card or account automatically at regular intervals. Commonly used in subscription-based services, they can be set up on a weekly, monthly, or annual basis, or even at personalized intervals depending on the company.
Recurring payments are highly effective for businesses that collect regularly scheduled payments. In fact, this payment model is beneficial for companies as well as customers for a variety of reasons:
How does recurring billing work?
How does recurring billing work? How to accept recurring payments. Graphic by Fit Small Business.
In order to accept recurring payments, it's important that businesses have a clear understanding of how recurring billing works. Independently from the processor or invoicing solution that the merchant chooses, the steps of the process are mostly the same:
The customer signs up for a subscription-based product or service, selecting a prearranged schedule that determines how often he will be charged for the service, and accepting the Terms and Conditions of the merchant.
Once the customer has opted for recurring billing, he enters his payment information, which is then stored in the payment processing system.
The storage of data typically happens using a method called tokenization, which is the process of exchanging sensitive data for non-sensitive data called tokens.
These tokens can't be used outside of the payment processing system - they are only valid internally, and they will be undecipherable if a fraudster or a hacker tries to track them back to their original value.
At this step of the recurring billing process, the client gives the merchant permission to safely store their credit card information, as well as executing the transaction every time a payment has to be made as a part of the subscription-based model.
Once the permission has been granted, the recurring billing will begin to take place. In a similar manner to a credit card transaction, the payment processor contacts the credit card network and the issuing bank in order to confirm the payment.
Every time the recurring transaction is confirmed, the customer will receive an invoice explaining the details of the payment, and the date for the next renewal. In come occasions, customers may also receive an advance notification letting them know when the payment is about to take place.
What are the benefits of recurring payments for companies?
Here are some of the benefits that companies experience when accepting recurring payments:
1. Fewer late payments & improved cash flow
Businesses that accept recurring payments have the advantage of experiencing fewer late payments, which in turn can help them have a more predictable cash flow to operate with. Because the funds are pulled automatically from the account of the user, and don't require manual action, he won't forget to make the payment on time.
Of course, if the account doesn't have enough funds for the automatic charge, a manual action might still be required from the user - such as trying with a different credit card or adding funds to the original one. But overall, recurring payments are one way to have a more predictable cash flow**, giving more flexibility for businesses.**
2. Better customer experience
Delivering great customer experience is essential in today's highly competitive and dynamic world. In fact, it is highly valued by consumers - according to Super Office, more than 86% of buyers will pay more for a better customer experience.
Image source: superoffice.com
Businesses that accept recurring payments are able to enhance customer experience because it makes payments more simple and worry-free for consumers. Many people don't want the hassle of having to remember each services for which they'll have to pay, especially if it requires them to go to the physical location.
Think about gym subscriptions - it's so much more convenient to get charged at the end of each month instead of having to make the payment manually or go to the gym to do that.
3. Reduced operational costs
Recurring payments are also a great way to reduce the operational costs that are typically associated with manual payments. Because all future payments are put on autopilot, there is no need for consumers to receive, open, and act on invoices. You also won't have to spend money on email marketing to remind them about their late payments.
With recurring billing and electronic invoices, all new sales enter your account automatically, eliminating the need for any direct intervention from your business. In addition, because the charges are automatic, you can cut on administrative costs and even customer support as you will have less conversations with customers.
What are the benefits of recurring payments for customers?
As we mentioned, not only businesses that accept recurring payments benefit from it. It also has advantages for customers as well:
As we discussed previously, one of the biggest benefits of this payment model for customers is convenience. They can get charged for the services they enjoy without having to remember to do it manually every time. In addition, electronic billing eliminates the need to go to the physical location to make a payment.
Recurring payments also come with the added convenience of sending automated receipts directly over text or email.
Companies that accept recurring payments with a PCI-DSS compliant Payment Gateway can also add the benefit of security for customers.
Secure gateways like MYMOID use a method called tokenization, which converts sensitive payment data into undecipherable tokens, making the storage of credit card data for recurring payments safe and completely protected from online payment fraud.
Image source: medium.com
Recurring payments, combined with electronic invoices, also provide a lot of flexibility for customers. They can easily manage and update their payment methods and subscription levels at all times without having to speak directly to the company or go to a physical location.
What are the challenges of recurring payments?
Of course, businesses that are looking to accept recurring payments should also be aware of the possible challenges, especially with payment gateways that are not effective enough. Let's take a look:
1. Payment failures
While the process is entirely automated, it is not immune to failures that can be beyond the control of the merchant. Credit card declines, due to multiple reasons such as card expiration, insufficient funds, incorrect payment details, or suspected fraud are common experiences for businesses of all sizes.
For this reason, it's important that companies have a plan to deal with such payment failures, and choose a powerful payment gateway that will work with them closely to reduce the number of credit card declines.
2. Dealing with payment errors
Being able to handle payment errors efficiently is equally as important as detecting them on time. For this reason, businesses that want to accept recurring payments should select an efficient recurring billing system that give them and their customers more flexibility.
For example, if a card is about to expire or no longer valid for some reason, merchants can give customers the possibility to update their payment information before the next payment is processed.
What are the two types of recurring billing?
In order to learn how to accept recurring payments, companies should also understand what are the different types that exist. Put simply, there are are two types of recurring billing - fixed and variable.
Fixed recurring billing
Fixed recurring billing means that the merchant pulls the exact same amount from the customer's account in every payment cycle. This is the preferred type for businesses that provide services for a fixed price.
Think about Netflix - they have different subscription plans to choose from, but the amount for the plan selected by the customer doesn't change month per month. In this example, the customer agrees to a fixed price that will be charged on a monthly basis.
Variable recurring billing
Variable recurring billing refers to payments in which the amount that the merchant collects from the customer can be different in every payment cycle. These variations may depend on the usage of the product, the way it's used, the amount of users, and other factors. One common example is your monthly electricity bill - in winter, we tend to use more electricity than in summer, so the automatic charges will vary month by month depending on how much electricity is used.
Who can accept recurring payments?
Practically all companies that offer subscription-based services or services in which customers pay on a regular basis (weekly, bi-weekly, monthly, annually) can accept recurring payments. Here are some of the most common use cases for this payment model:
This applies not only to SaaS (Software-as-a-Service) companies, but also to every company that offers subscriptions in general. For example, newspapers for which you sign up to receive every week or month, or fun subscription boxes that you get delivered straight to your door.
Subscription services can be based on fixed recurring billing, for example a streaming service like Netflix or Amazon Prime. However, many SaaS companies also offer variable recurring billing according to usage - for example, hosting services.
Or phone companies that charge you a fixed amount for a paid plan, but can charge you more if you exceed your minutes or MB.
Another common use case in which companies can accept recurring payments are membership services. This can include gyms, online courses, football fan clubs, social clubs, airline memberships in which travelers earn miles, co-working spaces, and more. This type of services typically charge fixed recurring payments.
Some products and services can be purchased at once, but paid over regular installments to make it easier for customers to pay. For example, if you want to renovate your kitchen or bathroom, but you can't pay the whole amount at once, the contractor may let you pay the amount over 12 months of regular monthly installments.
And of course, one of the most common use case in which the service provider can accept recurring payments are government and municipal services. For example, when you are paying for your water or electricity bill. This type of recurring payments is typically variable because you get charged at the end of the month according to consumption.
How to accept recurring payments
If you are looking for a way to accept recurring payments, the easiest and fastest way to start doing that is by using an all-in-one payment gateway that provides a whole scale solution to your payment needs.
MYMOID is a powerful end-to-end payment processing platform designed to help businesses grow into new markets and delight their customers with a personalized experience from start to finish.
Accept payments across 45 countries in 128 currencies, uncover new areas for growth, reduce chargebacks, gain valuable insights, increase your conversion rates and accept recurring payments with a scalable solution in compliance with Level 1 PCI-DSS, GDPR and the European Directive PSD2.
As we mentioned previously in the article, in order to accept recurring payments, companies need to operate in a safe environment PCI-DSS that allows for the secure storage of all credit card data for next payments.
As a certified PCI-DSS Level 1 Payment Gateway, MYMOID will ensure that all your sensitive data will be protected through a process called tokenization, in which it's substituted by randomly-generated values called tokens.
These tokens will have no intrinsic value outside of the payment system, preventing fraudsters from deciphering the actual credit card information.
Prone to chargebacks
It's important to keep in mind that subscription-based services are more prone to chargebacks. Because they are typically charged without the customer being present. there is a higher potential for fraud since the customer is not able to give permission each time his card gets charged by the merchant. As a result, credit card data can be stolen from merchants.
However, MYMOID is an all-in-one solution for payment processing, fraud monitoring and prevention, recurring payments, debt collection, subscription revenue management and more. Are you ready to accept recurring payments?
Get in touch with us today, and start growing your business with our powerful collection of tools for your business. Accept recurring payments and work with us easily and seamlessly.
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